On September 12, the Federal Deposit Insurance Corporation (FDIC) released a financial institution advisory letter related to effective credit risk management practices for purchased loan participations (Advisory). The Advisory applies to all FDIC-supervised banks and savings associations, including community institutions.
The Advisory, which notes the benefits to financial institutions that purchase loan participations, reminds purchasing institutions that losses on purchased loan participations can result from an over-reliance on originating institutions, particularly with respect to out-of-territory and unfamiliar markets.
The Advisory suggests that institutions implement an appropriate credit risk management framework that includes effective loan policy guidelines, written loan participation agreements and an independent credit analysis before purchasing a participation loan.
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