PORTLAND, Ore. - Credit unions' growing presence in commercial lending and additional opportunities in such loans aren't projected to dry up anytime soon, according to the leaders of several CUSOs that specialize in member business loans (MBL).
As Credit Union Journal reported June 9, demand has remained strong for commercial loans and services, in part because a struggling economy and bad loans among other lenders have led them to make policy changes. As fall begins, CUSOs are reporting that conditions have only improved for credit unions since summer began.
Banks, which have been driving small businesses to credit unions due to tightened lending practices, aren't expected to fully re-enter the commercial lending arena until mid-to-late 2009, predict the CUSO heads, some of whom believe the bank pullout sets the stage for credit unions to capture a strong portion of the commercial lending market that they may never relinquish.
"We are building a foundation for credit unions to become a player in this market," said Larry Middleman, president of CU Business Group (CUBG) here, who shared that CUBG business remains 50% to 60% above 2007's pace. "Given the opportunities we are getting nowadays with banks saying 'no' to customers, if credit unions do a really good job and come through and take care of their borrowers, they will be players, perhaps primary players. I think we are in the process of creating a strong business platform in commercial lending."
While more credit unions are moving forward with business lending, headlines about CUs facing commercial lending challenges and examiners taking aim at MBL portfolios (see related story) remind credit unions about the importance of entering commercial lending in a measured fashion, agree the MBL CUSO chiefs. Concerns about credit unions using brokers, having thin and inexperienced commercial lending staff, and overly aggressive loan practices have the attention of the industry.
What's Really Driving Delinquencies
Jim Gallagher, president of Member Business Solutions (MBS) in Tallahassee, Fla., joined with Middleman in becoming concerned when the national statistics for commercial loans at credit unions nationally showed that delinquencies were spiking earlier this year. Working independently to investigate what was driving the numbers, both say their review of data included in 5300 reports has arrived at the same conclusion.
"I sorted the data from the largest reportable delinquency to the smallest," Gallagher said. "The worst 10 credit unions represent 40% of all reportable delinquencies. A small number of credit unions are greatly influencing the delinquency numbers for the industry overall."
What that indicates, both Middleman and Gallagher contend, is that credit unions should not be scared away from moving into business lending because a small number of CUs may have had risky underwriting practices in place or used brokers.
"At MBS we are not big fans of brokered loans," Middleman said. "If credit unions know brokers well on a local basis and are familiar with the types of deals the brokers bring, then they can get much more comfortable with using them. But never use brokers in a shotgun approach."
Middleman also expressed concern that the business lending problems sometimes result from credit unions having thin or inexperienced commercial lending staffs.
"You need to have depth to your program," said Middleman. "I'm not trying to sell our CUSO's services, but we work with many credit unions that have one key business lender and an assortment of junior staff. If that key business lender leaves, now you may have a lot of complex deals on books that all of sudden you may not have expertise to deal with."
Not only is expertise important in underwriting, it's also critical in how credit unions market to small businesses, especially today, offered Kent Moon, president and CEO of the South Jordan, Utah-based Member Business Lending (MBL).
"It's a target-rich environment now," said Moon, who shared that MBL dollar volume is up 59% over last year. "The small business market is always a strong market, you just have to understand how it works in an expanding or contracting economy, and you address what the market needs."
Market Remains Strong
Moon contended the market remains strong whether the economy is up or down. In a declining economy small businesses stop buying large pieces of capital equipment and real estate and turn to recapitalizing, refinancing to improve cash flow, Moon explained. More small businesses are also formed due to individuals losing their jobs and finding it easier to create a small business than find a new position.
"Right now we are pursuing opportunities that are presented in a contracting economy," Moon said. "And when the economy expands, we'll shift our focus to the market's need and that opportunity."
In Miramar, Fla., CU Business Capital (CUBC) believes the way to grow business lending today is by providing services to small businesses.
"Our philosophy is that there has never been a greater opportunity for credit unions to add business members, gather deposit dollars, and loans will come from that," said Murray Halperin, SVP of marketing and business development for CUBC. "It's proven-add ancillary merchant services and really build relationships."
The MBL CUSO leaders agreed that banks will not fully re-enter the commercial lending market until at least June 2009-likely even later-after they have recapitalized and taken their focus away from subprime writedowns, and the government's new administration takes over.
Meanwhile, credit unions should take advantage of business at hand, said MBS's Gallagher. "I got a request yesterday from a business owner who has had a relationship with one of our member credit unions for several years. He has relationships with other banks and one of them tightened credit on his available line. So now the credit union has the chance to take that bank out. We're going to see a lot more of this."
MORE
For related stories on member business lending in the current economy, visit www.cujournal.com and type the following terms into the search bar at the top right of the home page:
* Downturn Seen As Opportunity For CUs & Small Biz
* Mid-Year Losses Continue To Spread Among CUs Sources
For info on this story:
MBL: http://www.mblllc.com/
CUBC: http://www.cubusinesscapital.com/
MBS: http://www.mbsllc.org/
CUBG: http://www.cubusinessgroup.org/(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
