A loan participation note (LPN) is a fixed-income security that allows investors to purchase portions of an outstanding loan or package of loans. Through LPNs, investors gain a pro-rata share in collecting interest and principal payments and take on a proportional risk of default.
Banks, credit unions, and other financial institutions often enter into loan participation agreements with local businesses, offering loan participation notes as a form of short-term investment or bridge financing.
Key Takeaways
- Loan participation notes (LPNs) enable investors to claim a portion of outstanding loans issued by other lenders.
- The lead bank underwrites and issues the loan, with participant investors stepping in to purchase a pro-rata amount.
- LPNs are particularly popular with credit unions, fostering greater economic participation and community building by sharing both risk and reward with local stakeholders.
How a Loan Participation Note Works
To meet local borrowers’ needs and boost loan income, many community banks utilize loan participation agreements to share loan ownership. Community banks have also formed lending consortia. For example, the Community Investment Corporation of North Carolina (CICNC) offers long-term financing for developing low- and moderate-income multifamily and elderly housing across North and South Carolina.
Loan participation notes cater to local community needs. Credit unions, financial cooperatives created, owned, and operated by their participants, provide a great example. While some credit unions are large and national, many are smaller and more community-based. Cooperative principles of credit unions include voluntary membership, democratic organization, economic participation, autonomy, education, cooperation, and community involvement.
Credit unions and banks both offer services such as accepting deposits, originating loans, and providing financial products like credit cards and certificates of deposit (CDs). There are key structural differences in their use of profits. Traditional banks seek profits for shareholders, while many credit unions are not-for-profit, investing excess funds into projects that benefit their community members.
Inspired Success Story
Angel V. Castro, a pioneer in the Latin American credit union movement, demonstrates the impactful potential of community-focused financial instruments like LPNs. Recognized by the National Credit Union Foundation, Castro adapted the credit union model to fit local needs in Ecuador, extending credit to members for agriculture and other ventures. His work underscores LPNs’ effectiveness in enacting positive community change.
Related Terms: fixed-income security, pro-rata basis, credit unions, bridge financing.
