MADISON, Wis.-Underwriting member business loans isn't like underwriting consumer loans, one person is cautioning.
Joni Lovingood, senior consultant, risk management for CUNA Mutual Group, said underwriting has a foundation in understanding the business member and the purpose of the loan.
"Risk is inherent in lending," she said. "The only way to completely avoid risk is to make no loans. But if properly underwritten and monitored, business loans carry no more risk than consumer loans."
The best place to start, Lovingood continued, is with a thorough analysis of a business member's credit and cash flow. If a CU feels it lacks the expertise there are third parties available to perform underwriting, including several CUSOs.
Simillarly, with loan participations, it "is very important to examine the underwriting from the originating credit union. If the buying credit union would not make the loan according to its own underwriting standards, it should not participate."
What To Include
Participations should include full and fair disclosures by the selling CU that detail the repayment history on the loan, any policy exceptions that were applied, the depository relationship the business member has with the credit union, and any regulatory waivers or conflicts of interest.
According to Lovingood, both buying and selling CUs looking to enter a loan participation agreement should have similar strategic plans. "These should be realistic to current market conditions," she said.
In the event a loan goes sour, collections policies and procedures between the participating CUs should be spelled out from the beginning. Lovingood said loan officers should regularly monitor business members.
"Get updated financials and be ready to respond to any signs of distress," she advised. "The collateral should be audited at least annually; more frequently if there is trouble. Sometimes a workout agreement can fix a problem, but other times repossession or foreclosure is the only option."
