In a loan participation, which bank generally performs the underwriting, and what is expected of the participating bank?

• A. The lead bank performs underwriting; the participating bank relies entirely on it
• B. The lead bank generally performs underwriting, but the participating bank must perform its own due diligence
• C. Neither bank performs underwriting
• D. Both perform underwriting jointly

Answer: (B)

In a loan participation, the key split is who handles the credit decision and who is backing the loan. The lead bank that originates the deal generally performs the underwriting and makes the initial credit decision. The participating bank buys a portion of the loan but must conduct its own due diligence to verify the borrower’s credit quality, the terms, and the structure that the lead bank is offering.

This independent review by the participating bank is essential even though it may rely on the lead bank’s information and underwriting package. The participant needs to assess its own risk exposure, confirm that collateral and covenants meet its standards, and ensure the loan fits its risk appetite and regulatory requirements. Ongoing monitoring, reporting, and compliance responsibilities also fall to the participant in proportion to its share.

So, the correct understanding is that the lead bank generally handles underwriting, while the participating bank must perform its own due diligence to ensure it is comfortable with the risk and terms of the loan.