Debunking Myths about Loan Participation

There are several myths surrounding loan participation agreements. Unfortunately, this has created a mental siege and has prevented people from seeing lenders’ bountiful benefits and risks. This article discusses below some of the loan participation myths and the truth about them.

• You can only get participation interest in mortgage loans from a bank.

Truth: Mortgage lenders can also set up participation agreements with other lenders.

• There is a need for all lenders in the participation agreement to maintain a relationship with the borrower.

Truth: The only Lender that needs to maintain this position is the lead lender.

• On a loan participation agreement, the lead Lender has more risk than gains.

Truth: There are both risks and benefits. You just have to take a well-calculated risk.

• Participation agreements have no alternatives.

Truth: There are several alternatives. Some of which are: Hypothecation Agreement, Loan Sale Agreement, Dual Lenders, etc.

• All participation agreements are the same.

Truth: They are not the same. There is a comprehensive participation agreement that covers several important details. This type is a complex participation transaction agreement system. There’s also a “short-form” agreement that certain lenders prefer because of its brevity and simplicity. Some details to include are participation agreements, etc.

• The borrower has to consent to the loan participation.

Truth: Most times, a borrower does not have the right to consent to participation.

• No securities law issues bind the sale of a fractional loan interest through a participation agreement.

Truth: Different securities law controls the sale of a fractional interest in a loan sale by a lender.

There are more myths and misgivings about loan participation. Click here to find accurate answers to some of these commonplace rumors about loan participation.