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Allowance For Loan Losses & Partner Guarantee

We have an agreement with a partner whereby they will receive a percentage of the future interest payments on a loan that we originate with a merchant. In doing so, if the merchant defaults on that loan, the partner who is receiving the percentage of the interest payments must pay back to us their share of the principal losses. They do not have to put up collateral. My question is would you only reserve the ALLL on 85% of the loan originated? Is this considered a credit enhancement?

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

My opinion...(it's been awhile since my credit/banking days)

1. Reserve with a 100% credit basis.
2. Just because you have an agreement and you call them a "partner" does not guarantee you payment. Indirectly, you are extending credit to your "partner".
3. Do not conflate the credit (to which you have to recognize ALLL) and it's support (guarantee, collateral, etc).

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