In addition to the credit-sharing problems that lenders should avoid, as noted above, which are primarily fuelled by changes to THE standards in place under the SAS, lenders should ensure that the terms of their loan-sharing agreements protect against the unfortunate consequences that leading banks and participating banks experienced during the recent recession. Finally, some loan participation agreements previously included mandatory provisions for the sale or repurchase of participating banks. These provisions ranged from the compulsory purchase of a participant by the credit bank at the arrival of a borrower`s default to the redemption of the will. According to language, these types of provisions have allowed major lenders to better control their credit relationships with the borrower or have prompted a participating bank to purchase a stake in a loan. These provisions are now part of the requirement that the sale of stakes not take place in a non-regulatory manner and that it be actually sold. While it is important to recognize that a lead lender can still buy back a participating bank in equity, it simply cannot have a necessary sale/buyout in the loan participation agreement. Although FASB 140, as amended by FASB 166, is only an accounting standard, its adoption has had the greatest impact on what banks can no longer do in terms of credit participation. In particular, FASB 140, as amended by FASB 166, requires that the loan participation (i) be based on a proportionate interest in the loan; (ii) require that all funds from the loan be shared on a pro-rata basis, with the exception of cash from services provided (i.e. an origination fee or a service fee); and (iii) are not due to regressium. If a loan participation does not meet these requirements, it cannot cancel the participation agreement; However, participation is unlikely to be considered the sale of part of the loan. On the contrary, it will most likely be treated as a direct loan from the participating bank to the borrower. In this case, some unintended consequences may occur, such as exceeding a bank`s legal credit limit and other breaches of compliance with the law. Another problem, often mentioned during the recession, was the ownership of locked or surrendered collateral, which led lead banks and participating banks to ask how these guarantees should be borne by banks after liquidation or rebate, since the “loan” no longer exists.
In reality, these guarantees should be treated as OREO or OPPO. Depending on the nature of the asset, a limited liability corporation is the preferred preferred ownership structure for this scenario and will continue to do so, particularly with changes to the limited liability company`s rules that will come into effect on August 1, 2015. The placement of OREO or OPPO equity in a limited liability company can significantly limit the risk of leading banks and participating banks to non-contractual liabilities, with banks each benefiting from a share in the company corresponding to their proportionate share of the participating loan. This is especially important when assets are entities that are and will remain open to the public after the asset is locked or handed over. It is important to note that major and participating Minnesota banking companies must obtain approval from the Minnesota Department of Commerce before the formation of such entities. The participation agreement should include a provision for the creation of such an organization and, where possible, the company`s draft incorporation documents should be negotiated and developed at the same time as the participation agreement.