DEFINITION of 'Loan Participation Note (LPN)'

A loan participation note is a fixed-income security that permits investors to buy portions of an outstanding loan or package of loans. LPN holders participate, on a pro rata basis, in collecting interest and principal payments. Banks or other financial institutions often enter into loan participation agreements with local businesses and may offer loan participation notes as a type of short-term investment.

BREAKING DOWN 'Loan Participation Note (LPN)'

To meet the needs of local borrowers and to increase loan income, many community banks use loan participation agreements in which one or more banks share in the ownership of a loan. Community banks have also formed lending consortiums, such as 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 Note and Community-Oriented Financial Services

One of the purposes of loan participation notes is to help meet the needs of borrowers within a local community. Several other institutions have also sprung up for similar reasons. Credit unions are one such example. A credit union is a financial cooperative that is created, owned and operated by their participants. While some credit unions can be large and national in scale, such as the Navy Federal Credit Union (NFCU), others are smaller in scope.

Credit unions and banks generally offer the same services, including accepting deposits, originating loans for individuals or small businesses, and offering financial products such as credit and debit cards, Certificates of Deposit (CDs). Key structural differences exist in terms of how a commercial bank and credit union use their profits, however. While traditional banks function to generate profits for their shareholders, many credit unions operate as not-for-profit organizations, putting excess funds into concrete projects that will better serve their community of de-facto owners (i.e. members).

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

Cooperative principles of credit unions include: voluntary membership, democratic organization, economic participation of all members, autonomy, education and training for members, cooperation, and community involvement.

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