Lending Council litmus test: Should you be offering member business loans?

first_imgIs your credit union ready to offer member business loans? That is the question addressed in the CUNA Lending Council’s new white paper, entitled Commercial Collections: A Partnership Between the Collector and the Loan Officer.The white paper, authored by credit union and finance writer Judy Dahl, explores the factors for a credit union to take into account when considering a new member business loan (MBL) program, and how best to ensure the success of such a program. Drawing on commentary and advice from credit unions and industry experts with first-hand business lending experience, the Council’s research focuses primarily on the collections side of MBL programs, although the white paper leaves readers with no shortage of “front end” MBL strategy and discussion of its potential to affect collections.“If your credit union offers MBL, at some point, your credit union will have loans in collections,” reads the white paper’s introduction. “Despite sound underwriting and upfront analysis, diverse internal and external factors can affect small business success and the owners’ ability to repay loans, which is why it is critical your credit union has collections policies, resources, and processes in place when an MBL program is launched.”Let’s take a quick look at the points presented.Finding the right staff for the job.Staffing is key among the considerations the Council addresses. While consumer and commercial loans share some characteristics, they also present significant differences, demanding that MBL lenders and collectors possess more complex skill sets. Put bluntly, if your credit union hasn’t hired staff with that experience—or outsourced some or all MBL origination and servicing—this might not be the right time for you to begin offering MBLs.Alternatively, if you have skilled, experienced collectors with the right set of strengths, you’re probably prepared to prevent or minimize MBL losses. What does that set of strengths look like? That’s among the main questions the Council has chosen to explore within.Understanding the reasons for MBL collectionsThe inherent complexity of dealing with business entities creates more potential reasons for delinquency in MBL as compared with consumer loans and residential mortgages. For instance, the costs for commercial collections are nominal in the early stages and escalate as delinquency does. Overall, the loans are generally more costly to resolve than consumer loans, meaning it generally takes more time and staffing—and the legal costs are usually higher.So, have resources in place. For credit unions that are unsure whether they possess the necessary components for building an in-house MBL program, the white paper offers a number of alternative options to consider pursuing, such as working with a third party for loan origination and servicing. And if your first delinquent loan catches you unprepared anyway, don’t panic. The Lending Council addresses what to do in that situation as well.So, are you ready to offer member business loans?The quality of the loans you’re making will be a primary driver of your successful collections. So if you’re not already offering MBLs, consider these experts’ contributions to the white paper to ensure you’re not walking in blind.Know the different expertise required.Commercial lending is a very different animal than consumer lending, observes Wil Spears, manager of business lending at Coastal Federal Credit Union, Raleigh, NC. “It requires a different expertise as far as staff and collection efforts themselves, and that’s important to            know if you’re going to be successful.” Spears also offers a list of required expertise, which            includes a well-rounded knowledge of financial analysis, an understanding of different       industries and more.Know your MBL program options.“Unless a credit union has $300 million or more in assets, it can’t build a large enough portfolio    to offset the startup costs associated with an in-house program,” opines Chuck Anderson, a   retired credit union chief credit officer, now an independent business services consultant. “But     as an introductory step, you can contract with a CUSO specializing in MBL. Then they have the          overhead and expenses, and you can bring the program in-house when your credit union            grows.” He goes on to break down why a credit union might want to do MBL in-house, contract with a CUSO, or even own part of the CUSO so as to get profit-sharing benefits.Do it right or don’t do it at all.According to statistics he’s read, only about 25% of credit unions offer in-house MBL, recalls      Ed Franks, vice president & manager of business services at iQ Credit Union, Vancouver, WA.            “Many aren’t originating them, they’re just buying all or part of the loans from CUSOs.”             Business lending can be very profitable, he adds. “You can better serve members and you don’t    have to send your business members elsewhere. But it’s very risky.”Set expectations early.“Begin with the end in mind,” advises Tim Rowe, chief risk officer at Member One Federal           Credit Union, Roanoke, VA. “In planning and establishing your MBL program, communicate         expectations, so everyone knows—from the lending manager, to the CEO and board—that there   will be delinquencies. It will happen. They’ll be larger loans, and they need to be prepared and            understand that it’s part of the business.”These topics, opinions, advice and more are explored in detail in Commercial Collections: A Partnership Between the Collector and the Loan Officer. The full white paper is available at URL.CUNA Lending Council produces a number of white papers annually, each designed to offer thought-provoking, executive-level content and take a deep dive into various lending topics. The white papers are specific to credit unions and include commentary and/or case studies from credit unions relevant to the topic. The Lending Council’s Member Resources Committee, which is comprised of fellow Council members, is responsible for producing these white papers. 3SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblr,Dale Frankhouse Education:Bachelor of Arts in Economics, University of Toledo 1988CUNA Business Lending Certification Institute: Fundamentals & Credit AnalysisProfessional Activities:CUNA Lending Council Conference Committee 2008, 2009, 2010NW … Web: https://sunfederalcu.org Detailslast_img