Structuring Mortgage Loan Participation Agreements: Strategies for Lead Lenders and Participants

Banks and other lenders have historically purchased participations in commercial mortgage loans to achieve growth, employ funds, diversify credit risk, and deploy liquidity. Litigation between originating and participating lenders highlights the critical nature of the loan participation agreement in protecting the interest of all parties to the transaction.

Key provisions of the participation agreement include, among other things, voting and other rights and obligations of each party involved in the participation, seller representations and warranties, transfer provisions, and reclaiming or buying back the transferred fund.

For due diligence with respect to the borrower, the originating lender and the underlying real estate collateral is a necessity to mitigate risk for the loan participant. The FDIC, in its Financial Institution Letter 492015 (FIL492015), provides due diligence guidance for banks in managing risks associated with these transactions.

Listen as our authoritative panel of finance practitioners looks at the current state of the loan participation market and outlines best practices for drafting or reviewing key provisions of participation agreements and effective due diligence for lenders. The panel will also explain the FDIC’s FIL492015 regarding lender risk management for purchased loans and purchased loan participations, as well as discuss some recent case studies related to loan participations.

1. Overview of loan participations
   1. What is a “participating interest?”
   2. What are the key characteristics?
2. Key participation agreement provisions and how they differ from syndications
   1. Lender voting rights
   2. Defaulting lenders
   3. Borrower workouts, foreclosures
   4. Seller reps and warranties
   5. Reclaiming or buying back transferred funds
3. Specific considerations
   1. Circumstances in which a loan participation can be regarded as a “true sale” of the underlying loan
   2. Circumstances in which a participated loan may be subject to another’s security interest.
   3. Automatic Perfection
   4. Settlement conventions/implications of delayed settlement; how loan sellers may obtain settlement liquidity coverage
4. Lender due diligence
   1. Understanding and reducing the selling counterparty risks
   2. Considering the participation structure
   3. Additional concerns relating to underlying real estate collateral
   4. How much do you review of the deal and how much using representations
5. FDIC Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations

The panel will review these and other key issues:

• What are the lessons from recent litigation regarding loan participation agreements?
• What are the key provisions of a mortgage loan participation agreement?
• When will a mortgage loan participation be regarded as a “true sale” of the underlying loan?
• What specific information should participants obtain from the lead lender prior to entering into the transaction?