Whole-Loan Sales

A whole-loan sale transfers ownership of specific receivables from you to a buyer for cash. It is easy to mismeasure, because the money arriving at settlement looks like a result when much of it is a change in how the same assets are funded.

Use it when you need liquidity on a defined pool, when you want to exit an asset type, when a facility is approaching maturity, or when the buyer values the collateral more than your cost of holding it. Give yourself time to run the process, because a pool marketed under visible funding pressure gives the buyer information you would rather not hand over.

Whole ownership versus a participation

A whole-loan sale transfers the loan itself. The buyer takes the economics and the credit risk and steps into the position you held. Ownership of record may sit with the buyer directly or with a nominee, custodian or trustee acting for it, depending on how the transaction is structured and how the collateral is registered. Note also that transferring ownership does not by itself end your involvement: if you retain servicing, or the agreement contains repurchase or indemnity provisions, the contractual relationship and the retained risk continue.

A participation transfers an economic interest while you retain legal ownership. The buyer receives an agreed share of collections and bears an agreed share of losses, but the relationship with the obligor and the loan documentation stay with you. Participations can be attractive where re-registration is costly, and they leave you holding an asset with a contractual obligation attached. Where the loan documents restrict transfer, do not treat a participation as an automatic route around the restriction: counsel needs to review the specific clause, and consent may still be required. Which instrument you are actually signing is a question for counsel, because the label on the document does not determine the analysis.

Selecting the pool and fixing the cutoff

Every sale starts with a defined population. Get three things right.

Define selection criteria in writing before you pull the population, and keep the query that produced it. Buyers will ask how the pool was assembled and whether it was cherry-picked against the rest of your book. A documented, reproducible selection is worth real money in the pricing conversation.

Fix a cutoff date and hold it. Balances, delinquency status and accrued interest are measured as of that date. The cutoff gives you the measurement point, but it does not by itself decide who is entitled to a payment received afterwards. That is set by the purchase agreement, so make sure the document says what you think the cutoff implies.

Reconcile the pool tape to your ledger before you send it. If the tape says 5.000m and the ledger says 5.014m, explain the difference rather than adjusting the tape to match. The loan tape discipline that supports a facility diligence process is the same discipline that supports a sale, and buyers read reconciliation quality as a proxy for operational quality.

Price, accrued interest and settlement

Price is expressed as a percentage of unpaid principal balance at the cutoff. Above 100 is a premium, below is a discount. Around that number, confirm four mechanics.

• Whether accrued but unpaid interest transfers with the loan or is paid separately at settlement.
• Who is entitled to payments received between the cutoff date and settlement, and how those are trued up.
• Whether any part of the price is held back pending file delivery or document remediation.
• What conditions must be satisfied on the settlement date, including lien releases and file transfer confirmations.

Agree the interim collections treatment explicitly and build the true-up calculation before you sign. It is a routine source of post-settlement argument and an avoidable one.

Clearing existing liens before transfer

If the loans being sold are financed on a warehouse, the facility has a claim over them and the buyer will not take them subject to that claim. The mechanics are routine but time-sensitive: you calculate the release amount, the buyer funds, the facility is repaid from proceeds, releases are filed or delivered, and ownership transfers.

Start this with your capital provider before you agree a settlement date. Release procedures, notice periods and any minimum release amounts sit in your facility documents. A buyer ready to fund on a date your provider cannot accommodate is a scheduling failure that costs you credibility.

Servicing retained or released

Servicing released means the buyer takes over collection, borrower communication and reporting. You lose the borrower relationship and you must transfer data and files in a form the new servicer can actually use. Whether that earns a better headline price depends on the buyer, the asset and what your servicing is worth to them, so test it rather than assuming a premium.

Servicing retained means you keep performing the work for a fee. You preserve the relationship and any cross-sell value, and you keep the operational cost and the performance obligations. Confirm the fee, the reporting specification, the standards you are held to and the circumstances in which you can be replaced. The build behind that commitment is set out in servicing requirements.

A bank buyer runs its own independent analysis rather than relying on the seller: it wants access to the information, documented terms of transfer, servicing and any recourse, and the ability to monitor the loans after purchase. That is why it will not accept your credit memo as a substitute for its own file review.

A 5m sale, in numbers

The following case is fictional and stated in US dollars. It shows settlement cash on a single sale and deliberately separates three things that get conflated: gross proceeds, cash released and lifetime profit.

You sell 5.00m of par balance at a price of 98%, producing 4.90m of gross proceeds. From that, 3.50m repays the facility debt secured on those loans, and 0.05m covers transaction costs paid at settlement. Cash released to you is 1.35m.

Now compare that to what you had invested. The 5.00m of loans were funded with 3.50m of facility debt and 1.50m of your own equity. Released cash of 1.35m is 0.15m below that 1.50m original equity position. The gap has two components: 0.10m of sale discount, being 2% on 5.00m of par, and 0.05m of transaction costs. The costs are already deducted in arriving at 1.35m, so count them once and do not subtract them again from the equity side of the comparison.

The teaching point is the three-number distinction. Gross proceeds of 4.90m measure what the buyer paid. Released cash of 1.35m measures what you can redeploy. Lifetime economic profit is neither of those. It depends on the interest and fees actually collected while you held the loans, your funding and servicing costs over that period, the credit performance you experienced before sale, and the discount and costs on the sale itself. Losses you might have taken had you held on are a counterfactual, not recognised profit.

The 1.35m is capital released for reuse. Comparing it with the original 1.50m equity shows a 0.15m reduction from the sale discount and closing cost, before considering any earlier earnings or losses. Note too that this walk is a cash movement, not a return calculation: it says nothing about the period over which the equity was deployed.

Repurchase obligations and the exposure you keep

Most purchase agreements include loan-level representations, and a breach typically triggers a repurchase obligation or an indemnity. Some agreements add early payment default provisions requiring repurchase if a loan misses a payment within a defined window after settlement.

Model this before signing. A breach rate observed on a risk-based file review is not automatically the probability of repurchase across the pool, because you deliberately selected the files most likely to show problems. You can use it as an estimate only where the sample was validated as representative; otherwise use it to identify problems and design further testing, not as a numerical floor or an expected cost. Confirm the notice mechanics, the repurchase price formula, whether cure is permitted before repurchase is demanded, and whether there is a time limit after which representations expire. What any specific provision means in your jurisdiction is a question for counsel.

Accounting and legal treatment are not automatic

Whether the sale removes the assets from your balance sheet under the accounting standards you report under is a separate analysis from whether the sale is effective between the parties. Continuing involvement, retained servicing, repurchase obligations and retained interests all bear on that analysis. Ask your auditor before you build the transaction around an assumed treatment, not after.

Running a sale process that holds up

Run the sale before you need the cash. Buyers read urgency, and a pool marketed on your own timetable gives you room to reject a price you do not like. If sales are becoming a recurring part of your funding rather than a one-off, structure the relationship properly through a forward flow arrangement so that pricing, criteria and settlement mechanics are agreed once rather than renegotiated every quarter.