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Loan participations are an effective way for financial institutions to supplement their balance sheets with attractive assets and overcome common challenges to organic loan growth, a limited field of membership, and/or swings in the economic climate.
In a loan participation program, there is a lead lender responsible for selling the loan participations (“seller”) and one or more buyer institutions (“buyer”). The seller either sources and originates the loan organically or acquires the loan from another entity (typically a nonbank originator, such as a marketplace lender). The seller then sells fractional shares of the loan, or ‘loan participations,’ to one or more buyers while also retaining a minimum percentage for its own balance sheet and regulatory requirements.
For credit unions, regardless of how loan ownership was established by the seller (e.g. organic originations or whole loan acquisition), the borrower will become a member of that seller institution. The borrower does not, however, become a member of the buyer(s), even if a single buyer acquires more than a 50% share of the loan.
A successful loan participation program does require regular, comprehensive performance reporting and payment remittance to all buyers. This ensures each buyer has appropriate, current, and accurate information for each loan they own fractional owners in.
Loan participations benefit both the lead lender (the ‘”seller”) and the buyer institutions (“buyers”).
For sellers, selling loan participations can help the institution manage liquidity and concentration limits, generate non-interest income and increase its capacity to serve its customers.
For buyers, loan participations allow for a quick and secure way to increase loan-to-share ratios and diversify balance sheets — without having to shoulder the administrative costs and effort of sourcing, originating and servicing the loans in-house.
Over the past 10 years, LendKey has developed an approach to loan participations called ‘forward flow,’ which is designed to make participations more dynamic, predictable, and inclusive.
Institutions can think of forward flow as a subscription. The seller subscribes to a steady stream of demand (e.g. monthly purchase commitments) for participation in interest-bearing investments, and the buyer subscribes to a steady stream of asset production (loan participation purchases) that fit its risk adjusted yield targets.
Forward flow via ALIRO substantially reduces the administrative burden of maintaining, diligencing and growing a loan participation program for both buyers and sellers, while providing the infrastructure to rapidly scale access to these efficient, popular networks.
Buyers can be onboarded and begin purchasing loan participations on ALIRO in a matter of weeks.
Of course, there are necessary due diligence and compliance obligations to satisfy, which ALIRO makes as easy and efficient as possible. All required information and materials to evaluate the asset, originator, and the ALIRO platform are accessible in one location allowing teams to streamline their approvals.
Once setup, a buyer can easily engage in participation purchases across other asset classes by simply completing their diligence of the asset and originator. All payment remittance, reporting, and program maintenance are consistent across deals.
At onset, it is expected to have LendKey evaluated as a vendor by an ERM team as part of the platform due diligence process. Lending and financial stakeholders will evaluate the assets to be purchased as well as the parties involved in administration of the loan program (e.g. originator, servicer, etc.).
Once launched, ALIRO handles the bulk of the work in maintaining the loan participation programs. From performance reporting, payment remittance, and generating accounting entries, ALIRO simplifies the loan participation experience for all parties. Buyers, specifically, need only to review the loans to the level of their preference prior to the recurring transaction (e.g. monthly).
At this time, originators on the ALIRO platform are seeking buyers with the desire to deploy at least $500,000 per month.