Participation Agreement
A participation agreement is an economic arrangement whereby a lender originates a loan to a borrower and then sells a portion of that loan to another party.
Participation Agreement Mechanics
- The originating lender commonly holds a participation interest in the loan
- The originating lender retails title to the loan
- The originating lenedr retains all the loan documentation in its own name and continues to service the loan
- The originating lender maintains all interaction with the borrower
- Only the economics are transferred to the agreement purchaser
Participation Agreement Risks
- Introduces counterparty risk. The holder of the agreement may have trouble collecting if the original lender fails, even if the borrower is paying.