June 25, 2020
By Christian Widhalm, Chief Revenue Officer at LendKey
As COVID-19 impacts our lives and livelihoods, credit unions are seeing a need to deploy capital quickly and cost-effectively to maintain their financial health. Many credit unions face excess liquidity as members hoard cash, along with weak loan demand and tighter margins due to current Fed interest rate policies.
Clearly, credit unions face the challenge of deploying liquidity into assets that carry an appropriate risk-adjusted return.
Loan Participations Are the Solution for Excess Liquidity
Loan participations provide access to higher-yielding asset classes that help diversify portfolios and increase ROA. Loan participations offer an alternative to generating whole loans with attractive risk-adjusted yields.
The average rates on refinanced student loans today might range from 3.50% to 7.50% – a yield profile that is hard to duplicate in the current environment.
In loan participations, multiple lenders share in the funding of a pool of loans. The lead lender underwrites and closes the loans, in keeping with its underwriting standards, and sells participations to a purchasing lender. Each institution that shares in the funding of a loan becomes an “owner” of a portion of the loan portfolio. This avoids the need for each credit union to create its own program or partner with an outside provider.
And, today’s technology makes the participation process streamlined and cost-efficient. At LendKey, our digital lending platform provides a quality borrower experience, while enabling credit unions to easily evaluate loan participation pools and partners, and to purchase, originate, monitor and service the loans.
A 2018 study by Cornerstone Advisors, sponsored by LendKey, modeled the effect of deploying 10% of excess liquidity in loan participations with a 5.00% return, and found that a $500 million credit union could boost ROA from 0.54% to 0.77% and ROE from 5.77% to 7.97%.
Liquidity Issues in Today’s Economy
In today’s “COVID-19 economy,” credit unions face a triple threat of rising liquidity, diminished loan demand and low yields. Growing the portfolio with higher-yielding assets is a challenge. But loan participations – especially if generated through an efficient and robust technology platform is providing a solution for credit unions’ liquidity and earnings challenges.
Learn how you can immediately deploy capital through modern loan participation by contacting LendKey today at sales@lendkey.com.