What Is A Loan Participation Agreement

15. April 2021

While the idea of transferring the credit participation process to third parties can be very attractive, lenders should know exactly what it is from start to finish. Prior to the purchase of a loan, participation in an equity interest or the signing of a third-party contract, financial institutions would be advised to consider the following: as defined by the FDIC, a loan participation is an agreement under which a lender directs a loan to a borrower and then sells part of that loan to one or more other financial institutions. The lender or principal lender retains a partial interest in the loan, holds all credit documents in its own name, handles the loan and negotiates directly with the client for the benefit of all participants. At least one court has ruled that claims of fraud and misrepresentation by a participating bank against a leading bank should be dismissed because of the clear exclusions of liability in the participation agreement. See UniCredito Italiano SPA v. JPMorgan Chase Bank, 288 F. Supp. 2d 485 (S.D.N.Y. 2003). In UniCredito, the participation agreement is provided for in a relevant part: finally, the independent advisor of your credit union should review your credit participation contract before being executed. The most compelling reasons why financial institutions use crowdfunding loans are: Section 701.22 of the NCUA rules also requires that all loan participation be supported by a written agreement between participants.

The agreement must include the following: the sale of participatory loans allows the leading financial institution to retain control of an important customer relationship, instead of sharing relationships with other competing financial institutions. Lisa D. Love is a lawyer who focuses on corporate finance, project financing, equity financing and secured transactions (including loan bonuses and loan participation). She was a U.S. Treasury advisor, financial institutions, quasi-public and private development agencies, Fortune 100 companies and other companies. She is currently Co-Chair of the NAMWOLF Transactional Practice Area Committee and a member of the NAMWOLF National Board. Because of this relationship between the main participants, the leading bank – which has often taken out the loan – is known for many of the financial data of the borrower behind the credit. To this end, participants can rely on the lead bank`s assessment of the borrower`s creditworthiness, and participants can expect the lead bank to have submitted all supporting documents to the participant before entering into a participation agreement.


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