Loan Participations Market Update

Transcription

1 Loan Participations Market Update Jeff Miller Managing Director October 23, 2018

2 Background LoanStreet is an innovative loan participation platform that enables institutions of all sizes to cost-effectively participate loans in a regulatory-compliant manner. Jeff has been working with Credit Unions for over 25 years both as an investment advisor and for the past 18 years as a loan participation specialist. Prior to joining LoanStreet, Jeff ran the participation department for First Jersey CU via FJ Financial Group, a CUSO of FJCU. Jeff also co-founded Paragon Financial Group LLC (PFG), a CUSO owned by Paragon Federal Credit Union. PFG was a pioneer in the CU loan participation field in the late 90 s and helped usher in a new investment option for CUs. 2

3 NCUA participation requirements Primary Regulation Section ( Loan Participations ) governs loan participations by credit unions for both the originating lender and purchaser. Examination Manual Examiner s Guide ( Participation Loans ) on pages 10A-34, NCUA Letter to Credit Unions 08-CU-26 Supervisory Letter & Exam Questionnaire. NCUA Legal Opinion Letter Treatment of Individual Loans 3

4 General Regulatory Requirements Loan Participation Policy Written policy for participations Policy must be approved by the Board Covers underwriting standards, permissible loans, limits on aggregate purchases 4

5 General Regulatory Requirements May be incorporated by reference into a master agreement Written Participation Agreement Must be properly authorized & executed by all parties Must retain a copy of the agreement Must include: Identification of loans sold Originator s retained interest Custodian of loan documents Access to financial and performance info Duties and responsibilities of servicer Replacement of servicer 5

6 Due Diligence Process Conduct ALM analysis as appropriate Conduct appropriate diligence based on size/complexity of the participation purchased For example: Seller Diligence Review loan policies, servicing policies and repossession procedures Review historical performance and financial reports Become comfortable with reporting capabilities Loan Level Diligence For consumer loans, buyers typically request a sampling of loan files For commercial loans and other loans sold individually, buyers typically request the full loan file for each loan 6

7 Most participated types of loans Auto & Auto Lease Residential Mortgages & Home Equities Student Recreational Vehicle (watercraft, 4x4s, motorcycle, campers, mobile homes) Member business loans (mostly commercial real estate) 7

8 Deal Sheets Summarize Key Attributes Identifies loan type & available principal Shows estimated yield to the buyer (based on WAL, Price, Servicing, WAC) Provides pricing & servicing fee retained by the seller and weighted average coupon or interest rate (WAC gross & net) for all loans in pool Shows weighted average credit score across all loans in the pool Set out weighted average original and remaining term for all loans in the pool Provides additional relevant details about the pool 8

9 Deal Sheets Data Analysis & Distribution Interest Credit Score LTV DTI (if available) Original term Remaining term 9

10 Who benefits from loan participations Small Credit Unions Mid-sized Credit Unions Large Credit Unions 10

11 14% 12% 10% 8% 6% 4% 2% 0% Scaled participations benefit everyone <$10M $10M< & <$50M Loan Growth Q Q Q Q Q Q <$10M $10M< & <$100M $100M< & <$500M $500M< Cost of funds / Average Assets $50M< & <$100M $100M< & <$500M $500M & <$1,000M Source: NCUA $1,000M< Source: NCUA 100% 80% 60% 40% 20% 0% Source: NCUA Loan-to-Share Ratio Q Q Q Q Q Q <$10M $10M< & <$100M $100M< & <$500M $500M< Large CUs growing with higher capital costs Smaller CUs have significant excess liquidity Scalable solution benefits everyone Maximize lending capacity Risk diversification for both parties Better RoE for both parties 11

12 Benefits for sellers Generate premiums & servicing income At a 50 bps spread, every $10mm principal outstanding equals $50,000 servicing income per year For every $10mm principal sold, each point of premium equals $100,000 in premium income Maintain Origination Pipeline! 12

13 Example: non-interest income Prestige Community Credit Union ($92 million in assets) Never sold loans before 12 pools sold over 18 months 15 buyers in 11 states 1 Standard Agreement No increase in headcount Increased non-interest income 10% Prestige Community was able to maintain its loan origination pipeline, manage its concentration and liquidity risks and earn substantial non-interest income through up-front premiums and servicing fees on the sold pools. - Sammy Shanafelt, CEO, Prestige Community Credit Union 13

14 Example: non-interest income Enbright Credit Union ($67 million in assets) Never sold loans before 10 pools sold over 21 months 19 buyers in 11 states 1 Standard Agreement No increase in headcount Maintained pipeline Increased non-interest income 10% We move loan pools through LoanStreet at the rapid rate we need to generate the liquidity to keep our robust indirect lending program open for business. - Ron Smith, CEO, Enbright Credit Union 14

15 Benefits for Buyers Generate more interest income 4 point spread between loans to investments Every $10mm in principal purchased equals $400,000 in additional interest income 15

16 Example: Increase loan-to-share ratio PriorityONE Credit Union of Florida ($91 million in assets) while we were very successful adding HELOC s and mortgages to our balance sheet, we needed some additional car loans to finetune our portfolio mix. We determined that we could increase our loan income and Return on Assets by purchasing auto loans. - Nancy Rappaport, CEO, PriorityONE Credit Union of Florida 16

17 Example: Increase loan-to-share ratio Newport News Municipal Employees ($40 million in assets) 75% 70% 65% 60% 55% 50% Loan to Share Ratio 69% 66% 62% 59% 57% 56% Q1 '17 Q2 '17 Q3 '17 Q4 '17 Q1 '18 Newport News Credit Unions $10M-$50M Originating loans has been a major problem for us over the last few years. Buying loan participations has become an important element of our strategy for growing our loan to share ratio. - Mike Popadiuk, Finance Manager 17

18 Reporting Portfolio Status & Performance Reports should show: Performance status Defaults Collateral breakdown Principal held Accrued & unpaid interest Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 18

19 Reporting Distribution Summary Distribution Summary Reports show distributions during the period by pool 19

20 Reporting Loan Level & Payment Level Loan Level & Payment Level Distribution Reports provide a detailed analysis of all cash flows, including waterfall over time for principal, interest, fees and recoveries or other proceeds 20

21 NEW NCUA Opinion on Participations In March NCUA s General Counsel issued a new opinion on participations Important considerations Loan participation regulation must be met throughout life of the transaction Each loan must be identified & treated independently Common pitfalls for CUs Calculation and collection of servicing fees Netting advances for CPI or other outlays 21

22 The Net Interest Ratio or Golden Ratio Common method of calculating servicing fees Beginning Balance * (Servicing Spread / Periods Per Year) These methods are prone to errors when there are no payments in a month or multiple payments in a month The net interest ratio is calculated on actual interest received (Servicing Spread / Interest Rate) * Interest Received Ensures accurate calculation of servicing fees 22

23 Common Errors Example 1 Interest Rate 5.00% Servicing Spread 0.50% Contractual Passthrough 4.50% Loan Details 100% vs 90% Servicing Fee Periods per year 12 Total periods 48 Ownership 90% Start Month 1 Full (100%) Principal Outstanding $11, $10, Buyer's (90%) Principal Outstanding $10, $9, Buyer's Principal Received $ Buyer's Interest Received $41.67 Difference Seller s Servicing Fee $4.63 Passthrough rate to buyer 4.44% % Net Interest Ratio Servicing $4.17 Net Interest Ratio Passthrough to buyer 4.50% 0.000% Calculating servicing spread on 100% of balance rather than 90% pro-rata ownership results in 5.6 bps more servicing spread earned by the seller 23

24 Common Errors Example 2 Interest Rate 5.00% Servicing Spread 0.50% Contractual Passthrough 4.50% Loan Details Unscheduled 2nd Payment Periods per year 12 Total periods 48 Ownership 90% Start Month 1 Regular Payment Month 1 Unscheduled Payment Buyer's Principal Outstanding $10, $9, $9, Buyer's Principal Received $ $ Buyer's Interest Received $41.67 $37.63 Total / Weighted Average (single month) Difference Seller s Servicing Fee $4.17 $- $4.17 Passthrough rate to buyer 4.50% 5.00% % 0.248% Net Interest Ratio Servicing $4.17 $3.76 $7.93 Net Interest Ratio Passthrough to buyer 4.50% 4.50% % 0.000% Calculating servicing spread on balance results in the seller earning 24.8 bps less servicing spread 24

25 Common Errors Example 3 Loan Details Loan 1 Loan 2 Beginning Balance $20,000 $40,000 Participant s Balance $18,000 $36,000 Participant Ownership 90.0% 90.0% Loan 1 Loan 2 Interest Rate 6.00% 4.00% Servicing Spread 0.25% 0.25% Passthrough Rate 5.75% 3.75% Improper Netting of CPI Advances Loan 1 Loan 2 Total Principal (Participant Share) $ $ $1, Gross Interest (Participant Share) $90.00 $ $ Servicing Fee Deducted $3.75 $7.50 $11.25 Net Interest (Participant Share) $86.25 $ $ CPI Applied (Participant Share) ($900.00) $0.00 ($900.00) 25

26 Common Errors Example 3 (continued) Loan Details Loan 1 Loan 2 Beginning Balance $20,000 $40,000 Participant s Balance $18,000 $36,000 Participant Ownership 90.0% 90.0% Loan 1 Loan 2 Interest Rate 6.00% 4.00% Servicing Spread 0.25% 0.25% Passthrough Rate 5.75% 3.75% Improper Netting of CPI Advances Loan 1 Loan 2 Total A/R Increase (P & I paid) $ $ $1, A/P Increase (from CPI purchased) $ $0.00 $ End of Month Balances & Distributions Cash Received ($481.02) $ $ A/P Balance $0.00 $0.00 $0.00 Proper Results (A/P Table) Cash Received $0.00 $ $ A/P Balance $ $0.00 $

27 Key Take-aways Loan level vs payment level detail (ask for and get payment level!) No servicing fees applied to loans without payment Calculation of servicing fees using net interest ratio Look for accounts payable / receivable information on advances 27

28 For More Information Join the conversation and stay up to date on all things related to loan participations. Follow LoanStreet on LinkedIn and become a member of the Loan Participations Group on LinkedIn. 28

29 Appendix A Glossary of terms ABS (Absolute Prepayment Speed): a prepayment model that calculates prepayments on a loan as a monthly percentage of the original loan balance. This model is commonly used for auto, truck and recreational vehicle loans. Coupon or Rate: the interest rate on the loan paid by the borrower, expressed as a percentage rate per annum. CPR (Constant Prepayment Rate): a prepayment model that calculates prepayments as a percentage of the current loan balance. This model is commonly used for real estate loans and student loans. DTI Ratio: generally, the ratio of the monthly debt service, interest plus principal (from either the applicable loan obligation or all known obligations), to the borrower s monthly gross income. Gross WAC: the WAC before deducting the Servicing Spread charged by the originating lender. LTV Ratio: generally, the ratio of the original loan balance over the original collateral value. LTV can also be expressed as current balance over the most recent collateral value. Net WAC: the WAC after deducting the Servicing Spread charged by the originating lender. Prepayment Model: an algorithm used to determine the rate at which a loan or pool of loans will prepay or repay prior to the maturity date. Price: the cost as a percentage of par value of the loans to be purchased. For example, a price of 101 means that for every $100 of principal purchased the buyer must pay $101, not including accrued but unpaid interest. Servicing Retained: means that the originating lender continues to service the loan, including collection of payments. Servicing Spread or Servicing Fee: the fee charged by the originating lender for servicing the loan. The Servicing Fee is typically paid by reducing the Coupon passed on to the participation purchaser (the Net WAC). For example, a 25 basis point Servicing Spread for a pool with 3% Gross WAC means the buyer receives 2.75% Net WAC and the seller keeps the remaining 0.25%. Term: the period of time from the loan s origination date to maturity date. Weighted Average (WA): is the average of some set of values calculated by giving weight to certain values based on some attribute of the data set. For example, loan pools typically weight averages by principal outstanding. In the context of this memorandum, consumer loan weighted averages are determined by weighting loans by giving weight to an individual loan by measuring the current principal outstanding of the loan as a percentage of the total principal outstanding in the pool. WAC: the Weighted Average Coupon for all loans in the pool, determined by reference to the weight of the current principal balance of each loan in the pool as a percentage of the total principal. Weighted Average Life or WAL: the estimate of the time it will take for the average dollar of principal in the pool to be paid in full. This estimate takes into account the contractual term of the loans in the pool, adjusted for the assumed rate of prepayments. (see Prepayment Model above) 29

30 Appendix B Sample deal sheet 30