Loan participations: Risk management and accounting considerations
As a financial institution, it’s likely you frequently receive loan requests that exceed your willingness or capacity to lend. These requests are often handled through shared lending, otherwise known as loan participations. Loan participations involve the sale of a portion of an existing loan, or anticipated loan, by the lead lender (who disburses all funds, supervises the perfection of legal interest in underlying collateral, and usually services the loan) to one or more participating institutions. Although loan participations help an institution invest excess liquidity and grow its loan portfolio, risks can arise with sufficiency and accuracy of information and other issues related to indirect contact to the borrower and the borrower’s information.
This white paper discusses risk mitigation, accounting for sales of participating interests, and other considerations for a financial institution participating in shared lending.