Mortgage lending is not an easy area to navigate, particularly for those involved in complex transactions. Not only is there a need to abide by state and federal lending laws, there is also a need to carefully structure agreements so that transactions go as smoothly as possible and don’t lead to legal liability and financial loss.
In the world of commercial mortgage lending, one common practice is to use loan participations. Loan participation can be beneficial in that it can allow a lead bank to increase liquidity and share risk with other lenders. It can also allow participating lenders to diversify their lending portfolios without having to underwrite and service the loan. There are risks associated with loan participation, though, and both lead banks and participating lenders need to take steps to minimize these risks.
One important point for both lead banks and participating lenders is to carefully clarify the roles of both parties in participation agreements. Terms can vary, but in an ordinary participation agreement, there is no fiduciary relationship between the lead bank and participating lenders unless the participation agreement clearly imposes fiduciary duties on the lead bank. Participation agreements are usually set up as a contract involving a buyer and seller, with no agency relationship. In many cases, original lenders also disclaim all liability. These factors can affect the risks involved in these transactions.
Many participation agreements require participating lenders to acknowledge that they did not rely on the lead banks analysis of the loan documents, the borrower’s credit, and the collateral. Even in cases where there is no such provision, participating lenders should always rely on sound legal counsel and do their own due diligence rather than relying on the work of the lead bank.
In our next post, we’ll continue looking at this topic.