If the participation commitment indicates 100% of a loan is being sold to the participant (Less Servicing) Can the lead bank still hold a portion of the loan.

For example $1,000,000 operating line.
Agreement says Lead Bank Share $0 Participant share $1,000,000.
The loan is advanced $500,000 The participant should hold $500,000 of the loan. But Lead bank holds $200,000 and Participant only holds $300,000. Even though actual note has a balance of $500,000.

Can't find anything in the agreements other that the commitment amounts that says the lead bank can change the amount that will be participated out. But technically I don't see anything that says they can't either.

My assumption is the banks lending limit has changed and they can hold more internally than when the loan was originally participated. However, the participating bank should recieve notification that indicates they intend to do this though? right? It is a change to the original participation agreement.

Any resources regarding where to look for more information on this scenario would be appreciated.

Thanks.

You need to review the agreement to determine if it is with or without recourse. This may also impact where this lies on your balance sheet. Below is an extract out of the OCC Loan Portfolio Management Examiner Handbook.

Recourse Arrangements
Repurchase agreements are subject to the limitations of 12 USC 84. If the
selling bank makes any direct or indirect recourse arrangements, written or
oral, that are not permitted by 12 USC 84, these arrangements are considered
to be extensions of credit to the selling bank subject to 12 USC 84. See 12
CFR 32.2(j)(1)(iv) and (j)(2)(vi).
Prudent recourse arrangements are documented in writing and reflected on
the books and records of both the buying and selling bank. The failure to
properly record or document these arrangements may constitute a false entry,
statement, report, or representation in violation of 18 USC 1005.

This is a non-recourse participation

It appears to me that something is "off" then. I don't know how you can have a Participation Certificate that is 100% sold but the bank keeps $200,000. If something has changed it should be documented with a new Participation Agreement.

AND if there is something in the documentation that allows the bank to buy back or keep any of the loan amount then the loan must not be complying with FAS 166 and the bank should be showing the full loan amount on their call report.

Thanks for the insight. My instincts were saying something was off as well. Just wanted to make sure there weren't some special circumstances I had missed. We will be following up with the lead bank to get this staightened out.

I really appreciate those of you who take the time to follow up on these questions.