A few weeks ago I was visiting with the Chief State Examiner in Minnesota, Terry Meyer, and we got on the topic of member business loans. While I have worked in the credit union industry for the past seven years, I previously worked with other regulatory agencies and board of directors of other financial institutions regarding problems that they had, including business loans. As a result of that conversation, I thought it would be appropriate to share some of my thoughts regarding member business lending, including participation loans, and the credit union industry.
As each credit union looks to the expanded powers available to them, such as member business lending, they must do so with common sense and prudence as this type of loan brings a unique set of risks and characteristics that are not generally familiar to the credit union management. While each credit union may have a set of items that is important to it on this matter, the following three items have been instrumental in my success.
First, for those credit unions that are trying to grow their member business lending portfolios through loan participations, it is important to know the seller and the qualifications of the seller's business lending department.
You cannot rely upon them to properly underwrite a loan that is going to be in your portfolio! That is something that you need to do. However, if you do not have confidence in their abilities to properly underwrite and manage the loan, then you should not be investing in that loan.
Next, regardless of who originates the loan, each credit union must have a thorough understanding of the purpose of the loan, the capabilities of the borrower, the quality of the collateral, and the cash flow of the business, just to mention a few of items needed to prudently underwrite a business loan. Each credit union must underwrite these risks according to its own internal guidelines and credit criteria. The impact of a poorly underwritten member business loan can have a significant impact on the earnings and net worth of the credit union. A good example is to look back in history at the savings and loan industry in the 1980s and the impact that "acquisition-development-construction" loans had on their capital position.
Finally, you need to have good, competent personnel making your business loans. People who understand and can underwrite and manage a business loan portfolio are critical to your success in this market! You need to pay them for their work.
Remember that most of the good business loans are already at the local bank because they have an existing relationship. Those people who are looking for loans are looking for a reason-you need to understand and evaluate that reason as part of your underwriting process.
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