Over the past few years, credit union loan originations have seen positive growth year over year. However, some credit unions face excess liquidity but may be hampered to originate more loans because of limited size, reach or access to members.
Other credit unions have strong loan volumes but have reached concentration limits or liquidity levels. Such disparities and circumstances may trigger some credit unions to sell loans (e.g. to reduce concentration limits) or buy loans (e.g. for balance sheet management). Loan participations have become a viable solution to address these situations credit unions face.
What is this research about?
Loan participations refers to loans that other credit unions can purchase but the originating credit union is required to retain a portion of the loan (e.g. a federal credit union that is the originating lender must retain 10% of each loan sold in a participation agreement).
The key reasons for buying or selling loan participations include:
- Diversify portfolio risk
- Manage balance sheet/liquidity
- Increase loan volume
- Add a revenue source
This study presents further details regarding these main reasons as well as uncovers some of the key pain points for credit unions involved in both sides of the loan participation deal.