7 Key considerations to establish policy and grow the MBL portfolio
The NCUA’s new member business lending (MBL) rule has opened the doors for credit unions to grow their loan portfolios. Endeavoring into member business lending requires a sound strategy that balances inherent risk with perceived opportunity. The first step to outlining a successful MBL strategy requires establishing policies that provide a framework for lending activities. Defining specific lending policies ultimately sets up the credit union for success.
The Sageworks whitepaper Mitigating Top Member Business Lending Risks recommends the following areas for consideration when establishing policies for credit union MBL strategy:
1. Cash flow analysis
Develop MBL policies that provide guidelines for performing consistent and accurate cash flow analyses. Be sure to understand how cash flow will be used in determining the borrower’s debt service coverage ratio.
2. On-site inspection, appraisals & appraisal reviews
Ensure that well supported appraisal valuations are used for making credit decisions and that appraisal reviews are satisfactorily performed with appropriate assumptions, methodology and market comparisons.
3. Geographic risks
Draft policy that restricts loans outside of the credit union’s target market area. Examiners will look critically at loans made outside of the normal market area and will expect mitigations to be in place to compensate for added distance.
4. Limits & restrictions
Include well-thought out limits and restrictions to sufficiently control commercial lending risks. Consider overall MBL portfolio limits, loan type limits and geographic restrictions, as well as debt service coverage ratio (DSCR), loan-to-value (LTV) and other appropriate ratio limits.
5. Corporate entity, licensing & signing authority verification
Focus on verifying the good standing and proper licensing of the corporate entity as well as the signing authority of corporate officials representing the entity.
6. Credit risk rating system
Establish a credit risk rating system that complies with WAC and FAS guidance and is understandable and useful for staff. It is important to establish guidance on when credit ratings are to be updated and how risk ratings will be used to monitor overall portfolio risk.
7. Audit review and control
Avoid risks through both internal and external audits that verify that effective internal controls are in place. Independent, third-party reviews can be effectively used by most credit unions with significant MBL activity. Credit unions that have even a trace amount of MBL could also use independent third party reviews to validate in-house audits and that underwriting quality is satisfactory.
Credit union policies should be tailored to suit the institution’s needs and goals. Defining board-approved lending policies that outline MBL growth not only satisfies regulatory requirements, it reduces the subjectivity inherent in unbridled interpretations of unwritten goals and practices, while promoting consistency and objectivity.
Additional Resources
Webinar: Credit Union Strategic Planning Best Practices
Whitepaper: Mitigating Top MBL Risks
Sageworks Member Business Lending Starter Kit
Sageworks Credit Risk Solution
With Sageworks Credit Risk Solution, credit unions benefit from best-in-class credit risk analysis that accurately measures risk in a relationship at origination and throughout the life of the loan. Find out more information here.
