Guidelines Aimed At Limiting Default Rates On MBLs
As member business lending continues to surge, a credit union task force has unveiled new guidelines for avoiding a similar rise in loan defaults.
Grace Mayo, CEO of Telesis Community CU here who leads the CUNA Business/SEG Services Committee that is working to ensure safe underwriting of member business loans, noted that loans to small business will represent more than 3% of credit unions' total portfolios by year end.
This compares with about 2.5% of the total portfolio currently and less than 1% three years ago, Mayo added. According to a statement by CUNA, about 18% of credit unions offer member business loans, with an average loan size of $140,600.
Members Business Solutions Co., LLC and CUNA's Member Business Lending Peer Group have published guidelines to make lending to these small businesses safer. "It is a new product for the industry and there is a need for some benchmarks," Mayo added, explaining the need for the guidelines.
Members Business Solutions, which is jointly owned by Members Development Co., LLC and the Pennsylvania Credit Union Association, has started a certification program and is also facilitating a secondary market for member business loans.
Mayo said that following the guidelines should reduce default rates. "We are doing it so that we don't have to hear about them. We need to have a uniform guideline to prepare ourselves," she said.
Among the guidelines: that loans not be extended to help a business cover losses, or to provide working capital. Rather, loans should go toward investments, such as expansion of established business.
The guidelines also suggest a ban on lending to some types of businesses, including bars, restaurants, adult entertainment and gambling establishments. They also single out start-up companies, gas stations, refineries and salvage yards, all of which come with various risk and potential liabilities.
All loans sold to the MBL Fund require three identifiable sources of repayment, the guidelines said.
According to a statement published by the Small Business Administration (SBA), demand for loans has been picking up as the economy expands.
Loans approved under the SBA's guaranteed loan program in the last quarter of last year amounted to $3.56 billion, up from $3.12 in the same period a year earlier and $2.24 billion in the last quarter of 2003, the organization said.
Separately, according to a study by credit report provider Experian, owners of small businesses have a 21% higher income than the general population, are more likely to live in higher-value homes and have higher education levels. The study defined a small business as one with 25 or fewer employees.