Where The Risk Lies In Business Lending
Member business services is an area with great potential for credit unions-both positive and negative- according to one expert.
Doug Benzine, VP-research and consulting with CUNA, told attendees of a breakout session at the California and Nevada CU Leagues' Big Valley Educational Conference here credit unions must be aware of both the pluses and the minuses associated with offering business services.
"This is a completely different environment than anything you have done in the past," he cautioned the audience members-most of whom indicated their CUs do not currently offer business products. "I don't mean to scare anybody away from member business services, but I want to advise of things to watch for."
As of the end of 2005, more than 1,800 CUs had funded a member business loan, with an average loan amount of $167,000, he said. In contrast, the average loan amount in 2004 was $100,000.
"There is a lot of growth, but still a long way to go," he said. "Credit unions had $14.5 billion in outstanding member business loans at the end of last year. That is a big number for credit unions, but a drop in the bucket for banks."
As an example, Benzine said 187 CUs in California-or 33% of the Golden State's 565 credit unions-have outstanding member business loans (MBLs). The total amount of business lending by credit unions in California is $5 billion-compared to $146.3 billion by banks. "Just a little bit bigger share of the marketplace," he assessed. "Credit unions have just 3% of the market, but banks don't want to let credit unions in."
There are many reasons CUs get involved with member business services, he said, topped by an opportunity to generate more income. In many cases, members are asking for them. Also, it is a way for credit unions to increase deposits, loans and membership. It allows them to stay competitive by keeping their "business members" out of banks, and increase member satisfaction. Business loans are economic trend neutral, because most have floating rates tied to the prime rate or Treasury notes, which adds flexibility to the portfolio.
However, he cautioned, some credit unions enter the space without knowing what they are getting into. He said they need to be aware of the key disadvantages. These include: the regulatory environment, the need to change a CU's culture and the need to hire expertise from outside the credit union movement.
"Credit unions have the most regulations of any financial institutions," he declared. "For example, the 12.25% business lending cap is a random percentage not based on safety and soundness; it was tied to negotiations for HR 1151. Banks have no cap-business lending is their sweet spot and their cash cow. It is where they make most of their money."
The culture change is the most overlooked aspect, according to Benzine. He said CUs must be aware they will be drawing up rules for loans and savings that are completely different from what they are used to.
As for hiring expertise from outside: "Few credit unions have someone on the bench with business services experience. They must hire a banker. However, it is getting easier to hire a banker, because decision making at banks is becoming centralized. People want to bank the way it used to be." Joking, he added, "It takes a while to get the 'bank' out of these people, but it happens."
Member business lending help for CUs might be coming soon from Congress in the form of the Credit Union Regulatory Improvements Act, which would benefit credit unions' business offerings in multiple ways. It would increase the cutoff for defining an MBL to $100,000 from $50,000. CURIA would also exclude loans or loan participations by federal credit unions to non-profit religious organizations from the member business lending limit mandated by the Federal Credit Union Act.
And, it proposes to raise the member business lending ceiling to 20% of assets, up from the present 12.25%.
Four Models To Choose From
There are four models for CUs wishing to enter the member business lending space to follow, Benzine said. The first, and most gradual, is to enter into loan participations. Second is to join a CUSO. Third: establish a limited suite of business products and add more as members request them.
The fourth option is to move quickly to a full product line. A CU following this model must be willing to make expenditures for an experienced staff, a powerful host system or the necessary outsourcing, he said. "Credit unions want to know: 'How do we do business services?' The answer depends on the credit union-the culture of the institution and its risk-averse nature. For credit unions that have never seen a business loan, participations are the least expensive. They can see how other credit unions are doing it, how they underwrite, and so on."
It is not "realistic" to offer only business deposit products or only business loans, he said. "Small business people do not have the time to shop rates. They are busy making widgets and trying to meet payroll. They want someone they can trust who will handle both deposits and loans."
Another overlooked, but important, challenge is the extra time and staff demands business services places on a CU, Benzine continued. "Every business member comes in at 4:45 p.m. on Friday with a bag of coins and a bunch of checks needing processing. This causes the teller lines to go out the door, and guess what that does to member satisfaction? Credit unions need separate teller lines to keep all members happy."