Historically, a credit union was a financial institution that specialized in personal financial transactions for members – checking or savings accounts, home or auto loans – not necessarily business ones. Today, credit unions are evolving and increasingly looking to offer commercial loans, also known as a Member Business Loan (MBL), which can be an affordable and easy way for members to grow their businesses while working with a lender they know and trust.
Offering MBLs is new territory for many credit unions. On the upside, MBLs help diversify their portfolio, create differentiation in the marketplace, generate revenue, and give back to the communities they support, but there are risks associated that merit caution.
Understanding Member Business Loan regulations
MBLs are, however, subject to federal and state rules and regulations, which differ from personal transactions regulations. As a result, lending officers may not have a complete understanding of the cumbersome and complex rules for MBLs. For example, federal regulations governing a business loan entail more due diligence, longer and more stringent documents, more covenants or restrictions, and additional financial compliance. On top of that, states may require different or other information.
Thus, credit unions must understand all the regulations to comply with them. Some differences from personal financing may include the types of loans they can offer, fee schedules, eligible borrowers, required governance of the credit union, underwriting standards, collateral options, and more. In addition, financial reporting for MBLs differs from what members need to provide for their personal loans. Lending officers need to ensure members understand what is required of them.
Mitigating the risks of MBLs
As with any type of lending, MBLs carry risks. Therefore, a credit union should learn about all the risks of business loans and take precautions to protect assets and members from those risks. A good risk mitigation plan includes a clear loan policy that outlines standards for diversification of the loan portfolio, processes for loan review and monitoring, and a credit risk rating system.
Consistency and fairness in the loan process are key, so a credit union must ensure that loan decisions are made equitably and objectively. Before launching the MBL program, leadership should clearly define the eligibility criteria for MBLs, including the type of loan (such as lines of credit or equipment financing), the loan’s size, terms, and the type of business.
Similarly, it is essential to have policies and procedures for the loan approval process, beginning with the application and including documentation, underwriting, collateral and more.
Seizing the MBL opportunity
An often overlooked element of MBLs is marketing. Business owners may not realize they can secure financing from a credit union and may look instead to a neighborhood or traditional bank for a loan. However, once a credit union understands the regulations and addresses all the risks of MBLs, it can launch a new business line. A good marketing strategy that educates and informs member business owners about the benefits of a Member Business Loan can help with this endeavor.
Sassoon Cymrot can also help. Our Banking and Finance team specializes in representing credit unions in loan transactions. They also work with lending officers and CEOs to help credit unions establish a fair member business loan program that can help the institution expand its services. Contact us today to talk about these or other actions we can help with.
- Structuring the deal
- Writing the commitment letter
- Securing Title documentation and issuing title policies
- Representing the credit union in the loan transaction
- Advising on environmental or real estate concerns
- Ensuring the credit union develops or has access to skills to effectively manage the program.
Devon A. Kinnard is a Partner at the firm focusing on finance and commercial transactions, including bilateral and syndicated asset-based and commercial real estate loan facilities; state and federal tax credit financing; bond and public finance transactions; private securities offerings and debt and equity capitalizations; joint ventures; mergers and acquisitions and other corporate transactions arising out of the day-to-day operations of closely- and publicly-held companies.
