Risky Business (Lending)
Credit unions have recognized the fertile opportunities presented by member business loans. But many don't understand the distinctions and complexities such lending presents compared to traditional consumer lending, two industry experts said.
Kevin Thompson, vice president, product development for CUNA Mutual Group's Credit Union Financial Solutions, and David Dunn, director of operations for CU BizSource, offered their insights on MBLs to CUNA Mutual's 10th Annual Discovery Conference.
Dunn urged attendees to explore whether member business lending is right for their credit union and to take advantage of available industry resources. "Small businesses represent almost 99% of all employers and nearly all of the self-employed, which makes up 7% of the total workforce," Dunn said.
Credit unions currently have more than $11 billion in member business loans outstanding, and that amount is growing by 20% annually. "From those statistics, it's clear this is a great opportunity for credit unions, but it's a new and complex area, and it needs to be done right," Dunn said.
Dunn cited NCUA's definition of a business loan as any loan, line of credit, or letter of credit more than $50,000 where the borrower uses the proceeds for commercial, corporate, agricultural or other business investment property purposes.
"You can't take your current consumer lending officer and say, 'Go do business loans,'" he cautioned.
To implement a member business lending program, NCUA requires credit unions adopt a specific commercial lending policy and have staff members with at least two years of commercial lending experience or use another party that fulfills that requirement.
Credit unions can build their own program, or partner with a third party, among them CU BizSource, Cooperative Business Services and Business Partners, along with information on a new member business lending web page posted in May by CUNA. Business lending for credit unions is tightly regulated, said Thompson, referring to NCUA Regulation Part 723.16, which caps a credit union's member business loan volume at 12.25% of assets.
"A successful member business lending program leads to constraints, such as the NCUA cap and the need for more liquidity. Fortunately, credit unions can find relief in the secondary market."
Secondary Market For Business Loans
Thompson highlighted a third-party provider investment pilot program approved in March by the NCUA board to enhance member business lending opportunities for credit unions. CU System Funds was developed by CUNA Mutual to purchase member business loans from credit unions and sell shares in the fund as investments to interested credit unions.
Described as "innovative" by NCUA, the program will improve liquidity for member business loans by allowing originating credit unions to sell their member business loans to the funds to lower their balance sheet risk.
"This new investment opportunity allows for greater diversification and is expected to offer attractive yields given its risk characteristics," said Thompson. "It provides an efficient secondary market alternative to loan securitizations and participations, plus credit unions benefit from professional portfolio management and diversification," he said.