Loan participation guidence issued by federal regulators

Guidance on sales of 100% loan participations has been issued by federal banking regulators.

"If not appropriately structured, these 100% loan participation programs can present unwarranted risks to the originating institution, including legal, reputation and compliance risks," said the regulators. According to the guidance statement, policies for a 100% loan participation should meet the following criteria:

1. The motivations of the parties involved should be commercial in nature.

2. Participants should be limited to sophisticated financial and commercial entities and individuals with experience in dealing with loan participations. The originating institution should also have a distribution plan that ensures that the general public does not become the target of marketing efforts for resales by loan participants.

3. Only borrowers who meet the originating institution's credit requirements should be placed in these programs.

4. The originating institution should allow potential loan participants to obtain and review appropriate credit and other information on the borrower to enable the participants to make an informed credit decision. Promotional materials should clearly state that the participants and not the originating depository institution are responsible for making the ultimate credit decision based on each participant's own review of information pertaining to the borrower.

The guidelines note that the originating institution should establish procedures for ensuring compliance with applicable regulations and consistency with the institution's policies and procedures. The originating institution also should have written participation agreements that set forth the rights and obligations of the parties participating in the program.

Regulators indicated that the guidance statement applies only to a small number of mostly very large insured depository institutions.