Comment Detail

Comment

Challenge:

The point system for “member financial participation” is restricting and doesn’t really provide flexibility for Bank’s and Sponsors when loans are participated.

For instance our Bank is looking to participate in a construction loan for a project in which a non member Bank is the lead. Our Bank is also willing to sponsor the project for the AHP app.. Under the current system the borrower gets no awarded point for “member participation.” The exclusion for points is as follows “The member must originate the construction and/or permanent financing. Loan pools, pari passu, or similar financing structures with multiple financial institutions do not qualify for points in this category.”

If our Bank was the lead and participated it out the borrower would also not get points because the BAnk isn’t the exclusive lender.

However if our were the only lender it would get up to the full 6 points for lender participation.

This can pose issue to both the member Bank and Sponsor:
1) When trying to manage Bank exposure its often that smaller institutions will partner with larger institutions. If this is the case the sponsor is driven to pursue larger institutions vs. local lenders or submit the application without member points.
2) LIHTC deals where the purchasers of the equity may also be the construction lender. These tend to be larger and community Bank’s typically don’t buy the LIHTC’s
3) Sponsor could be at risk for recapture if at any time the Bank decides to participate out a portion of the loan- outside of the sponsors control
4) Banks are at a disadvantage when looking to support larger projects if participations are not eligible

Given the FHLBNY relies on the LOI or AHP 159 (attached) for participation it may not even be recognized by the FHLB until after closing and funding

To make sure capital gets into hands of sponsors and the Bank’s are protected from unintentional default on the project some things to think about are
1) Many times the bank is “boxed out” because smaller community Banks don’t have the liquidity or appetite to purchase tax credit. Large Bank’s have the ability to purchase the LITHC’s and in return require they receive the construction financing.
a. Things to consider when it’s a known participation prior to application.
i. What is a meaningful participation level?
1. Can it be tiered (challenge again is if things are sold down post award this would change scoring)
a. 100% = 6 points
b. 75%=5 points
c. 50% = 3 points
d. 25%= 2 points
e. <25% = 1 points
2. Or (more preferable)
a. Lead Bank- 6 points
b. Non Lead Bank-3 points
i. This option encourages construction or perm. loan participation vs. 1 time grant.
3. Participation must not be diluted below a certain level?
a. Level TBD?
ii. Lender rights may also be something the home loan bank wants to consider?
1. Both banks have equal voting rights
a. Yes- 6 Points
b. No- 3 Points
2. Participant Bank should be involved in the requisition process. SHOULD BE REQUIRED.
a. Approving draws and “boots on the ground”
b. Periodic site visits by the Member Bank should ensure that the project is in
2) Each Bank has a level they are typically ok with holding on a given relationship or Sponsor/Developer. This could either be loan specific or it could be “developer specific.”
a. By selling down a loan the Bank may be able to do more projects with the same developer and spread the risk over multiple projects
b. Selling down preserves dry powder
c. In sell down it could be blind to the Sponsor/developer and may never even be known.
Bank typically at AHP application does not have “everything” needed to understand the deal. So typically its fully underwritten from time of application to approval, and sometimes after the fact. Depending on loan size and number of deals with developers the risk appetite may warrant a participation or sell down.
What happened this year that we did not experience last year was more requests for “donations” to ensure participation because the participation clause excluded the borrower from getting any points in lender participation. Typically the Bank would rather participate in the construction financing then “grant” money to the project. In a grant situation we are less participative in the financing of the project as we have no ongoing monitoring or credit needs.