Expanding Your Member Business Loan (MBL) Portfolio Through Credit Union Service Organizations (CUSOs)
Earlier this summer, the NCUA unanimously approved a series of proposed changes to their regulations on member business lending (MBL). These amendments, if adopted, would lessen current restrictions to make it easier for credit unions to lend to businesses. The proposal just concluded its 60-day comment period and a final version will be drafted in the coming months.
While credit union lending to businesses has been on the rise over the last several years, the proposed MBL changes would allow the institutions to grow this area of their portfolios. But business loans are inherently more complex than consumer lending and require a robust process for evaluating the business’ and member’s ability to repay. With the potential for added risk in MBL and more complicated credit analysis, credit unions aiming to start or build on this area of the portfolio have a few options to support their institution.
Aside from growing MBL exclusively in-house, some CUs may opt to outsource loan processes to credit union service organizations (CUSOs). Before making the decision to pull the trigger on CUSOs to expand business lines and operating services, it’s important to know which benefits of the organization are a good fit for your institution.
Experience: Investment in a CUSO can be beneficial because it can offer a variety of services such as marketing, loan servicing, portfolio review and management, IT services, insurance and more depending on an institution’s needs and resources. CUSOs hire professionals who are well-versed in commercial lending. This resource can help alleviate some costs such as hiring tenured commercial lenders internally or training your existing staff.
If your credit union’s long-term plan is to eventually bring the lending program in-house, many CUSOs also offer consultative training to help internal staff to become more comfortable with business lending practices. Transitioning to an internal program can take some time, but working with experienced professionals from the CUSO can be helpful in ensuring your borrowers experience no gap in assistance.
Topics of training may include what financial data to collect from businesses, spreading the data and account for complex entities with commingled debt or income, building a financial projection for a company, seeking and using industry benchmarks to make more informed decisions, etc.
Cost: Naturally, both short and long-term cost to the CU will be a considerable factor when making the decision to enlist a CUSO. When a credit union outsources loan underwriting, it typically allows the CUSO to collect a percentage of each loan as a fee. In other scenarios, CUSOs will require a substantial equity investment. These fees could add up annually and take away from your bottom line on income earned from your loan portfolio.
Given such variability in pricing and investment, it is critical to ascertain exactly which services are necessary and clearly evaluate the required cost, as well as the effect it will have on future net income.
Processes: After considering factors like experience and cost, it is important to create a plan on how your institution would actually work with the CUSO. Consider what an ideal process would look like for loan administration – how the loan moves from origination, through booking and into management. Likewise, how will the credit union ensure that the CUSO receives all borrower information in a timely fashion? Obviously transparency throughout the process will be critical for your internal staff and your members, particularly when the need for customer support arises. An extensive loan administration plan is necessary to reduce the risk that comes with MBL so be sure discuss these points with the CUSO to eliminate possible inefficiencies or potential opportunities for compliance issues.
With consideration and the right plan of action, CUSOs can no doubt be a valuable resource for your credit union in driving MBL growth.