By Robert T. Lieber Jr., Attorney
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.
Part 723 of the NCUA Rules and Regulations outlines the requirements for implementing an MBL program. More specifically, section 723.5 mandates that the board of directors adopt specific business loan policies and review them at least annually. Furthermore, the board must consult an individual with at least two years experience with the type of lending the credit union will be engaging in. This individual, however, need not be an employee of that same credit union; it may be a contractor, third party or even an employee of another credit union. Nevertheless, the actual decision to grant any MBL must reside with the credit union.
Beyond the requirements just mentioned, credit unions launching an MBL program must also meet NCUA policy requirements with respect to their maximum overall exposure, credit decision analysis, collateral requirements, and servicing, underwriting and appraisal procedures. Also note that the NCUA recommends having collection procedures that are tailor fit to the business loans you are providing; they should not be the same standards being used for consumer collections.
Although the NCUA, through Part 723, has provided a framework of minimum standards and requirements for MBL lending, credit unions may request a waiver from certain parts of the NCUA’s rules. A waiver request may take the form of a one-time waiver for a single, unique loan or blanket waiver, whereby the credit union is granted authority to conduct lending activities without having to comply with a specific provision. When evaluating a credit union’s waiver request, the NCUA looks at the credit union’s financial capacity, management capability and MBL experience.
Establishing an MBL lending program is a great way to expand your credit union’s portfolio, but it also requires a significant investment of time, money and resources. Assessing and analyzing the creditworthiness of a business requires a different approach than that used for consumer loans. A credit union will likely need to hire additional staff with business lending experience and in some instances invest in new analytical programs or systems. There are a myriad of factors that a credit union should consider before launching or expanding an MBL program.
The Credit Union Small Business Job Creation Act of 2013 (H.R. 688) and the Small Business Lending Enhancement Act of 2013 (S. 968), if passed, will make it even more appealing for credit unions to offer MBL lending to their members by raising the MBL lending cap. However, any credit union considering to initiate or expand their MBL program must analyze and asses the requirements and risks in doing such.
Robert is an attorney of Consumer Collections in the Philadelphia, PA office of Weltman, Weinberg & Reis Co., LPA, who can be reached at 267.940.1647 and firstname.lastname@example.org.