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Stress Testing Participations

Stress Testing Participation Loans

Stress Testing ParticipationsOverview: Participation loans often have characteristics quite different from other loans in the portfolio, and therefor it is useful to be able to stress test those loans separately from others. A recent addition to the Madison Report library makes it easy to stress test participation loans separately from other loans in the portfolio.

There are many factors that make participation loans different from others in the portfolio. They are usually larger loans, participations purchased were originated by another lender and are typically serviced by that lender, and the underwriting standards applied to these loans may be more rigorous than others in the portfolio.

Consequently, when stress testing the portfolio it may be useful to exclude participation loans so that the other loans in the portfolio may be evaluated. Or it may be useful to exclude only participations purchased so that stress tests are applied only to loans that were originated by the client organization.

Finally, while participation loans may have been underwritten with more demanding criteria, they also tend to be larger loans, so that if a problem occurs, the consequences are more pronounced. That being the case, it is useful to be able to select only participation loans, or only participations purchased, or only participations sold and test those loans.

The ability to easily include or exclude participation loans from stress tests provides added value to stress test reporting.