Due to statutory or regulatory restrictions on the amount which a Bank may lend to a single borrower, in some large loan arrangements, a Bank will enter into a participation agreement. A loan participation generally refers the sale by one Bank (the “Lead”) to another (the “Participant”) of a part interest in of a part interest in an extension of credit or a credit facility (i.e., a loan).
Commercial real estate loans are popular loans in which to purchase participations. The real estate collateral is easily valued by a Participant and it benefits from title insurance, insuring the leads lien position. The Participant is responsible for its own assessment of the creditworthiness of the borrower and the documentation, which requires knowledge of the applicable loan documentation requirements.
The Lead and the Participant enter into a participation agreement providing for the sale of the participation interest to the Participant and otherwise defining the rights and obligations of the Lead and the Participant. The Lead generally executes and delivers to the Participant a participation certificate in favor of the Participant evidencing the Participant’s interest in the loan, although the delivery of a certificate is not required and is sometimes dispensed with. See the sample Participation Certificate and Agreement which combines these documents located at the end of this Chapter.
The loan agreement providing for the loan is between the Lead and the borrower; the Participant is not a party to the loan agreement or to any security documents relating to the loan. The Participant has no direct rights against the Borrower and the Borrower has no obligations to the Participant unless the loan agreement explicitly confers certain rights in its favor.
The Participant’s lack of rights against the borrower requires the Participant to rely upon the Lead for the servicing of the loan, the enforcement of the borrower’s obligations under the loan agreement and the related documentation and the protection of the Participant’s interests.
If the loan is sold (as opposed to the sale of a participation) an Assignment of Deed should be executed by the seller in favor of the purchaser and filed in the Real Estate Records. See the Assignment of Deed located at the end of this Chapter.