Bank News - November 2012: Participations — Problems In The Making, And How To Avoid Them, Part II


Originally published in Bank News, November 2012.

The most critical component of the relationship between the lead bank and its participants, and the source of most disagreements, is communication. A prudent lead bank will adopt the motto “early and often” in all of its communications with the participants. But it is helpful for a lead bank to understand the communications that it is required to give, and those that are discretionary.

Necessary or required communications will be those that are speci?ed in the participation agreement. They may include the status of borrower performance, the status of collateral, reports and information from borrowers, and similar information. On the other hand, discretionary communications are those that are not required by the participation agreement, but which a prudent lead bank would give to participants. A prudent lead bank will follow the golden rule, and will communicate any information to the participant that the lead bank would want to know if it were in the shoes of the participant. Th e form of communication is also important. A prudent lead bank (as well as a participant) will communicate in a form that memorializes all discussions and decisions. Although telephone and oral communications are important in reviewing critical issues, any critical communications and decisions should be documented in writing. Emails are generally sufficient for this purpose, but should be regularly printed and held in the loan ?les.

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