How Does a Whole Loan Transaction Work?

A whole loan transaction refers to any transaction involving the sale, transfer, or other disposition of a direct or indirect interest in any individual or pool of consumer receivables, trade receivables, auto loans, commercial mortgages, etc.

To initiate a whole loan transaction, most buyers start by producing loan tape. A loan tape denotes an electronic file or set of files that captures the lending product data from a financial firm’s systems. Typically originating as a database extract, a loan tape works as a snapshot of a subset of an organization’s credit portfolio information. The amount and details included in a loan tape varies depending on what information is required. Information provided generally falls under Debtor, Loan Level Product, etc.

Who Are The Parties?

A loan transaction normally involves two parties. The counterparty in such a relationship is considered the other entity participating in the financial transaction. For the transaction to be initiated, there must always be a counterparty. More specifically, every buyer of an asset must be paired with a seller who is willing to sell and vice versa. A counterparty relationship can include deals between individuals, businesses, governments, or any other organization. It should also be noted that the counterparty is often unknown. Additionally, there can be several counterparties involved in a loan transaction.

Due Diligence

An essential element in buying a loan is performing due diligence. Due diligence is considered a detailed assessment of of the borrower’s overall economic and financial position (e.g., the borrower’s creditworthiness, the risk involved in the loan, and the suitability of the loan’s terms) and the borrower’s legal capacity to enter into the loan agreement performed by the arrangers and the lenders (Penuica, n.d.). The lead arrangers gather both public and private information about the borrower and the financial transaction and then select the appropriate information to share with all parties involved in the loan.