MADISON, Wis.-Loan participations can be an effective tool to diversify loan portfolios, but credit unions are being given a reminder that such investments require a calculated approach by experienced lending staff.
That's the word from Brad Mundine, regional manager of Credit Union Protection Risk Management at CUNA Mutual. "You've got business loans out there that are pretty high dollar where one credit union may not have the capability to fund the entire loan. So what they will do is get the business opportunity and try to participate the rest," he explained. "When the economy was thriving and the real estate market was bubbling there was a lot of money to be made and a lot of builders were doing very well. It was an area that a couple of credit unions got into without doing all of their homework in some cases."
While residential construction has slowed in much of the country, there are a number of areas where loan participations and overall commercial demand are seeing decent demand. When a credit union is faced with a loan participation investment opportunity, it is critical for it to do its own research, Mundine stressed. While the originator may have a good reputation and is putting a good lead loan on its books, it may have a different risk appetite and different portfolio than the CUs looking to invest. Big losses during the housing bust were caused by some credit unions buying into participations and originating loans that were not up to their usual standards and in industries they did not fully understand.
"Credit unions have a very low marketshare of business lending so it's not something that has ever really been a major part of the market," said Mundine. "As they try to diversify into forms of business lending, it's going to be new."
