ALEXANDRIA, Va. (9/26/13)--Credit unions developing a new member business loan (MBL) program should keep it simple, National Credit Union Administration staff said during a Wednesday webinar that touched on MBL underwriting, microlending, and other business lending topics.
The above Filene Research Institute graphic was used to demonstrate how credit unions and their members can benefit from member business lending. Click the magnifying glass symbol to the left of the image for a larger view.
The webinar was presented in part by staff from NCUA's Office of Small Credit Union Initiatives and NCUA Region IV's division of special actions.
MBLs offer credit unions a chance to increase their own loan and fee income, and give them a chance to deepen community relationships, the agency presenters noted. According to NCUA statistics, a total of 2,125 credit unions have reported making MBLs, with an average portfolio size of $19 million. The average MBL is $128,000, and the average delinquency rate on MBLs is a low 1.76%.
Credit unions that are entering the MBL market must be ruthless in sticking to their chosen area and size of lending, NCUA staff said. Recognize that a credit union "cannot be everything to everyone," and do not make your credit union the lender of last resort, the agency hosts added.
Another presenter, Jerilee Beaudoin, director of commercial services for SEFCU, Albany, N.Y., outlined the underwriting standards her credit union has established for its own lending program. An MBL program must list specific goals and identify program limits and restrictions, including aggregate MBL program limits, geographic area restrictions, and industry and loan type limits, she said. The credit union should also address how program weaknesses and limitations will be satisfactorily addressed going forward, and establish a timeline and budget for the MBL program.
While most credit unions do some type of microlending right now, Dave Grace, managing partner of Dave Grace & Associates, encouraged credit unions to increase this practice and enter what is a growing field. Eighty-eight percent of all U.S. businesses are considered microbusiness, and they employ 25% of the U.S. work force. Access to capital is the largest growth barrier for these businesses, and there is limited competition in this area, he said.
Further, microbusiness loans of $50,000 or less are exempt from the MBL cap under NCUA regulations. Grace said that microbusiness loans that are made now can grow into larger MBLs later on as businesses grow.
To make successful microloans, Grace suggested credit unions should:
Price the loans accordingly;
Start borrowers on short loan cycles;
Start with smaller amounts; and
Collect on these loans as soon as they go bad or before problems start.
Credit unions can also consider offering business development services for microloan borrowers, and offering different types of business accounts, tax preparation services, and other benefits to these borrowers.
Credit unions may need to develop alternative underwriting methods for microloans, and should price and provision for larger loan losses, he said.
An archived, closed-captioned version of the MBL talk will be posted on the NCUA home page within two weeks.