Over the past 20 years we’ve seen many credit unions step into the commercial lending arena and find success while minimizing risk. For some, it can certainly feel like a daunting task if you don’t have internal knowledge or experience at your credit union. Accordingly, NCUA regulations allow credit unions to ensure proper oversight to include the required expertise and experience needed to oversee a commercial lending program with the use of third parties.
The credit unions that are wading out into the commercial lending waters are experiencing increased revenue streams, additional opportunities to diversify their loan portfolios, increasing average deposit balances, the ability to gain new membership, increased fee income and diversification of the overall loan portfolio risk.
So, one might ask; “is it possible to get into commercial lending without the big internal salary expenses from hiring the expertise, knowledge and experience needed?” The answer is simply “yes”! Many credit unions have partnered with CUSOs that manage the back-office functions of a commercial lending department. This can include loan underwriting, preparing and providing the credit memo, billing for and processing payments, ordering and reviewing appraisals, construction loan draw request inspections, producing loan documents, and providing the myriad of required reports.
Business loan/commercial lending regulation—Experience
To expand on the NCUA Regulation Part 723: Member Business Loan/Commercial Lending, it provides an option to meet the required experience, as noted below taken directly from NCUA regulation:
Option to meet the required experience:
A federally insured credit union may meet the experience requirements in paragraph (b)(1) and (2) of this section by conducting internal training and development, hiring qualified individuals, or using a third-party, such as an independent contractor or a credit union service organization. However, with respect to the qualified lending personnel requirements in paragraph (b)(2) of this section, use of a third party is permissible only if the following conditions are met:
- The third party has no affiliation or contractual relationship with the borrower or any associated borrowers;
- The actual decision to grant a loan must reside with the federally insured credit union;
- Qualified federally insured credit union staff exercises ongoing oversight over the third party by regularly evaluating the quality of any work the third party performs for the federally insured credit unions; and
- The third-party arrangement must otherwise comply with §723.7 of this part.
Business loan/commercial lending—Training
Credit unions can also gain or expand their business lending knowledge through a multitude of training sessions provided by these same CUSOs. Training sessions can include, but are not limited to:
- Business Services Training – focused on providing training to your credit union staff on specific business entities, required documentation to request and review and what to expect when working with your local businesses.
- Commercial Loan Committee (CLC) Training – centered on training your internal CLC on how to review and understand your Commercial Loan Policy, the credit memo, what to look for, what questions to ask, and the next steps on approving or declining the loan. The training should also include best practices on monitoring the business lending program and reporting requirements, both internally and to the board.
- Commercial Loan Committee – depends on the size of your organization, however, this typically includes your President & CEO, Chief Lending Officer, and/or higher-level lending officer, and any other executives or leaders vital to the business loan decision making process. The committee is generally 3-5 people and decisions are made by majority.
- Monitoring and Reporting – it’s important to establish processes and procedures when it comes to monitoring and reporting. Each commercial loan committee meeting should conclude with capturing minutes of the meeting, date and meeting attendees, highlights of the loan discussion, final loan decisions, and agreed upon covenants. Commercial Loan Committee meeting minutes should be kept for future reference, audits, and exams. Reports are then reviewed on a consistent basis to monitor the portfolio based on concentration, delinquency, risk grades, maturing loans, late charges, and outstanding tickler items, such as insurance, UCC filings, and updated financials to name a few.
- Commercial Appraisal Training – concentrated on the regulations as they relate to commercial loan appraisals, the different types of appraisals, appraisal requirements and valuation methods, along with an understanding of the uses of market evaluations and the credit union’s role in overseeing the process.
- Commercial Lending Oversight Training for the Board of Directors – focused on ensuring your board of directors is equipped with the knowledge to monitor and review the commercial loan policy, expectations as they relate to executive managements role and responsibilities, mitigating risks, and risk management reporting.
- Collection on Commercial Loan Guidance – aimed at providing guidance on current collection laws and regulations, determining early warning signs of a problem loan, default remedy options, and problem loan resolution scenarios.
- Business Credit Training – dives into the borrowing entities, business loan types, financial statements, and basic concepts, along with balance sheet ratio calculations, income statement analysis, and debt service coverage ratio discussions.
- Commercial & Industrial (C&I) Loan Analysis – an in-depth look at business loan types, business entities, different types of industries, understanding the life of a business through business history, future objectives, business operations, and financial management.
Commercial/business loan officer—Business development
There are a few CUSOs that also provide access to a commercial loan officer (CLO) through a shared network. This allows your credit union to refer commercial loan inquiries over to a specialized commercial loan officer who is ready and willing to handle the business loan request and application. The CLO responsibilities also include developing business outside of the credit union referrals and are typically expected to hit a pre-determined business loan goal and refer business deposits back to the credit union, assuming the credit union has established business deposit products. In some instances, the CLO is mentored or coached on a weekly or monthly basis to ensure they are considering credit union goals and objectives, developing relationships that will assist in meeting year-end goals and discussing and reviewing credit opportunities and possible loan participation needs.
The ability to utilize a commercial loan officer for a fraction of the cost of their salary, benefits and year-end bonus structure provides many credit unions the opportunity to get into the game—and win!
Small credit union model—Small business lending
Once upon a time small or micro credit unions couldn’t even consider business lending, but all that is changing. There are several CUSOs that have developed programs geared to the smaller credit unions that take cost, risk management, and education into consideration. They’ve designed discounted pricing models, collaborative participation opportunities and access to commercial loan officers based on individual loan opportunities, as needed.
Commercial/business lending—Final thoughts
The commercial lending door is wide open and ready for credit unions of all makes, models, and sizes, and business service CUSO’s are ready to step in and help.
Rethinking business lending at your credit union? Our team at Innovative Business Solutions would love to learn more about your goals and objectives and how we can help you establish a successful business lending program designed to reduce cost, minimize risk and add value to your bottom line.
