Solution To Scoring Biz Loans
Small business loans apparently are today's cure for ailing assets, if you read the dailies-but underwriting can be messy.
To ease the risk of making small business loans, Metropolitan Credit Union in September turned to origination technology offered through a local CUSO, Northeast Member Business Services (NEMBS).
"We have a comfort level with the origination software because it has been validated by many lenders with many years of experience, and we're developing a good feel for the credit scoring model," said Robert Cashman, CEO at the $610-million CU.
Metropolitan uses Baker Hill's LiquidCredit Bank2Business, a web-based service that manages the application process, boarding and servicing for small business loans.
The CU also gets scoring expertise in the form of Fair Isaac's risk prediction technology and credit models, which are part of the Baker Hill solution.
"With this scoring model, we can be aggressive but minimize our potential charge-offs," said Rick Slater, chief operating officer at NEMBS, based in Keene, N.H. The CUSO's charge-off history is nine basis points, he said.
Underwriting is more consistent now that the process is automated, said Cashman.
"With the traditional way of manual underwriting, there's a lot more room for subjectivity in making the decision," he explained. "Now that we're using our own pricing matrix and a scoring model built around the credit union's policies and procedures, we're able to take the emotion out of the decision-making."
Decisions and commitment letters are usually delivered in less than one day, he added.
Whereas the Baker Hill origination system is interfaced with the NEMBS documentation system, loan data currently must be manually entered into Metropolitan's core processing system, said Cashman.
Since the September inception of its new program, the CU has approved 20 of the 29 applications made, said Phil Bryan, senior vice president of Lending at Metropolitan.
Metropolitan has closed eight lines of credit for a total of $840,000, with an outstanding balance of $209,000, and five term-loans with $333,000 outstanding, Bryan said.
The credit union's increasing comfort with small business loans may encourage the CU to start making commercial real estate loans as well, Cashman said.
"Since we've been out in the marketplace making small business loans, we've received a tremendous amount of interest from members who are looking to us for commercial real estate loans," said Cashman.
"And working together as part of the CUSO gives us a wonderful opportunity in the form of participation loans for commercial real estate," he added.
NEMBS' solutions fit the credit union industry, Cashman continued.
The Baker Hill scoring model recognizes the not-for-profit businesses that credit unions so often take under wing, including start-ups and companies in business for less than two years. In addition, Metropolitan can take a low-risk approach to processing loans without guarantors.
As a smaller financial institution that is part of the business lending CUSO, Metropolitan was fortunate not to have to go out on a limb to pay for the Baker Hill technology, said Cashman.
"The individual credit unions in the CUSO are able to leverage their resources to make this more cost-effective, without giving up risk management," he said.
NEMBS focuses on small business loans under $250,000, but recently expanded the score card validation to $750,000.
The CUSO, which serves six credit union clients in the New England states, also processed its first commercial real estate loan this month.
For info on this story:
* Metro CU at www.metrocreditunion.org
* Northeast Member Business Services at www.nembs.com
* Baker Hill at www.bakerhill. com