Skip to main content

Risks in member business lending: Part II

June 29, 2013
Read Time: 0 min

Even though U.S. credit unions experienced solid growth in traditional lending areas last year, many are looking into the development or expansion of a member business lending program. With that comes a number of risks that must be evaluated. One of the risks, assessing creditworthiness, was discussed in part I of this post. In part II, tips on how to track performance are provided.

Tracking performance on a regular basis

By Mary Ellen Biery, Research Specialist, Sageworks

Many problems found in business lending among credit unions can be tied to failing to track performance of the loan on a regular basis. Consumer lending has patterns of delinquency and charge-offs that are well known to the credit union. And many credit unions take a “book it and leave it” approach to consumer loans: They don’t scrutinize the loan or the borrower’s creditworthiness unless the loan is past due.

But business lending requires regular review, and many credit unions’ systems aren’t necessarily designed to monitor lien filings, update cash flow estimates regularly and track compliance with loan covenants. “You’re not going to have thousands of businesses like you would car loans, but it’s critically important to stay on top of what’s going on there,” according to Tom Glatt, principal of Glatt Consulting, a Wilmington, N.C.-based firm that provides strategy consulting to credit unions.

Solutions for loan document management are helpful so that credit unions don’t have to “reinvent the wheel” every time they obtain documentation that can help ensure the borrower has positive cash flow, a full sales pipeline and so forth, according to Glatt.

Failing to stay on top of business credits means a credit union ignores the warning signs that firms often provide. That institution “is likely to have a higher rate of default and have larger losses when they do have those defaults,” says Brian McLaughlin, president of Tullamore Consulting, a Rochester, N.Y., firm that helps credit unions implement member business services. “The examiners will come in and look at the things you should have and should be looking at, so if you don’t have it, you’ll be criticized for not having it or for not paying attention to it if you do not document your review.

You have to have that information, pay attention to it and document what you are doing with regard to that information. If you say you will require a borrower to send quarterly statements and if you do nothing with those statements, that’s as bad as not getting them.”

Developing or expanding a member business lending program is an increasingly popular way U.S. credit unions are capitalizing on their strengths and growing their loan portfolios, and experts believe this trend will continue. Credit unions must evaluate major regulatory issues and consider areas of risk that may be different from those affecting their current loan portfolios. But experts believe the efforts can be rewarded.

“We’ve found that those credit unions that do focus on business lending are generally healthier than the average credit union,” says Glatt. His firm’s Credit Union Industry HealthScore evaluates individual credit union performance in 11 key ratios, and it found that credit unions engaged in business lending had a higher average HealthScore than the industry average.

“If you do member business lending right, it contributes to a very sound, solid organization,” according to Glatt. “But the key is doing it right.”

For information on some of the other common areas of risk associated with member business lending, download the whitepaper, Member Business Lending Landscape: Managing Risk & Opportunity.

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!

Looking for MainStreet Technologies? You are in the Right Place!

MainStreet Technologies is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the contact us button here, or the link in the top navigation, to reach product support for your MST products.

Make yourself at home!

Looking for Sageworks? You are in the Right Place!

Sageworks is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to your Sageworks products.

Make yourself at home!

Looking for Farin? You are in the Right Place!

Farin is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to your Farin client portal.

Make yourself at home!

Abrigo acquires construction loan management solutions

Coupled with our lending suite, Construct and +Pay from BankLabs enable end-to-end automated residential/commercial construction loans.

Read the press announcement

BankLabs Logo Abrigo Logo