Some banks choose to share a portion of the risk, and reward, of more complex loans. You can use PrecisionLender to price these loans as the originating bank, or the participating bank. You'll see the Participations field on the right side of the Opportunity screen, above the Payoff/Renewal field.
In This Article
- Originating the Participation Loan
- Participating in a Loan
Originating the Participation Loan
If you are originating a loan and wish to sell a piece of that loan to another bank, you will price the loan as if no participation was being considered. This will ensure that the entire transaction with your borrower is priced and its stand-alone return is calculated. Any details related to the participation will be captured in the "Participations" field on the Opportunity pricing screen.
Start by entering the full amount of loan you are originating in the "Amount" field. If you are charging an origination fee to the borrower, enter this entire amount in the "Fees" field. If any of the fee income is being passed to the participating bank(s), it can be added to the "Additional Expenses" field in the "Participations" popup (please see the Participation Expenses section in this article for more details).
In the example below, we have a $1,000,000 Commercial Real Estate loan with a .1% origination fee being charged to the borrower. We plan to participate out 30% of the deal to the “Bank Down the Street”.
Adding a Participation
Click the Participations field in the Opportunity pricing screen to open the Participations window.
The Participations Window
Use the Participations window to input the details around the Opportunity you're pricing.
Name and Amount of Participation
Begin with the name of the participating bank and then enter the percentage or amount of the deal they will own in the Participation field.
If you are participating the deal out to multiple banks, click Add New to enter the details for the next participating bank. This will create a blank participation page where you can fill in the relevant details for this bank. Continue this process until you have added details for all of the banks participating in the deal. You can toggle between participation detail pages by using the Participating Bank dropdown to select the bank you would like to see. The number next to Participations at the top of the window will display the number of participating banks that exist for this opportunity. You can remove banks from the participation by clicking Remove in the bottom left of the popup.
Participation Upfront Premiums
The amount you enter as the Upfront Premium Received represents the upfront premium received from the participating bank.
If you are charging an upfront premium to, or collecting an upfront fee from, the participating bank(s) for bringing them the deal, enter that premium either as a % of the participation amount in the field % of Amount or as a dollar figure in the box below it. (Note: Both upfront and annual premiums flow through the Financial Statements as Origination Fees included in the Interest Income).
Participation Annual Premiums
The amount you enter as the Annual Premium Received represents the annual premium received from the participating bank.
If you are charging an interest rate premium to, or collecting a fee from, the participating bank(s), you would enter the % in the Interest Rate Premium field or the dollar figure in the box below it. For example, if the rate charged to the borrower is 5.275%, but you are collecting a 1.0% rate premium from the participating bank(s), then you are only passing through 4.275% of the nominal rate to the participating bank(s). The 1.0% rate premium is entered in the Interest Rate Premium field.
Note: Both upfront annual premiums flow through the Financial Statements as Origination Fees included in the Interest Income.
If your payment type is Amortizing, your Annual Premium Received will be lower than if your payment type is Single Pay/Interest Only. This is because we are calculating the Annual Premium Received as an average over the life of the loan using the end balances for each year of the loan, and because amortizing loans pay down over time.
Finally, you can choose to add any additional expenses you may incur from originating and servicing the participation deal at the bottom of the Participations window. These expenses would be above and beyond your normal expenses found in the Origination and Servicing Channels above. These expense fields can also represent a fee income amount or % that you are passing to the participating bank(s) from your borrower.
Completed Participation Entry
After inputting the details, the Participations field will display the the total amount being participated out and the number of participating banks. Additionally, the retained portion of the participation will display to the right of the Amount field.
Pricing Conversion Loans with Participations
When participating out a Conversion loan such as a Construction loan, the details you enter in the Participation window on the initial loan carry over to the second loan. The Balance and total Commitment are reflected in the Payoff/Renewal field on the second loan.
How To Treat Participation Conversion Loans
If the Participation Amount is the same for both loans:
- You will not need to again enter details in the Participation window on the second loan, otherwise it will double count the participated amount. However, you'll need to re-enter any fees or expenses captured in the initial loan's Participation window through the Fees, Origination Channel, and Servicing Channel fields on the second loan.
If there is an additional Participation amount on the second loan:
- In the case where there is an additional amount being participated on the second loan (ie 25% of the initial loan and 35% of the second loan), you will use the Participations window on the second loan to add the difference between the two participations percentages as an additional amount. For example, if there is a 25% participation on the initial loan, and a 35% participation on the second loan, you'll enter a Participation for 10% in the second loan.
In most cases the participated % is the same on both sides, so best practice is to simply not add anything to the second loan.
When you convert a loan that has a participation on it, the payoff/renewal field on the second loan populates with the correct net balance to the bank. The commitment field on the second loan will show the full amount the borrower receives, but the participated amount is already taken care of. You can also see this in the financial statements by confirming the Loan Net Commitment is true.
Participating in a Loan
If you are participating in another bank's loan, you should enter it as you would if you were winning that loan. The Amount field will be the amount that you are purchasing from the other bank. For example, if you're purchasing in a $5 million loan, but are only buying $2 million, enter $2 million as the amount. Any upfront fees you are paying to purchase the loan should be entered as an Origination Expense, and any ongoing fees should be entered as Servicing Expense.