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Today is: October 20, 2018  

Compliance Companion®
Standard Procedures Manuals (SPM)

Loan Participations January 2018

This Manual provides bankers with an understanding of the developing law of loan participations, with particular emphasis on the proper documentation of a loan participation to protect the rights and clearly define the duties and responsibilities of the originating lender/seller, the lead lender (who may also be the originating lender) and the participant/purchaser. The Manual consists of seven sections.

  • Section I, Introduction, describes what a loan participation is all about, discusses other forms of multibank loan arrangements and examines the reasons why lenders enter into loan participations.

  • Section II, Due Diligence, explains the need for the participant to evaluate the underlying loan and the borrower. It also discusses the lead lender’s due diligence in selecting a participant and the participant’s due diligence in determining whether to purchase a participation from an originating lender.

  • Section III, Regulatory Issues Affecting Participations, focuses on the regulatory and accounting issues applicable to loan participations, including steps to avoid a loan participation being reclassified from a true sale to a secured borrowing, lending limit requirements, regulatory capital issues, and restrictions on affiliate transactions in connection with loan participations.

  • Section IV, Structuring Loan Participations, discusses the characterization of a loan participation as either a true participation or a credit participation and the implications if the sale of a loan participation is considered a security under the state and federal law governing securities. This section also examines the rights and duties of the originating lender/seller and the lead lender, as well as the rights, duties and remedies of the participant.

  • Section V, Loan Participation Agreements, reviews the critical provisions of a loan participation agreement, including the handling of contributions and settlements, structuring the lead lender’s role, the standard of care that applies to the lead lender, representations and warranties that are appropriate for the lead lender and the participant, defining the events requiring the parties’ consensus, default provisions and the remedies of the participant against the lead lender.

  • Section VI, Insolvency and Bankruptcy Risks, examines the issues that arise when the lead lender, the participant or the borrower become insolvent.

  • Section VII, Lender Liability, discusses to what extent an originating lender may be liable to the participant for fraud or negligence and whether a participant could be liable to the borrower for the originating lender’s bad faith.

This Manual is 127 pages, plus a 5-page appendix.


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