The National Credit Union Administration’s new member business lending regulations, implemented Jan. 1, are designed to ease restrictions in this key product offering, and a number of experts say the industry is poised to see a steady uptick in growth.
But those same experts caution that credit unions cannot take an “if-you-build-it-they-will-come” approach. They’ll need to invest in the research, market data and special expertise to expand their portfolios beyond the slow and steady growth the industry has seen over the last decade. The new rule, they say, can be a significant boon, but it’s not a panacea.
According to data from NCUA, for federally insured credit unions, MBLs outstanding have more than doubled from $10.9 billion at the end of 2006 to $23.2 billion at the end of 2016.
But if credit unions really maximize the new freedoms the regulator has granted them, they could see even more impressive results.
“While it is still early, I definitely think that the new MBL rule will enable credit unions to expand their business loan portfolios within their own strategic and risk management guidelines and still stay within the law and the MBL cap,” said Dennis Dollar, a former NCUA chairman who is now a credit union consultant.
The NCUA, he asserts, has put in place a balanced and well thought-out rule that is going to “positively impact” credit unions with the expertise in place to build their business loan offerings. Dollar said he expects both the credit union service organizations (CUSO) that provide MBL services to credit unions, as well as individual credit unions with the wherewithal to offer MBLs in-house, will see real growth over the next five years.
Larry Middleman, president and CEO of CU Business Group, a CUSO based in Portland, Ore., said the new MBL rules give credit unions the ability to lessen or waive personal guarantees, which has increased lending opportunities and allowed credit unions to go after “A” borrowers that have guarantees waived at banks.
“Credit unions can now make loans with policy exceptions without having to apply for a waiver through the NCUA,” he said. “For example, a loan with [a loan-to-value ratio] of 81% was formerly ‘an illegal loan’ per NCUA regulations. Now with proper justification, a credit union can make that loan without a waiver from the NCUA. This elimination of waivers makes lending much faster and more streamlined.”
But Mark Ritter, chief executive officer of Member Business Financial Services LLC, a CUSO based in Trevose, Pa. (just outside Philadelphia), cautioned the new MBL rule will make it easier for some credit unions and much harder for others.
“Credit unions must demonstrate in-house understanding of business loans at the board, senior management, and staff levels,” he said. “If you have a good knowledge base in-house you will find the new environment much easier. Those credit unions that leaned on a CUSO or other third parties as their knowledge base will need to invest in training, new hires, or consultants to have a solid in-house understanding of business loans.”
Where the real growth might come, one expert suggested, is from credit unions who previously weren’t interested in even dipping their toe in the water.
William P. Beardsley, president of Michigan Business Connection, a CUSO based in Ann Arbor, Mich., said it’s not so much that the new rules have made it easier for a credit union to get into business lending, but the stronger growth opportunities do make it a whole lot easier to justify the investment—in talent and resources, either in-house or by going with a third party — required to start offering these loans.
“Both before [the new rules] and now, lending to businesses and commercial real estate investors requires considerable expertise and discipline,” Beardsley elaborated. “The new rule outlines very well the expectations of the regulator, while also allowing credit unions the opportunity to define their processes and policies in ways that best achieve safety and soundness and fulfill their member mission.”
Higher LTVs
Ritter said the new MBL regime will “undoubtedly” lead to higher loan volumes at credit unions. “In the overall curve of business lending, the very best [borrowers] in your marketplace could receive terms that credit unions just couldn’t provide [before],” he said. “The biggest impact will be the new opportunities in serving businesses operating in [the local] community and getting less dependent on real estate investors.”
Ritter cited a hypothetical example: a $60,000 loan for a light-duty box truck. “Credit unions are great auto lenders and previously this loan would have been limited to the 80% loan-to-value [requirement] with pressure to do annual reviews,” he offered. “Now credit unions can establish policies to make small loans like this in a more common-sense manner.”
Another example Ritter posed relates to service-oriented medical professionals such as doctors and dentists. “They are low-risk loans, but few credit unions funded loans to them because the business usually contained few assets to meet the 80% loan-to-value requirement,” he noted.
Beardsley said his CUSO has seen increased interest from credit unions in business lending and it will “definitely expand” both member business lending and non-member business lending (participations). “Credit unions will be motivated to invest in the personnel, products and technologies that support their members because their competitiveness [will have] been enhanced, and the ability to remove participations from the calculation of the lending cap means that they will be able to derive more value from their commitment to their business lending capabilities,” he explained.
Michael Nagl, president and CEO of Centennial Lending, a CUSO based in Longmont, Colo., noted that the lifting of the personal guarantee requirement allows credit unions to be more competitive in the commercial lending space.
From the CUSO’s perspective, he said, institutions should leverage this waiver on a case-by-case basis and not use it as a rule of thumb. “We’re already a year into that portion of the new rule and I believe credit unions are using this waiver on an infrequent basis,” he said. “The new language surrounding loan participations was an outstanding addition. Non-member loan participations are not counted against a credit union’s MBL cap, allowing the savvy credit unions involved with MBL increased advantage in their markets.”
Nagl expects the new rules will help credit unions' loan portfolios — particularly in relation to the number and dollar levels. “One nice piece to the new rule [is] the exemptions they gave to credit unions with less than $250 million in assets,” he cited. “While this group has only 1% of the outstanding MBLs, developing different expectations and guidelines to allow for any competitive advantage is very helpful.”
Many new inquiries
With NCUA still working to certify all of the first quarter call reports, hard data on just how much credit unions were able to take advantage of the new rules wasn’t available at press time, but a number of CUSOs that partner with credit unions all across the country were able to offer a big-picture perspective on what their seeing, not only from the standpoint of what their CU clients’ portfolios are doing, but also from the standpoint of potential clients reaching out to them about getting an MBL program off the ground.
The CUSOs interviewed for this report agreed that the new rules have led to many new inquiries from credit unions across the country that are only now showing interest in MBLs. “We have received calls from credit unions from Alaska to Virginia,” he said. “And these institutions include small, mid-sized and large credit unions,” noted Shannon White, executive vice president and chief operations officer at Business Alliance Financial Services LLC, a CUSO based in Monroe, La.
Still, there are concerns that NCUA’s move away from its longstanding prescriptive approach could lead to problems, Nagl said. “My fear is that some credit unions or CUSOs will use the new language to grow their portfolios while not exercising proper risk management procedures.”
White said the new rule is offering credit unions both more breathing room and a stronger edge. “It will take the NCUA out of the day-to-day operations at credit unions, make them more competitive and also eliminate the waiver process, which is sometimes so lengthy that some deals are lost,” he said.
Though this was a rule change credit unions very much wanted to see, there is often a cost to change, even when it’s good.
“There are going to be some one-time costs in adjusting policy, products, and systems to the new regulatory environment,” Ritter explained. “The NCUA has done a great job in allowing credit unions to develop a more risk-based approach to business lending and make the small and simple business loans in a more cost-effective manner. Once everything is stabilized, credit unions will see a re-distribution of costs as more time and manpower is spent on where the risk is in the portfolio.”
Another issue, Nagl noted is that the rule puts increased onus on credit unions to invest in the expertise to underwrite these loans, analyze concentration levels and review processes and education of both senior management and board members.
Indeed, for as much as credit unions avidly supported the new role, White cautioned that, at least initially, NCUA examinations will be more complicated – meaning the cost of compliance will rise. “However, these higher costs will eventually be offset by the new loan volumes that credit unions will generate as a result of the more flexible new MBL rules,” he added.
But Middleman of CUBG asserted that the new rules will actually lessen the cost of compliance as credit unions no longer have to apply for NCUA waivers.
“Credit unions now can focus mainly on complying with their own credit parameters, which are easier to monitor than all the former requirements from the NCUA,” he added. “This reduces compliance costs. The only increase in cost from the new regulation is time spent on a one-time revision of the credit union’s policy to ensure compliance.”
Finally, Ritter reminded that regulatory changes take time to process and absorb into the system. “This [MBL rule] change has really turned into a slow process between the regulators, credit unions, and CUSOs,” he stated. “The guidance just came out in December and there will be about a two-year transition process for everyone involved when it comes to training, policy development, products, call reports, etc. NCUA examiners really haven’t received much training on the new rules to impact credit unions in any material manner.”
