Occassionally one of our banks will originate a loan and participate part of it out to one or more of its affiliates. Unless the loan is a community development loan, the guidance does not clearly explain what to do with participation loans in terms of what to report and what not to report. Can anyone tell me what, if anything, to report in the following scenerios?

1. Bank A originates a $2 million commercial loan. It does not have a community development purpose. Bank A participates $600,000 portions of the loan to Banks B & C. Bank A would not report the $2 million origination because it does not qualify as a small business loan. What about Bank B & C? Would they each report a purchase of a $600,000 small business loan?

2. Bank A originates a $900,000 commercial loan. Bank A participates out $300,000 portions of the loan to Banks B & C. Would Bank A report a $900,000 small business loan? What about Banks B & C? Would they report anything?

3. Bank A originates a $2 million community development loan and participates out $600,000 portions of the loan to Banks B & C. Would Bank A report a $2 million community development loan? What About Banks B & C?

Lastly, what is the difference between a 100% participation and selling the loan to another bank? If the loan was a $500,000 commercial loan, who reports it...the originating bank or the participating bank?

We are so confused!

Have you read page 55:


https://www.ffiec.gov/cra/pdf/cra_guide.pdf

From the CRA q and a

§ll.42(a)(2) Loan amount at origination

§ll.42(a)(2)—1: When an institution purchases a small business or small farm loan, in whole or in part, which amount should the institution collect and report—the original amount of the loan or the amount at purchase?

A1. When collecting and reporting information on purchased small business and small farm loans, including loan participations, an institution collects and reports the amount of the loan at origination, not at the time of purchase. This is consistent with the Call Report’s and TFR’s use of the ‘‘original amount of the loan’’ to determine whether a loan should be reported as a ‘‘loan to a small business’’ or a ‘‘loan to a small farm’’ and in which loan size category a loan should be reported. When assessing the volume of small business and small farm loan purchases for purposes of evaluating lending test performance under CRA, however, examiners will evaluate an institution’s activity based on the amounts at purchase.

Also, the 2013 CRA Guide is here:

http://www.ffiec.gov/cra/guide.htm

Somehow, Randy's link goes to the 2001 guide!

The CRA q and a is available at the FFIEC CRA site:

http://www.ffiec.gov/cra/qnadoc.htm


§ll.22(a)(2)—6: Do institutions
receive consideration for purchasing
loan participations?

A6. Yes. Examiners will consider the
amount of loan participations purchased
when evaluating an institution’s record
of helping to meet the credit needs of its
assessment area(s) through the
origination or purchase of specified
types of loans, regardless of examination
type. As with other loan purchases,
examiners will evaluate whether
participations in loan purchased, which
have been sold and purchased a number
of times, artificially inflate CRA
performance. See, e.g., §ll.21(a)—1.

Loan participations are treated differently for small business loans and community development loans. The originating bank would report the entire amount of the loan in both cases. But the participating banks report only the amount of the participation purchased for CD loans while they report the total amount of the loan at origination for small business loans. As far as small business loans are concerned the total amount of the loan at origination is what determines if the loan qualifies as a small business loan (not the the amount of the participation).

#1 - no one reports any small business loan
#2 - all banks report small business loans for the total amount of the original loan, $900K
#3 - the lead bank reports the entire loan and the participating banks report their $600K participation

Of course it this was about HMDA, loan participations are not reported under HMDA, only under CRA.

Now I understand. Thank you all for you help!

I'm a little confused by a couple of statements in this post and I'm hoping Len - or others - can clarify for me.

First is states: "But the participating banks report only the amount of the participation purchased for CD loans while they report the total amount of the loan at origination for small business loans."

But then in the examples: "#3 - the lead bank reports the entire loan and the participating banks report their $600K participation"

So does this mean that if I am a participating bank, I report my SHARE as a small business loan ONLY IF the total original amount is greater than $1MM, otherwise, if the total original amount is less than $1MM, I report the total amount of the loan as a small business loan even if my participating share is less than that? Doesn't seem to make sense.

I'm most confused by the statement "while they report the total amount of the loan at origination for small business loans." when talking about the duties of the particpating bank.

Thanks so much.

#3 in the original post referred to a Community Development loan situation in which the lead bank sold participations. Therefore the answer was the lead bank reports the entire value of the CD loan and the participating banks report their participation amount.

If the loan had been a small business loan (it couldn't be in the original example because it was a $2 million loan) then the lead bank and the participating banks all would report the total amount of the loan had it been for $1 million or less.

Review the CRA q and a on participations. Simply search on "participation" to reach the pertinent sections, which are pasted below.

§ll.42(a)(2)—1: When an institution purchases a small business
or small farm loan, in whole or in part,
which amount should the institution
collect and report—the original amount
of the loan or the amount at purchase?

A1. When collecting and reporting
information on purchased small
business and small farm loans,
including loan participations, an
institution collects and reports the
amount of the loan at origination, not at
the time of purchase. This is consistent
with the Call Report’s and TFR’s use of
the ‘‘original amount of the loan’’ to
determine whether a loan should be
reported as a ‘‘loan to a small business’’
or a ‘‘loan to a small farm’’ and in which
loan size category a loan should be
reported. When assessing the volume of
small business and small farm loan
purchases for purposes of evaluating
lending test performance under CRA,
however, examiners will evaluate an
institution’s activity based on the
amounts at purchase.

§ll.42(b)(2)—4: When an
institution purchases a participation in
a community development loan, which
amount should the institution report—
the entire amount of the credit
originated by the lead lender or the
amount of the participation purchased?

A4. The institution reports only the
amount of the participation purchased
as a community development loan.
However, the institution uses the entire
amount of the credit originated by the
lead lender to determine whether the
original credit meets the definition of a
‘‘loan to a small business,’’ ‘‘loan to a
small farm,’’ or ‘‘community
development loan.’’ For example, if an
institution purchases a $400,000
participation in a business credit that
has a community development purpose,
and the entire amount of the credit
originated by the lead lender is over $1
million, the institution would report
$400,000 as a community development
loan.

Kathy,

Good morning. As a follow-up to this string of CRA information - When dealing with CD Loans, what amount does the lead lender report? The full amount as indicated on the Note or only the dollar amount they do not participate away? In our example we have a Note for $2.5MM. We are the lead lender, on the day of closing we also closed a 40% participation with another bank. So in essence we have 60% and they bought 40%?

If you originated the CD loan and only your bank's name is on the note as the creditor you would report the full amount of the loan and the bank that purchases a participation in your loan would report the amount it purchased.

Len,

Good afternoon and thank you for the clarification. This confirms my current understanding.

Hi CRAStrong,

Where is the regulation that says the lead bank reports the entire loan as opposed to just their loan exposure...total credit (less) participation by other banks?

Len,

I only see regulation that tells the purchasing bank what to report. Where is the regulation that allows the leader bank to report the entire credit?

Hi Kathleen,

I see instructions for the participating banks, but where is the regulation that allows the lead bank to report the entire credit offering as a CD Loan?

The lead bank would report the loan as an origination as required by the Regulation. As such it reports the entire balance (the balance at origination) as instructed by the regulation. If this is not a CD loan, all participating banks would do likewise. But if this is a CD loan then the participating banks would report only the amount purchased. The reporting of the amount purchased for CD loans is an exception to the general rule that a bank would report the entire amount of the loan. The exception was adopted by the FFIEC a couple of years ago in the revised Q&A's. So ordinarily everyone would report the entire amount of the loan at origination and the only exception is for CD loans purchased. By default, the lead bank reports the entire amount of the loan. Keep in mind that what I am saying will be affected by the note document which I am assuming identifies the creditor as the lead bank.

This entire approach indicates how irrational the regulations can be. If banks who purchase CD loans report only the purchased amount why doesn't the same rule apply to purchasing a small business loan participation, for example? But the very fact that all lenders who purchase a participation in a small business loan report the entire amount leads to inconsistent and inaccurate data. I could go on about all the other exceptions and inconsistencies that imo generate inaccurate market data. One of the big exceptions is the handling of demand notes. Roll over a time note and it is reported (once per year), but renew a loan callable on demand and it is not reported. Many lines of credit secured by business assets are supported by demand notes. Consequently the annual renewals of those lines are not being reported leading to a significant understatement of small business lending activity.

I would like to add to this post for further interpretation, since it sinks in more when an example is posted.

Example:
If an agent bank originates a $750M loan (non-CD) and the participating banks purchase $150M, it sounds like each bank, including the agent bank, would report the $750M, correct? If the agent bank originates a loan over $1MM none of the banks would report, correct? Keep in mind these are non- community development loans. Those I get, each bank reports their portion.

Thanks so much for the clarification. The gov't does not make it easy and I agree with Len S....the regulations can be very much irrational.

Good Afternoon,

I would like to follow up on this question from fretzer. If we originate a $750,000 loan and participating banks purchase a certain portion (say each purchased $150,000), all of the banks would report $750,000 for their small business loan reporting? These are not community development loans. Thoughts are greatly appreciated! Kathleen Blanchard, I would love to hear from you. Thank you!

Yes as I explained in this thread 5 years ago, a participation in a small business loans is reported by all banks based on the original loan amount.

SECTION .42(a)(2) Loan
Amount at Origination
SECTION __.42(a)(2) – 1: When
an institution purchases a small
business or small farm loan, in
whole or in part, which amount
should the institution collect and
report – the original amount of the
loan or the amount at purchase?
A1. When collecting and reporting
information on purchased small
business and small farm loans,
including loan participations, an
institution collects and reports the
amount of the loan at origination,
not at the time of purchase.

Would a purchase of 1-4 home mortgages to LMI borrowers be considered a community development loan for an ISB? I realize if we originate a 1-4 it can't be reported CD as affordable housing. But, what about purchased 1-4s from a CDFI working in that space?

bump- por favor.

If these are individual loans, it will increase your penetrations into those areas, but I am not sure how purchasing individual mortgages equate to community development.

A community development loan is a loan that has a primary purpose of community development and, except in the case of a wholesale or limited purpose bank, has not been reported or collected by the bank or an affiliate for consideration in the bank’s assessment as a home mortgage, small business, small farm, or consumer loan, unless the loan is for a multifamily dwelling and benefits the bank’s assessment area(s) or a broader statewide or regional area that includes the bank’s assessment area(s).

Thanks Randy. I should have clarified- what about the purchase of a participation for a block of 1-4 mortgages? Would that count toward community development?

I am sure that you can get credit if these loans are in your assessment area. I am just not sure it falls under community development. I am dangerous when it comes to the new CRA landscape. You probably need to wait for Len or someone else to weigh in.