Managing member business lending risk
It’s been five months since the new member business lending (MBL) rule from the NCUA went into effect in January, providing greater flexibility to credit unions offering member business loans. “Credit unions that focus on business lending are generally healthier than the average credit union,” says Tom Glatt, Principal of Glatt Consulting, a Wilmington, N.C.-based strategic consulting for credit unions.
As credit unions look to expand their MBL portfolio, it is important to note some of the key areas of risk and understand opportunities for mitigation.
1. Board Oversight
When growing an MBL program, the change in concentration levels forces the credit union to review its overall lending and risk strategy. A Sageworks whitepaper MBL landscape: Managing Risk & Opportunity notes that ultimately, it is the responsibility of the credit union board to protect the financial institution and its members, so directors should outline the goals behind increasing business lending and the related risks. Credit unions should determine the focus of their business lending program and identify what is needed to achieve those goals.
For the board to be successful, CU management must provide continuous updates to the board regarding credit exposure, risks, performance versus targets and adherence to lending policy.
The growth of member business loans provides opportunities to expand in-house operations, and with that comes staffing needs. Not only do credit unions need adequate staff to effectively run the increased business lending program; those staff also need adequate training and experience to handle the growth.
“The issue that comes up time and time again when you talk to credit unions is that a lot of them want to grow, but the really don’t have the talent in-house,” says Tim McPeak, executive risk management consultant at Sageworks.
The 2016 rule defines proper staffing, as outlined in section 723.3, for various staffing levels. While the rule removed the 2-year requirement from regulatory expectations, the rule defines experience necessary for senior executives and qualified lending personnel. Generally, this experience includes skills in commercial loan portfolio management, risk rating policy and loss mitigation tactics.
The department should also have a mix of business development personnel and analysts to balance loan sales, underwriting and administrative activities.
3. Assessing creditworthiness
For credit unions accustomed to underwriting auto loans and consumer lines of credit, assessing creditworthiness of a manufacturing firm or other business is a major change. Credit unions may find they don’t have the proper systems or analytics to evaluate a more complex member relationship.
“Even a basic cash-flow analysis is inherently more complicated in business lending than for the standard consumer loan,” McPeak says. In growing a business loan portfolio, institutions need processes that accelerate loan analysis without increasing risk and quickly spread and analyze proposed loans to make smarter credit decisions.
4. Tracking performance on a regular basis
When it comes to consumer lending, credit unions may take a “book it and leave it” approach, not scrutinizing the member until the loan is past due. Business lending requires regular reviews, monitored lien filings, updated cash flow estimates and regular tracking of loan covenants. Examiners will be looking for this documentation, so it is necessary to have proper loan document management in place. A solution that automates member correspondence, reduces the time and cost of preparing for loan review and generates needed reports for management and examiners is ideal.
Developing a member business lending program provides credit unions large opportunities for growth, though it won’t come without challenges. In order to successfully implement an MBL program, it is imperative for credit unions to identify their goals, obtain adequate staffing, analyze credit worthiness and ensure proper loan documentation.
“If you do member business lending right, it contributes to a very sound, solid organization,” says Glatt. “But the key is doing it right.”
Sageworks offers lending, credit risk and portfolio risk software to help commercial lenders lower costs and improve the borrower experience. By automating business loan operations with Sageworks, banks and credit unions make good loans faster and optimize risk. Sageworks stands alone with a fully integrated life-of-loan solution, product and industry experts, exclusive benchmarks, patented technologies and an engaged client base of over 1,100 financial institutions.