Loan participation note – LPN definition
What is a loan participation note?
A Loan Participation Note (LPN) is a fixed income security which allows investors to purchase portions of an outstanding loan or a set of loans. LPN holders participate in a pro rata in the collection of interest and principal, and are also exposed to a proportional default risk.
Banks, credit unions, or other financial institutions often enter into loan participation agreements with local businesses and may offer loan participation notes as a type of short-term investment or bridge financing.
Key points to remember
- A loan participation note (LPN) allows investors to purchase a claim on a portion of an outstanding loan issued by another lender.
- With an LPN, the lead bank underwrites and issues the loan, while participating investors then purchase a pro-rated amount.
- LPNs are popular with credit unions, which use participation agreements to foster greater economic participation and community building by sharing risks and rewards with local residents and businesses.
How a loan participation note works
To meet the needs of local borrowers and increase loan income, many community banks use loan participation agreements in which one or more banks share ownership of a loan. Community banks have also formed loan consortia. One example is the Community Investment Corporation of North Carolina (CICNC), an affordable housing loan consortium that provides long-term, permanent funding for the development of low- and moderate-income multi-family and senior housing across North Carolina. and the South.
One of the purposes of loan participation vouchers is to help meet the needs of borrowers within a local community. Several other institutions have also emerged for similar reasons. Credit unions are an example. A credit union is a financial cooperative created, owned and operated by its participants. While some credit unions can be large and nationwide, like the Navy Federal Credit Union (NFCU), others are smaller.
The cooperative principles of credit unions include: voluntary membership, democratic organization, economic participation of all members, self-reliance, education and training of members, cooperation and community involvement.
Credit unions and banks typically offer the same services, including taking deposits, providing loans to individuals or small businesses, and offering financial products such as credit and debit cards and credit cards. certificates of deposit (CDs). Key structural differences exist in terms of how a commercial bank and a credit union use their profits, however. While traditional banks operate to generate profits for their shareholders, many credit unions operate as nonprofits, investing excess funds in tangible projects that will better serve their community of de facto owners (i.e. i.e. members).
Example of an LPN
For example, Angel V. Castro, a pioneer of the credit union movement in Latin America, was recently recognized for his efforts by the National Credit Union Foundation. Castro believed that the traditional American model of poverty reduction based on consumer credit would not meet the needs of people in the communities he worked with. In Ecuador, he focused on organizing credit unions that have expanded access to credit for their members specifically for agriculture and other activities.