Documenting Loan Participation Agreements: Practical Tips for Lenders. (Special Advertising Supplement Executive Summary)

By Little, Mark; Podzolka, Andrew | ABA Banking Journal, April 2003 | Go to article overview

Documenting Loan Participation Agreements: Practical Tips for Lenders. (Special Advertising Supplement Executive Summary)


Little, Mark, Podzolka, Andrew, ABA Banking Journal


Loan syndications and participations (together called "colending") have surged in popularity since 1991. This article focuses on participations, not syndications, where a lead bank funds a borrower and sells fractional interests to participating financial institutions who then share in the revenue stream from the borrower.

A typical loan participation involves a lead bank who lends directly to the borrower and sells to participating banks a portion of the loan. For most financial institutions, there are three motivations for selling a participation interest in a commercial loan: (1) to satisfy safety and soundness lending limits, (2) to hedge risk, (3) to earn non-interest fee income. To achieve these objectives, financial institutions must document their participations with care. These seven tips help realize the benefits of participations.

Remember the Regulator

Participation agreements are generally scrutinized as part of safety and soundness examinations. Examiners look for terms and conditions that provide for sharing of information about the borrower and the credit during the entire life of the loan and participation. It is also important to address the lead bank's administrative responsibilities, especially in the face of disagreement about how to handle the borrower's default.

Many routine participation agreements do not address the key points required by safety and soundness regulations or contain elements of recourse.

The Duty of Care

A lead bank's relationship to a participant can fall into one of four basic categories: seller of a property interest, independent contractor, disclosed agent, and fiduciary.

Many participation agreements contain language that imposes fiduciary or agency duties upon the lead bank. These are dangerous provisions. In many circumstances a lead bank may have to sacrifice its own interests for the interests of the participant. Fiduciary obligations should be eschewed altogether. If the lead bank agrees to be a disclosed agent, the provisions should be carefully drafted.

Sell No Securities

Is a participation interest a "security" under federal securities laws? Generally, no. Although it can be, unless the agreement includes the correct language. Failure to include that language exposes the lead bank to the risk that the sale of a participation interest does not comply with federal securities laws. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Documenting Loan Participation Agreements: Practical Tips for Lenders. (Special Advertising Supplement Executive Summary)
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.