By Ray Birch
NEW YORK—The number of credit unions expressing interest to one company over buying loan participations is increasing, fueled by smaller CUs seeking to increase their own lagging loan numbers.
The strategy is also helping credit unions overall cope with shrinking net interest margins, according to Ian Lampl, CEO and cofounder of LoanStreet, a company whose online portal matches loan participation sellers with buyers.
“We have been adding about one credit union a day to our portal,” Lampl, whose company serves more than 1,100 credit unions, told CUToday.info.
Lampl said attitudes toward loan participations have been changing in recent years, observing that at one time the agreements were viewed as largely serving only large credit unions.
“There used to be this view that participations should only be conducted by two large credit unions because of the complexity of the process,” said Lampl. “But that has really changed.”
Lampl said greater use of technology has made the deals easier to complete online, saying that has “democratized” the loan participation process.
“Credit unions of virtually all sizes can now get the benefits of loan participations,” said Lampl, whose company charges sellers a fee, and depending on the services required, an ongoing reporting charge. “They can buy different loan amounts, and this is due to greater availability of standard agreements, greater automation, and simpler reporting.”
The Have’s and the Have No Loans
As CUToday.info has regularly reported, the credit union industry is increasingly one of the “haves” and the “have-nots”—with NCUA data consistently showing asset, loan and membership growth is almost exclusively among the largest-asset CUs. Loan growth for small credit unions has been a significant pain point, with overall peer group data showing portfolios shrinking among CUs below $100 million in assets.
“The large credit unions tend to have the higher loan-to-share ratios, while the smaller credit unions the lower numbers here,” reminded Lampl. “As I said, with new technology and greater automation, smaller credit unions can now connect with the big organizations to buy participations.”
Lampl said small credit unions can buy a percentage of a loan pool that fits within their objectives and adds much-needed income to the balance sheet.
“They can gain interest income from loans they cannot offer themselves,” Lampl said. “And the bigger credit union now has room to make more loans.”
One CU Sees Strong Interest
As CUToday.info has reported https://www.cutoday.info/Fresh-Today/Alliant-CU-Reports-64M-in-Sales-of-Participations-in-RV-Loans-Says-It-s-Seeking-Additional-Buyers, interest in loan participations has been growing at the $14-billion Alliant CU in Chicago, which reported its loan trading desk sold $186.5 million and acquired $89 million in commercial and consumer loan participations during the first quarter of 2021.
Alliant said its trading partners in the 18 transactions included credit unions across the country and came in the wake of a successful 2020 in which it closed sales transactions totaling $219.7. A portion of the first quarter activity included sales of commercial real estate participations to six different credit unions on a multifamily property in suburban Chicago and another on a large, high-performing recreational vehicle resort community in the northeastern U.S., the credit union stated.
Alliant said it also sold four pools of consumer loans secured by recreational vehicles in the first quarter. CUToday.info featured Alliant’s RV loan participation business here.
“We’re seeing significant momentum as we expand our partnerships with other credit unions that seek loans backed by institutional-quality properties,” said VP Charles Krawitz, who leads commercial lending and loan trading at Alliant.
Full Gamut of Loans
Loan participations offered on LoanStreet run the gamut of CU loan types, said Lampl, noting prime auto loans have been attractive.
“Prime auto generally trades at a 130-basis-point spread over two-year Treasuries, after taking into account expected losses,” Lampl said. “Prime rates for auto loans haven't dropped much, so they've continued to sustain a certain level of spread over two-year Treasuries, which is the average maturity of a car loan. If you look at government data, you see that the participation market has been growing by more than 15% on a compound annual growth rate.”
Lamp emphasized the additional spread over what a CU gets from two-year Treasuries is significant revenue.
“You can’t survive on 15 basis points from two-year Treasuries,” said Lampl. “That extra 150 basis points of return is meaningful and can go a long way toward helping bottom lines and saving small credit unions.”