What is a loan participation note?
A loan participation note is a fixed income security that allows investors to buy parts of an existing loan or a set of loans. IAA holders participate pro rata in the collection of interest and capital payments. Banks or other financial institutions often enter into loan participation agreements with local businesses and may offer loan participation notes as a type of short-term investment.
How a loan participation note works
To meet the needs of local borrowers and increase loan income, many community banks use loan participation agreements in which one or more banks share ownership of a loan. Community banks have also formed loan syndicates. One example is the Community Investment Corporation of North Carolina (CICNC), an affordable housing loan consortium that provides permanent, long-term funding for the development of low-income and low-income multi-family and senior housing throughout Carolina North and South.
One of the purposes of the loan participation notes is to help meet the needs of borrowers in a local community. Several other institutions have also emerged for similar reasons. Credit unions are one example. A credit union is a financial cooperative created, owned and operated by its participants. While some credit unions may be large and national in scale, such as the Navy Federal Credit Union (NFCU), others are smaller.
Credit unions and banks generally offer the same services, including accepting deposits, making loans to individuals or small businesses, and offering financial products such as credit and debit cards and certificates of deposit (CD). However, there are key structural differences in how a commercial bank and a credit union use their profits. While traditional banks operate to generate profits for their shareholders, many credit unions operate as not-for-profit organizations, putting excess funds into practical projects that will better serve their community of de facto owners (i.e. their members).
For example, Angel V. Castro, a pioneer in the credit union movement in Latin America, was recently recognized for his efforts by the National Credit Union Foundation. Castro believed that the traditional American model of poverty reduction based on consumer credit would not meet the needs of people in the communities with which he worked. In Ecuador, it has focused on the organization of credit unions that have expanded access to credit for its members, specifically for agriculture and other activities.
The cooperative principles of credit unions include: voluntary membership, democratic organization, economic participation of all members, autonomy, education and training of members, cooperation and community engagement.