Key Insights
- Lower CBLR thresholds offer community financial institutions greater flexibility to expand commercial loan participations and enter new markets.
- Regulators expect purchased loan participations to undergo the same rigorous underwriting and diligence as originated loans.
- Performing independent credit analysis and screening originating banks helps institutions manage portfolio concentrations effectively.
One of the first car booster seats made was produced by the Bunny Bear Company in the 1930s and was little more than a framed chair that elevated children so they could see the things around them during car rides. Though car seats gradually expanded to include features such as toys and fake steering wheels to keep children occupied, it wasn’t until the 1960s when the focus shifted to keeping children safe. In 1962, the Jeenay Car Seat, designed by British journalist and mother Jean Ames, was the first car seat manufactured specifically to be used in the backseat with a 3-point harness system and a foam pad.
The shift from a simple booster seat to a safety system reflects a broader principle: As a tool becomes more important, the controls surrounding it must mature as well. Loan participations present a similar challenge for community financial institutions (CFIs). They can support growth, diversification, and balance-sheet management, but greater efficiency depends on disciplined underwriting, robust third-party due diligence, and a clear strategy for capital relief.
The shift from a simple booster seat to a safety system reflects a broader principle: As a tool becomes more important, the controls surrounding it must mature as well. Loan participations present a similar challenge for community financial institutions (CFIs). They can support growth, diversification, and balance-sheet management, but greater efficiency depends on disciplined underwriting, robust third-party due diligence, and a clear strategy for capital relief.
Greater Flexibility for Loan Participation Strategies
Loan participations are a valuable tool for CFIs to manage concentration risk and boost loan to deposit ratios. And recent regulatory updates provide capital relief that gives CFIs greater flexibility to participate in loans.
In April, the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) officially lowered the Community Bank Leverage Ratio (CBLR) to 8%, down from the previous 9% threshold – a change that took effect on July 1, 2026. For many CFIs, CBLR reduction means the ability to expand loan participation strategies by taking part in larger commercial deals or moving into complementary markets. And regulators seem to be warming to greater participation overall, as the National Credit Union Administration (NCUA) recently simplified loan participation rules for federally insured credit unions by raising concentration limits and easing retention hurdles.
In April, the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) officially lowered the Community Bank Leverage Ratio (CBLR) to 8%, down from the previous 9% threshold – a change that took effect on July 1, 2026. For many CFIs, CBLR reduction means the ability to expand loan participation strategies by taking part in larger commercial deals or moving into complementary markets. And regulators seem to be warming to greater participation overall, as the National Credit Union Administration (NCUA) recently simplified loan participation rules for federally insured credit unions by raising concentration limits and easing retention hurdles.
Maximize the Benefits, Stay Compliant
Despite these changes, however, regulatory scrutiny remains high and CFIs need to remain diligent regarding third-party diligence, a reality emphasized by the FDIC’s recent update of its advisory regarding third-party risk. Originally established in 2015, the February 2026 adjustment removes legacy references to reputation risk, but maintains the message that CFIs need to manage purchased loan participations as thoroughly as loans they originate, particularly credit analysis and documentation standards.
Given the lower capital requirements and eased participation risk controls, CFIs may want to prepare themselves for more thorough regulatory oversight on this front, as examiners may expect to see risk levels inch up as a result of such changes. CFIs may also want to proceed with caution to avoid greater flexibility under the CBLR translating to greater risk, which they can do by maintaining thorough underwriting standards and due diligence in loan originations. When buying loan participations, CFIs should consider independent verification of underwriting standards of the lead underwriter and should monitor loan performance and stress test underlying collateral.
Below are a few suggestions CFIs should consider to maximize the benefits of the new CBLR framework while keeping examiners happy:
Given the lower capital requirements and eased participation risk controls, CFIs may want to prepare themselves for more thorough regulatory oversight on this front, as examiners may expect to see risk levels inch up as a result of such changes. CFIs may also want to proceed with caution to avoid greater flexibility under the CBLR translating to greater risk, which they can do by maintaining thorough underwriting standards and due diligence in loan originations. When buying loan participations, CFIs should consider independent verification of underwriting standards of the lead underwriter and should monitor loan performance and stress test underlying collateral.
Below are a few suggestions CFIs should consider to maximize the benefits of the new CBLR framework while keeping examiners happy:
- Maintain independent underwriting reviews, as solely relying on the lead bank’s credit memo can raise red flags and introduce unintended risks if that bank’s reviews aren’t as stringent as those of your organization. CFIs should run an independent credit analysis that adheres to their internal loan policies.
- Screen the bank originating a loan as rigorously as your organization would screen a third-party provider and dig into their servicing capabilities, collection procedures, and historical loss performance records.
- Monitor for the possibility of unwanted portfolio concentrations by looking at exposures across both geographic regions and industries.
If CFIs maintain thorough underwriting standards in loan participations, they can use capital relief to help boost net interest income and achieve greater balance sheet resilience without the risk of regulatory penalties. One way to do this is to take advantage of correspondent bank services, like PCBB's Loan Participations program, which can help CFIs expand their CRE loan exposure with the help of expert leaders who can help with everything from identifying opportunities to remaining compliant with regulations.
