Loan Participation Agreement Pitfalls

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BKD recently became aware that certain third-party providers of loan documents to banks have revised their standard loan participation agreements. These revisions may cause those agreements to be noncompliant with accounting rules that allow the seller to account for the transfer as a loan sale. While they may still be considered a true sale for legal purposes, the accounting rules differ in some respects from the legal definition of a true sale, such as when the buyer doesn’t have the right to sell or assign its participation.

Participation agreements often contain clauses that require right of first refusal back to the seller and/or require the seller’s consent before the buyer can transfer its interest in the loan to a third party, along with a clause that consent won’t unreasonably be withheld. The seller can’t effectively control the interest sold or the participation must be accounted for by the seller as a secured borrowing instead of a loan sale.

If you have concerns about your current participation agreement, contact Jason or your trusted BKD advisor prior to year-end to discuss. Participation agreements often can be amended to incorporate language that will allow the transfer to be accounted for as a sale, but should be done prior to year-end.


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