We have recently started purchasing commercial participation loans. I am auditing the file which appears to be photocopies of all of the information from the originating bank and a Non-recourse loan participation agreement. Could someone just give me a brief synopsis of what you look for with loan participations purchased versus normal commercial loans.

Thanks

Everything. We want copies of all underwriting documents as well as all loan documents including but not limited to all financials, appraisals, ect. If the lead bank has it, we want it. It is a little aggressive but it is the CYA theory because we have had too many auditors ask for things we then have to contact the lead bank to obtain.

Don't forget your own independent credit analysis of the borrower, especially if purchasing from an unaffiliated party. Regulators hate it when you just accept the analysis and stress tests of the originator.

This may be moot if the purchase is intra-holding company and you share credit analysts.

And the bank should be doing it's own evaluation or appraisal of the entity. We had the OCC comment on this because we accepted a copy of the leading bank's appraisal.

Thanks!! I'm not quite sure what I would do without BankersOnline, but, it wouldn't be pretty.

We are OCC and that could very well be the difference.

Well, you don't have to actually get a new appraisal, however your appraisal policies should already cover the type of review necessary when accepting an appraisal that was originally conducted for another financial institution. Your responsibilities on the purchase of the participation is no less than that

Oh, and the way you do it makes perfect sense to me. It was the way we were handling participations until August. If we are the lead bank I certainly think we should be the one to initiate the appraisal but if we are buying the participation then we should be able to rely on the lead bank's appraisal. I may be missing something however or it could be that the OCC had a bee in their bonnet when they were here.

The OCC's (at least the examiners that were here) position was that we needed to conduct our own appraisal on participations. We had a copy of the lead bank's appraisal in the credit file and that wasn't good enough.

I would challenge that as long as you followed your appraisal review procedures. I would request on what were they basing this. They have no regulatory guidance as such. For these type of large complex transactions, you are talking some big dollars.

Our examiners position on this never did make any sense to me so I think we will challenge them on this one.

Sarah if you do an appraisal review (much like a credit comment) and show you did your due dilligance that should be enough for your examiners. Asking a commercial client to pop out an additional $4,000 for the second bank seems more than a tab bit over the line. And if they're not paying...who is?

Develop an appraisal review policy and format for these loans and stick to it with each. The consistent review should be enough to make the OCC happy.

In this sentence are we talking a real estate appraisal or an "appraisal" of the borrower?

"And the bank should be doing it's own evaluation or appraisal of the entity. We had the OCC comment on this because we accepted a copy of the leading bank's appraisal."

I have never seen the OCC require another appraisal of the collateral, but you have to do your own "appraisal" of the borrower, the deal, etc. Andn you would review the real estate appraisal just as if you had ordered the appraisal.

And don't forget to cover CIP in the agreement and the audit!

My understanding was that the lead bank is responsible for CIP in the case of participations purchased. Is this correct?

Correct. The bank that purchases a loan, is excluded from CIP.

Most participation agreements these days address that...make sure that they are CIPing, hold them responsible. They also should share the CIP documents with you if asked. Many banks are asking for copies so they can include that information in the assessment of the borrower's risk rather than just taking another bank's word for it. Just like you do your own credit analysis. That is what we are seeing. It gets addressed in the agreement and the docs are made available.

I have one more question relating to this topic. If the participations are made outside the participating banks primary lending area, do you prepare any analysis or assessment of the market area of the loan?

Question, as the purchaser you are required to perform your own credit assessment. Would you use the Lead banks credit report or obtain your own? With participation loans is it prohibited to share credit reports?

I would use the lead banks credit report to do your credit assessment.

Also remember that Participations are to be pro-rata. Anything other than pro-rata might require you to also keep the loan on the books. You still have some lenders thinking LIFO or FIFO are still possible.