6. Keep it local. “Local decision making is one of the big benefits of working with our credit union,” says Harkins. “For instance, the man who does the landscaping at our branches needed help to buy trucks and equipment. He wasn’t looking for a big loan, but he might not have fit the traditional ‘box’ at other financial institutions.”
Knowing your borrowers and the local market conditions can also help your credit union mitigate risk. While some credit unions choose to enter business lending through participations, that raises a red flag for Paton. “You can quickly get into trouble there, especially if the loan is in a geographic area or industry where you don’t have any experience.”
7. Increase your visibility. Business owners don’t always think of credit unions as a resource for their financial services. To turn that around, Tropical Financial makes a huge effort to be a visible player in the local business community. “We go to chamber of commerce programs, host events, and speak at the Rotary and the Kiwanis Clubs,” says Helber.
Erie Federal runs ads in local business magazines, sponsors local community and business events, works with local economic development groups, and has a blog dedicated to small businesses.
“We intend to put a big focus on member-business education,” says Miller. “We want to help members’ employees gain the business acumen they need to be happier, more productive employees. And we want to play a mentoring role for our small-business members. This service is about building relationships.”
8. Educate your entire team. Knowledge and support are critical at every level—from the board to the front-line staff. Make it an ongoing commitment, not a one-shot deal that happens before the launch of business services, suggests Helber.
“We’re taking a year to make sure we understand all the nuances of business lending so we can effectively educate our board on the risks,” agrees Miller.
Kaczmarek’s credit union has taken advantage of employee training provided by the Pennsylvania Credit Union Association on business lending, best practices for business accounts, and types of business entities. Many other state leagues offer similar programs.
9. Manage your risk. Business lending is inherently riskier than consumer lending. So it’s important to put policies in place that limit your exposure. After the recent real estate meltdown, most credit unions are leery of making commercial loans for anything other than owner-occupied properties.
“Have a healthy mix of loan types and collateral,” recommends Harkins. “Our CUSO’s reporting tools help us monitor our overall portfolio.”
Limiting online activities can also be prudent. “We don’t allow businesses to apply for loans online,” explains Paton. “You’re trying to build relationships, so you want to see the property and meet the controller.”
Most credit unions prefer to work with established businesses, he adds. “We like to work with organizations that have been in business for at least three years.”
Participation is another way to share the risk. “We keep our business loans in the $50,000 to $500,000 range, and most of them fall around $100,000,” says Helber. “If, for instance, we have a member who needs a $4 million loan for an owner-occupied building, we’ll use our CUSO to see if we can share the loan.”
Put policies in place to limit risk exposure over the life of the loan, he suggests. “Reporting is critical. Get routine financials from your business members on a set schedule.” You need to track and analyze this information to help you see if a business is stressed and getting into trouble, he says.
10. Show businesses they won’t get lost in the shuffle. Smaller businesses can quickly get frustrated working with large national banks, says Helber. “Their account rep might be in another city, their loan decisions are often made elsewhere, and they don’t get the service they need.
“We communicate that their experience at the credit union will be different, and that we’ll typically be able to offer them better terms and rates.”
NEW MUTUAL FUND COULD HELP WITH MBL CAP
A small group of credit union professionals are creating a mutual fund that could help credit unions package and sell their business loans—providing a way to better manage the member business lending (MBL) cap. The new fund’s tentative name is the “Unity Fund.”
It’s a collaboration of Tom Campbell and Mario Pelosi, managing directors of Glasgow Partners; David Dunn former commercial lender and former president of two credit union service organizations (CUSOs) providing business services; and Guy Messick from the law firm of Messick & Weber PC. To launch the mutual fund, the team will partner with investor credit unions in a CUSO that’s a registered investment adviser.
BNY Mellon conditionally approved the group’s proposal in December to become a mutual fund offered by BNY Mellon in its family of mutual funds. This was no small feat, according to Dunn. It shows the business viability of this project, he adds. It has a few more hurdles to clear before it can open for business, but its prospects look bright—no fund that has gained BNY Mellon approval has ever failed to clear subsequent regulatory hurdles.
At this time, NCUA has interpreted the investment regulations as not permitting federal credit unions to buy shares in the proposed mutual fund. There will be follow-through with NCUA to determine if the investment regulations could be amended to permit credit unions to buy shares in the mutual fund. In the meantime, the shares will be sold to institutional investors.
The quality control on the loans will be extensive, according to the fund’s creators. The CUSO will certify the lenders, and that certification must be reviewed and renewed annually. The CUSO will only certify experienced and successful business lending credit unions and CUSOs to sell loans into the mutual fund. If a noncertified credit union wants to sell loans to the mutual fund, a certified credit union must review and approve the underwriting. The certified lenders will service the loans in the mutual fund. The CUSO will review all loans sold into the mutual fund and there will be a third-party reviewer who’ll sample test the underwriting.
“The mutual fund will only be successful if the loans are of the highest quality. And we’re sparing no effort to ensure this,” Dunn says. “We’re excited about this new tool for the credit union industry that will help manage the regulatory cap issue [because when credit unions sell their business loans, those assets are taken off their books], provide liquidity from outside the industry, shift some lending risk to outside the industry, and provide high underwriting standards that will tend to raise the bar for credit unions that want to sell to the mutual fund. We look forward to the day when credit unions can buy shares in the mutual fund so they can benefit from a favorable return on their investment without the same level of risk that a loan participation might pose.
“There’s a great deal of business lending opportunity for credit unions,” he adds. “We’re not looking for the big syndicated real estate loans that have been so problematic. Credit unions can help America recover if they have the necessary business lending expertise and regulatory relief. This mutual fund can help credit unions seize their significant business lending opportunities.”
CUNA and credit unions are trying to get Congress to increase credit unions’ MBL cap to 27.5% of assets from 12.25%. Doing so would open up more opportunity to offer MBLs, inject $13 billion in loans into the economy and create as many as 140,000 new jobs, with no cost to taxpayers, CUNA says.