Selling Loans on LoanStreet

Transcription

1 Selling Loans on LoanStreet Ian Lampl CEO & Co-Founder Management team Ian Lampl, CEO Deputy Chief Counsel, Office of Financial Stability TARP Secretary s Honor Award for Exemplary Public Service during the Financial Crisis Corporate & Litigation Attorney at Cravath, Swaine & Moore LLP JD, honors, University of Chicago Law School BSE, cum laude, Electrical Engineering, Princeton University 2 1

2 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 Who benefits from loan participations Small Credit Unions Mid-sized Credit Unions Large Credit Unions 4 2

3 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! 5 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 6 3

4 Additional benefits of participations 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 Manage Interest Rate Risk X X 7 Individual loan sales & 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 8 4

5 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) 9 Overview: How to sell loans on LoanStreet 1. Register for LoanStreet 2. Receive Board approval 3. Identify loans for sale 4. Upload information to LoanStreet 5. Determine pricing 6. Marketing & due diligence process 7. Sale & closing 8. Post-sale monthly reporting Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 10 5

6 1. Register for LoanStreet Complete LoanStreet Registration form Complete IRS Form W-9 ( Create LoanStreet online profile at Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC Receive Board approval Create Loan Participation Policy Receive Board approval for Policy Consult internal ALM Committee, as needed Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 12 6

7 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 Identify loans for sale LoanStreet supports all loan types Examples: auto, student, residential, & commercial Determine amount to sell Concentration limits Liquidity needs Market receptivity Many smaller credit unions can only purchase in amounts ranging from $500k to $5mm so the ability to break-up larger pools or sell smaller pools more frequently is a key component of ensuring market access to liquidity. Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 14 7

8 4. Upload loan information to LoanStreet Generate export file from your core system Upload to secure LoanStreet site LoanStreet can accept exported files in a variety of formats (CSV, XLS, XML, etc.) Export generally includes at least the following data fields LoanStreet customer success team is available to assist with creating export file Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC Determine pricing Determine premiums & servicing spread to create estimated yield for purchaser Economic 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 at credit unions LoanStreet can help determine market prices upon request Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 16 8

9 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 17 Deal Sheets Data Analysis & Distribution Interest Credit Score LTV DTI (if available) Original term Remaining term 18 9

10 6. Marketing & due diligence process Grant Access to potential buyers Buyers perform all diligence activities on LoanStreet Seller due diligence Sellers often need to provide (and answer questions regarding) loan policies, servicing policies and repossession procedures Sellers often need to provide information regarding the historical performance of their loans and audit financial reports Loan level due diligence For consumer loans, buyers typically request a sampling of loan files For commercial loans, buyers typically request the full loan file for each loan LoanStreet can assist with finding the best buyer upon request Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 19 Buyer 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 20 10

11 7. Sale & closing Pre-closing Run update report the day before closing showing current amount outstanding for loans sold No need to sign another agreement All transactions & parties are covered by LoanStreet s master agreement Closing day Seller receives payment from buyers LoanStreet issues assignments and cross receipts to all parties Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC Post-sale monthly reporting Within 3 business days of month-end, send LoanStreet a P&I report for all loans sold LoanStreet calculates servicing spread and distributions Seller distributes proceeds within 2 business days after receiving LoanStreet report Upon request, LoanStreet can distribute funds on behalf of seller within 1 business day following receipt of proceeds from seller LoanStreet provides reporting to buyers and sellers Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC

12 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. 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 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 26 13

14 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 27 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 28 14

15 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 29 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) 30 15

16 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 $ 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 32 16

17 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 33 For More Information info@loan-street.com Ian.lampl@loan-street.com 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

18 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) 35 Appendix B Sample deal sheet 36 18

19 Appendix C Sample Upload File Extract 37 Appendix D Sample Monthly Reports 38 19

20 Appendix D Sample Monthly Reports 39 20