What is Loan Participation?

Transcription

1 What is Loan Participation? Molly Snody Director in Marketing and Business Development Background & Bio LoanStreet, Inc is an innovative loan participation platform that enables institutions of all sizes to cost-effectively participate loans in a regulatorycompliant manner. Molly Snody, Director of Marketing & Business Development 25+ years of bank and credit union experience. Vice President and Chief Credit Officer, Loan Operations Manager, Loan Review Officer, Senior Credit Analyst, and Director of Business Advisory Services. Nationally known trainer and consultant. She has earned a reputation for delivering dynamic products that exceed client expectations. 2 1

2 What is Loan Participation? Loan Participation is an arrangement under which a lender (the originating credit union) makes a loan to a member and then sells some portion of the same loan to one or more credit unions. Participations can be entered at any point during the life of loan at or prior to loan origination or any time after origination. 3 Basic Terminology Lead or Originating Credit Union: means selling credit union Participant or Participating Credit Union: means buying credit union Servicing Spread (or Fee): means the portion of interest the lead credit union retains from each interest payment for servicing the loan. Non-Recourse: means the lead credit union does not guarantee the returns on the purchased loans. All gains and losses are shared by the lead credit union and purchasing credit unions equally in proportion to their ownership levels. Patent Pending. LoanStreet is a registered trademark of LoanStreet Inc. 4 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 5 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 6 3

4 Loan Participation Policy Underwriting Policies Participation Policy Permissible Loan Types Origination Standards ALM Guidelines Due Diligence Procedures LoanStreet Loan Participation Policy template available upon request. 7 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 8 4

5 General Regulatory Requirements Due diligence (both loan level and originator) Other Considerations Examiner s treatment Compliance with other regulatory obligations Examples: Loans made in accordance with & 723 Financial accuracy in reporting 9 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 10 5

6 Due Diligence Process Consider investment horizon Auto short term asset Mortgage long term asset Make special note when considering Member Business Loan participations Is there a balloon maturity Is there a coupon reset (common to see 10 year loans with coupon reset in year 5) May require a third party review to meet NCUA requirements 11 Individual Loan Sales and Pooled Loan Sales Loans can be sold individually or pooled for sale When pooled, each loan is still considered an independent purchase even though many loans are being purchased at the same time 12 6

7 The Opportunity Pool of 200 Individual 1 st Mortgage Loans Totaling $12M in the Aggregate $10M is Available for Purchase Review a Sampling of Individual Loan Files for Due Diligence Purposes (Sampling must meet internal Participation Policy guidelines) Perform Due Diligence on Selling Credit Union Purchase or Invest $1M in $12M Pool In the above scenario a $1M investment equates to a 8.3% ownership interest in the loan pool and 8.3% in each of the 200 individual loans The Opportunities One Individual 1 st Mortgage Loan Totaling $750K $500K is Available for Purchase Review Individual Loan Files for Due Diligence Purposes Perform Due Diligence on Selling Credit Union(s) Purchase or Invest $500K in each Loan One Individual 1 st Mortgage Loan Totaling $750K $500K is Available for Purchase In the above scenario a $1M investment equates to a 66.7% ownership interest in each of the two individual loans 13 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) 14 7

8 Participation Types Non Recourse (most common form) Share in credit risk of borrower Perform due diligence (both originator and loan level) Share in costs (Accounts Payable) based on pro-rata ownership Collections Repossession Attorney Fees Insurance (CPI, etc.) Recourse Originator guarantees P&I payments Generally lower yields to buyers Due diligence focuses mainly on originator Usually treated as secured loan to originator 15 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 16 8

9 Glossary of Common 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) 17 Key Points Cost Structure Premiums Servicing Fees Pricing Considerations: Loan factors include: Weighted Average Coupon, Duration, Credit Score, LTV, DTI For auto loans: Indirect/Direct Market factors include: Comparison against permissible investments Seasonal liquidity 18 9

10 Deal Sheets Data Analysis & Distribution Interest Credit Score LTV DTI (if available) Original term Remaining term 19 Monthly Funds Flow Sends Full Monthly Invoice Remits pro-rata share & Detailed Report Lead Credit Union $$ Remits Monthly Full Loan Payment Member $ $ $ Participant Participant Participant Patent Pending. LoanStreet is a registered trademark of LoanStreet Inc

11 How Does It Work? From the date of transfer, all cash flows received from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership. The transaction may or may not include: Late Fee Sharing The Purchase of Accrued, but Unpaid Interest Payment of a Premium 21 How Does It Work? (continued) Reports from the originator encompassing all activities on the asset are continually required for the life of the participation, accompanied by cash disbursements each time the borrower pays the originator. The reporting process can become complicated if the seller is offering loans to multiple purchasers at differing percentages of ownership and differing fee structures. Sellers must get it right 22 11

12 Reporting Portfolio Status & Performance Reports should show: Performance status Defaults Collateral breakdown Principal held Accrued & unpaid interest 23 Reporting Distribution Summary Distribution Summary Reports show distributions during the period by pool 24 12

13 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 25 Why Engage in Loan Participation Activity? Reason For Participation Sellers Buyers Generate Liquidity X Diversify Balance Sheet X X Geographic Diversification X Asset Liability Management X X Risk Management X X Loans to One Borrower Limits X Regulatory Limits X Increase Non Interest Income X Increase Interest Income X Manage Interest Rate Risk X X Gain Experience Looking at Business Loans X 26 13

14 Who Benefits from Loan Participations? Small Credit Unions Mid-sized Credit Unions Large Credit Unions 27 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 28 14

15 Participations increase your ROA Example: Titan FCU ($48 million in assets) Return on Assets with this additional interest income, our ROA grew to 0.77% by the end of 2017, from 0.49% in Q Josh Vlajic, CEO, Titan FCU 29 Participations increase your Loan-to-Share Ratio Example: 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 30 15

16 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 31 Participations increase your non-interest income Example: 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 32 16

17 LOANSTREET Buy-Side Flow - Review Create a Strategic Plan or Get attorney approval of establish goals around Loan Master Loan Participation Purchases including a Agreement** Board approved Loan 1 Participation Policy* 2 3 Register at Conduct Seller Level Due Conduct Loan Level Due Diligence Diligence Review deal flow on LoanStreet s landing page, conduct an Advanced Search or contact us* Make a purchase decision, Close on Loan Participation including investment amount Receive Monthly Reports and Distributions of Principal, Interest and Fee Income *LoanStreet provides a free sample Participations Policy Template **LoanStreet provides a free Master Loan Participation/Syndication Patent Pending. Agreement LoanStreet which is a registered used by trademark nearly all of the sellers on its platform; Contacts for LoanStreet: Jeff.Miller@Loan-Street.com or Molly.Snody@Loan-Street.com LoanStreet Inc. 33 LOANSTREET Sell-Side Flow - Review Create a Strategic Plan or Have your attorney review establish goals around Loan or create a Master Loan Sales including a Board Participation Agreement** approved Loan Participation 1 Policy* 2 3 Register at Decide on Pricing Upload loan information to LoanStreet s secure site Identify Loans for Sale Market Deal & Provide Due Close on Loan Participation Diligence Information Provide Monthly Reports and Fund Distributions LoanStreet provides a free sample Participations Policy Template **LoanStreet provides a free Master Loan Participation/Syndication Patent Pending. Agreement LoanStreet which is a registered used by trademark nearly all of the sellers on its platform; Contacts for LoanStreet: Jeff.Miller@Loan-Street.com or Molly.Snody@Loan-Street.com LoanStreet Inc

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