Do Participation Loans Scare You?
The proper answer here is: “They should!” Especially if you do not have a clear idea at any time how the file is being managed. Concerns over what information is or is not present in a file and if the risk profile has changed from what you know will keep you awake at night. Thinking about how an examiner will treat a participation that lacks proper loan documentation is downright a nightmare!
Recently, we closed a major participation loan. Even after the closing, there exists some confusion among the participants as to what role MBS plays in the transaction and what role the credit union plays. In this blog, I thaought it valuable to provide an overview of what each stakeholder does in a MBS participation.
Pre-Underwriting to Term Sheet
The interaction between MWBS and the member is determined by the lead credit union. In the most recent loan we closed, the lead was not familiar with lending in the borrower’s industry. They provided us the contact information, and we met directly with the partnership group to discuss the project and gather all necessary documents to underwrite the loan. We also met directly with the general contractor and the developer of the retail/office development. After these meetings and our collection of information, we worked with the lead credit union as to acceptable terms for the loan. These terms were documented to the client in a term sheet.
Each interaction with a commercial or agricultural member is different. It is the responsibility of the lead credit union to determine when and to what extent to involve MWBS directly with the client. I have spent over 20 years in the field. I hated when my relationship with the client was usurped by a manager who had nothing better to do than to meddle. Sometimes I had to apologize to the client after the meeting just to keep the relationship going. At other times, directly bringing in an expert from the credit side of the shop helped strengthen the customer relationship and navigate the credit request into a closed loan.
So it is my belief and also the position we take at MWBS, that the level of direct interaction between MWBS and your customer is determined by you as the lead.
Underwriting to Loan Sale
Once the borrower approved the terms, we then continued the underwriting process by analyzing all relevant information and preparing a comprehensive write-up. The lead credit union reviewed both the write-up and all source documents, made suggestions for improvements on the credit analysis and then approved the deal. In this case, the credit union did not want to own the entire credit, so a participation sale was needed. MWBS revised the write-up for the sale and began to market the opportunity, first to MWBS members, then MWBS subscribers, and finally to any other interested funding source. In each presentation, the interested loan buyer had access to both the credit presentation and all source documents to make their own judgment about the appropriateness of the credit for their portfolio.
At the same time, all other things necessary to complete the underwriting, such as the appraisal, environmental report and title work, were all ordered and reviewed by MWBS. These documents, along with MBS reviews, were presented to the participants.
Closing
Closing documents were prepared by MWBS. We have a loan document system that allows us to prepare appropriate closing documents, applicable in any state. In this case, we had participants in North and South Dakota, a borrower in North Dakota and a project in Minnesota. The document set was sent to all participants and borrowers for review prior to closing.
MWBS worked directly with the title company to arrange the closing and utilized the title company to close the transaction and handle the filing of all appropriate lien documents.
Construction Management
MWBS will manage the construction process on this loan. We have contracted with a title company to handle all disbursements and lien waiver collection. We also have a third party architect that will provide percentage of completion inspections throughout the process. This is in addition to the general contractor and architect of the borrower signing off on each draw request.
Draw requests and inspections will be presented to the participants when funds are needed. Each participant will be able to review the request and will then electronically transmit the funds to MWBS’ account. MWBS will then directly pay the title company, who will pay the construction bills.
Loan Servicing
MWBS services its own participations. All bills and statements are generated by MWBS and sent to the customer. Any other customer communication, such as sending tax statements, comes from MWBS. Payments are sent to MWBS and applied to the loan, utilizing the core processing system of MWBS. Monies are distributed to each participant, along with a detailed breakdown of how they should be applied. It is the job of the lead and its participants to apply their payment appropriately.
Loan File Management
It is my belief that if you are the participant on a loan file, you should have access to whatever is in the file. We provide that through a secure electronic file that can be accessed on-line. Each credit union participant has its own folder set up on our servers and its own unique password. A credit union can log in and view its loan files in an indexed fashion whenever it wants.
File management is ongoing, and MBS utilizes an electronic tickler system to track when information is required to be placed in the file according to the loan covenants. Notifications can be sent directly to the borrower and communicated to the lead credit union, if assistance is needed to collect documents. MWBS reviews these loans in light of the current financial information on an annual basis. A term loan review is prepared, along with a new risk grade, reflecting the current condition of the credit. All this information is placed in the electronic file. Loan owners can access current information that has been processed by MBS inside the file.
The Role of the Credit Unions
The loan owners may find this structure is different than other participations they are involved in. The lead credit union helps determine the direct level of involvement MWBS has with the client. The lead may assist MWBS in obtaining all the necessary documents for underwriting, but the lead does not produce the loan documents, close the loan, accept payments from the customer and pay all participants directly. All this is handled by MWBS.
I would like to say the participants can just sit back and relax after the loan is closed, but I would be lying if I told you all you had to do was to clip payment coupons that we send you. The loan participation is still an asset on your books, and as with any asset, you must watch and monitor it as if this were money from your own grandmother. The MWBS structure gives you the proper tools to do that.