A jumbo loan is a form of loan issuance on an especially large scale to one borrower with the participation of several lenders. A jumbo loan should not be considered a specific loan type – it is a standard loan, which differs in the number of participants in the transaction. That is, only the mechanism of accumulating credit resources and the technique of taking out a loan are different; the form and principles of jumbo lending are traditional.
With the help of jumbo loans, export transactions, international projects are credited, financing of multinational corporations is carried out. This is issued for large tranches, which means a higher credit risk.
One bank is not able to meet such high requirements of the borrower – due to limited own reserves, and due to legal restrictions. Therefore, in order to establish cooperation with large clients, a group of two or more banking institutions are combined into a syndicate (consortium) in order to reduce the risk of the transaction and meet the financial needs of the borrower by uniting their free financial resources.
Features of a jumbo loan
The essence of jumbo loans can be summarized as follows. A client – a legal entity, managers of a large project or the government, applies for a loan to a specific bank. Due to the limited resources of their own, even the leading banks are not always able to provide the required amount. Consequently, for an optimal way out of the situation, the bank takes on the role of a coordinator and applies with an offer of cooperation to other banks that would help to mobilize the required amount.
The list of potential investors is preliminary agreed with the borrowers and only after that the coordinator addresses the partners with a proposal.
Further, the coordinating bank acts as the main lender and organizer: it negotiates with the client, deals with the transaction, ensures the collection and transfer of funds, controls the use and repayment of the loan.
Benefits of jumbo loans
For the borrower, this is the ability to get financing at reasonable interest rates without the need to issue corporate bonds or other securities transactions.
Large borrowers are reviewed by banks as VIP clients, for whom individual service terms are issued so that the funds received are used as efficiently as possible in accordance with the needs of the company. And this: issuing a fixed amount or opening a credit line, the possibility of early repayment, the possibility of prolongation, lower interest rates and other terms convenient for the borrower.
For participating banks, such an operation is a rather profitable deal, since it is an opportunity to receive income without using their own labor and time resources. All necessary is to allocate the requested part of the total amount of the loan tranche and wait for its repayment. In addition, participation in a jumbo loan is an image project for participating banks, which improves the quality of the loan portfolio.