Buying On LoanStreet Molly Snody Director in Marketing and Business Development Molly.Snody@Loan-Street.com 717-896-8466 www.loan-street.com 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
NCUA Participation Requirements Primary Regulation Section 701.22 ( Loan Participations ) governs loan participations by credit unions for both the originating lender and purchaser. http://goo.gl/66yhmy. Examination Manual Examiner s Guide ( Participation Loans ) on pages 10A-34, 35. http://goo.gl/lwzklu. NCUA Letter to Credit Unions 08-CU-26 Supervisory Letter & Exam Questionnaire. http://goo.gl/fyplar NCUA Legal Opinion Letter 18-0133 Treatment of Individual Loans https://www.ncua.gov/regulationsupervision/pages/rules/legal-opinions/2018/loan-participation.pdf 3 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 LoanStreet provides a Sample Policy Template 4 2
General Regulatory Requirements Written Participation Agreement 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 LoanStreet provides a Master Loan Participation Agreement 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 701.21 & 723 LoanStreet provides technology which allows you to perform Loan Level and Seller Level Due Diligence from a single platform 6 3
General Regulatory Requirements Must Have Financial Accuracy in Reports and Treat Loans Independently LoanStreet provides monthly Buy-Side Reports which allow you to efficiently complete monthly accounting entries and track loan level and portfolio level performance LoanStreet s monthly reports account for each loan independently even though it may have been purchased at the same time as other loans as part of a loan pool 7 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 8 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 9 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 Q1 2017. - Josh Vlajic, CEO, Titan FCU 10 5
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 11 Overview: How to buy loans on LoanStreet 1. Register for LoanStreet 2. Receive Board approval (Policy and Strategic Goals) 3. Identify Opportunities 4. Perform Loan Level Due Diligence 5. Perform Seller Level Due Diligence 6. Make a Purchase or Pass Decision 7. If Purchase Decision Made, Close on Participation 8. Receive post-sale monthly reports and cash distribution Patent Pending. LoanStreet is a registered trademark of LoanStreet LLC. 12 6
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 13 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 14 7
Register for LoanStreet Complete LoanStreet Registration form Complete IRS Form W-9 (https://www.irs.gov/pub/irs-pdf/fw9.pdf) Create LoanStreet online profile at https://www.loan-street.com/accounts/institution/register/ 15 Find Buy-Side Opportunities on www.loan-street.com 16 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 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
Deal Sheets Data Analysis & Distribution Interest Credit Score LTV DTI (if available) Original term Remaining term 19 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
Begin the Loan Level Due Diligence Process 21 Access Additional Loan Level Details 22 11
Review Scanned File Documents 23 Begin Seller-Level Due Diligence Process 24 12
Review Seller Supplied Information 25 Making a Decision to Purchase or Pass After Performing Loan and Seller Level Due Diligence Decide to Purchase or Pass If Purchasing: Consult with Accounting Team Upfront Liquidity Needs GL Entries at Purchase and Ongoing Monthly Entries Provision for Loan Losses NCUA 5300 Call Report Entries 26 13
Purchase and Closing Pre-closing Seller runs updated report the day before closing showing current amount outstanding for loans sold Loans more than 20 days delinquent are removed as non-saleable LoanStreet calculates pro-rata shares based on updated balance information All transactions & parties are covered by LoanStreet s master agreement Closing day LoanStreet provides full wire instructions including breakdown of amounts owed Remit principal, premium and accrued and unpaid interest to Seller LoanStreet issues assignments and cross receipts to all parties 27 On-Going Monthly Reporting Within 3 business days of month-end, Sellers 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 reports to buyers and sellers 28 14
Access Buy Side Reports Anytime 29 Reporting Portfolio Status & Performance Reports should show: Performance status Defaults Collateral breakdown Principal held Accrued & unpaid interest 30 15
Reporting Distribution Summary Distribution Summary Reports show distributions during the period by pool 31 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 32 16
Access Payment Level Details Anytime 33 Buy Side Portfolio View Located under the Buy Side drop-down menu View all loans, or sort by originator, pool, etc. 34 17
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 35 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 36 18
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 $11,111.11 $10,901.53 Buyer's (90%) Principal Outstanding $10,000.00 $9,811.37 Buyer's Principal Received $188.63 Buyer's Interest Received $41.67 Difference Seller s Servicing Fee $4.63 Passthrough rate to buyer 4.44% - 0.056% 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 37 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 $10,000.00 $9,811.37 $9,621.96 Buyer's Principal Received $188.63 $189.41 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% 4.7476% 0.248% Net Interest Ratio Servicing $4.17 $3.76 $7.93 Net Interest Ratio Passthrough to buyer 4.50% 4.50% 4.5000% 0.000% Calculating servicing spread on balance results in the seller earning 24.8 bps less servicing spread 38 19
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) $332.73 $692.85 $1,025.58 Gross Interest (Participant Share) $90.00 $120.00 $210.00 Servicing Fee Deducted $3.75 $7.50 $11.25 Net Interest (Participant Share) $86.25 $112.50 $198.75 CPI Applied (Participant Share) ($900.00) $0.00 ($900.00) 39 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) $418.98 $805.35 $1,224.33 A/P Increase (from CPI purchased) $900.00 $0.00 $900.00 End of Month Balances & Distributions Cash Received ($481.02) $805.35 $324.33 A/P Balance $0.00 $0.00 $0.00 Proper Results (A/P Table) Cash Received $0.00 $805.35 $805.35 A/P Balance $481.02 $0.00 $481.02 40 20
LoanStreet Reports Contain Accounts Payable 41 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 42 21
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 www.loan- Street.com* Conduct Seller Level Due Conduct Loan Level Due Diligence Diligence 6 5 4 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 7 8 9 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 Agreement which is used by nearly all of the sellers on its platform; 43 For More Information info@loan-street.com www.loan-street.com Molly.Snody@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. 44 22
Appendix A - Sample Deal Sheet 45 Appendix B - 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) 46 23