June 7, 2010
It is now almost mid-year 2010 and we find that over 2,000 credit unions are offering member business loans. On a cumulative basis over $30 billion in total loans are on the books.
The industry is currently lobbying to expand the existing regulatory limitations on the maximum size of the MBL loan portfolio as a percentage of the credit union’s total assets. Many CUs are attempting to expand their ability to provide small businesses with financial services and, across the country, more CUs are considering getting into MBS/MBL activities. The regulators at both the state and federal levels are carefully watching this momentum.
Given the challenging state of the current economic environment nationwide, the regulators want to make sure that the CUs offering MBS/MBL services are giving full consideration to the wide range of organizational issues that constitute a sustainable/successful MBS/MBL program.
Over the last five years, one of the primary areas of focus for CUs has been on the development of MBL policies and procedures. The business loan underwriting process has received the most attention. Credit unions have been working to develop more viable business credit qualification standards and they have been working hard on setting their primary focus on the logic of debt service coverage.
Establishing procedures to identify and stress test the prospective borrower’s internal operating cash flow has become a more standard underwriting practice in the CU industry as time has gone by. This transition is critical to separate business profitability from business operating cash flow. The ultimate objective is to identify the borrower’s true capacity to repay.
This transition trend is encouraging, but a lot more work will need to be done to make sure CUs have the ability to truly identify viable primary and secondary sources of repayment for their member business loans.
Banks are currently facing significant challenges managing their existing business loan portfolios. They have all ratcheted up their underwriting standards. As a result, access to credit has become more difficult for many of their current and prospective borrowers.
Many of the borrowing prospects that have been recently walking into the doors of CUs all across the country are looking for help because they no longer qualify for credit from their bank. The challenge for CUs is to determine which of these prospective borrowers are truly creditworthy.
In many cases the banks are not restricting access to business credit by raising their underwriting standards. Instead, they are simply asking their borrowers to meet their standard underwriting requirements.
This implies that many of these credit situations were established utilizing more liberal debt service coverage standards and measurement procedures that, using hindsight, were not in strict compliance with the bank’s core lending policies. So word to the wise is to be cautious about readily taking on these so-called lending opportunities. Your battle cry should remain, “If the cash don’t flow, the loan don’t go!” If you are using the services of an outsourced business loan underwriter, do you feel confident your MBL loan committee can effectively review these underwriting packages and make viable final credit approval decisions? Does everyone on the MBL loan committee have business lending experience? Have the committee members been exposed to adequate levels of training to professionally fulfill the responsibilities of this review and approval process?
The regulators are also concerned about the ongoing viability of business loan administration. How is your CU addressing credit administration?
The reality is that the real credit risk management issues begin when the loan is actually approved and booked. Monitoring loan performance and applying proper risk rating levels to the individual loans in the portfolio must be done properly and on an ongoing basis.
Are you employing the services of a qualified independent business loan review service to verify that your underwriting processes and ongoing credit administration management practices are staying in compliance with your policies and procedures?
In the event you have a business loan that falls into non-accrual status, what is your operational plan to manage this situation? Do you have available staff members with business loan workout experience that be assigned to manage these credits? If not, who will be given this responsibility? Have you arranged for training that will help to adequately prepare them to fulfill this administrative assignment?
Your overall business credit administration process must be designed to be proactive and anticipatory. Early warning signs should be built into the review process so you can identify any situations where credit quality is deteriorating long before it becomes a significant credit risk problem.
The development and retention of staff members with these business credit administration skills will be critical going forward for CUs that plan to have viable MBS/MBL programs.
The CU industry has made a lot of progress in the professional development of MBS/MBL over the last five years. Still, lots more needs to be done to get to a point where small business owners across the country enthusiastically turn to the CU industry as a service provider of choice.
No one should have told CUs that providing MBS/MBL would prove to be a simple new business opportunity to exploit. In fact it represents a complex business model that requires significant organizational commitments to support.
Somehow the old adage “the harder I work, the luckier I get!” seems to fit what needs to be done to achieve provider-of-choice standards for small businesses and to provide peace of mind to both the state and federal regulators.
Jim Devine is founder, chairman and CEO of Hipereon, Inc., a financial consulting firm dedicated to the growth and profitability of small businesses and their financial services providers. He serves as co-facilitator of the CUES School of Business Lending.
