Loan Participation Note (LPN): What it is, How it Works, Example

What Is a Loan Participation Note?

A loan participation note (LPN) is a fixed-income security that allows investors to buy portions of an outstanding loan or package of loans. LPN holders participate proportionally in collecting interest and principal payments and share the risk of default.

Banks, credit unions, or other financial institutions often enter into loan participation agreements with local businesses and may offer LPNs as short-term investment or bridge financing.

Key Takeaways

• A loan participation note (LPN) allows investors to purchase a claim to a portion of an outstanding loan issued by another lender.
• With an LPN, the lead bank underwrites and issues the loan, while participant investors subsequently purchase a pro-rata amount.
• LPNs are popular with credit unions, which use participation agreements to foster greater economic participation and community building through sharing risk & reward 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 where multiple banks share ownership of a loan. Community banks have also formed lending consortia. One example is the Community Investment Corporation of North Carolina (CICNC), an affordable housing loan consortium that provides long-term, permanent financing for the development of low- and moderate-income multifamily and elderly housing throughout North and South Carolina.

Loan participation notes help fulfill the borrowing needs of local communities. Credit unions are another example of institutions formed for similar reasons. While credit unions can vary in size, some are large and national, like the Navy Federal Credit Union (NFCU), while others are smaller in scope.

Credit unions and banks offer similar services, including accepting deposits, originating loans for individuals or small businesses, and providing financial products such as credit and debit cards and certificates of deposit (CDs). However, there are structural differences in how commercial banks and credit unions utilize their profits. Traditional banks aim to generate profits for shareholders, while credit unions operate as not-for-profit organizations, directing excess funds towards community projects benefiting their members.

Example of an LPN

Angel V. Castro, a pioneer in the Latin American credit union movement, was recently recognized by the National Credit Union Foundation for his efforts. Castro believed that the traditional U.S. model of consumer credit-based poverty reduction would not meet the needs of the communities he worked with. In Ecuador, he focused on organizing credit unions that provided credit access specifically for agriculture and other endeavors.

Angel V. Castro, a pioneer in the Latin American credit union movement, was recently recognized by the National Credit Union Foundation for his efforts. Castro believed that the traditional U.S. model of consumer credit-based poverty reduction would not meet the needs of the communities he worked with. In Ecuador, he focused on organizing credit unions that provided credit access specifically for agriculture and other endeavors.