The Basics of the Member Business Loan

At the end of 2012, credit unions had over $41 billion in member business loans outstanding, but as more credit unions either add member business lending programs or aim to grow their existing programs, the risks associated with member business loans continue to loom.

A member business loan (MBL) includes any loan, line of credit or letter of credit where the borrower uses the proceeds for commercial, corporate, business investment or agricultural purposes. Credit unions should be cognizant of the available exceptions to the general definition above.

A loan is not an MBL if it is secured by a lien on a one to four family dwelling that is the member’s primary residence or by shares in the credit union or deposits in other financial institutions, or in situations where any agency of the federal or state government (or its subsidiaries) fully insure or guarantee the loan or offer an advance commitment to pay the loan in full. Likely, the most significant exception is that pertaining to loans that when added to other loans associated with the borrower or associated member, is less than fifty thousand dollars. This exception allows credit unions to be flexible in the loans that they offer so long as they do not pass the fifty thousand dollar threshold.

MBLs offer credit unions the ability to diversify their balance sheets and revenue streams while simultaneously expanding their relationships with current members. Despite these advantages, MBLs accounted for only 6 to7 percent of the total loans made by credit unions every year since 2009. The reason for the scant percentage likely lies in the fact that adding MBLs to a credit union’s portfolio brings forth added policy requirements.

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