The MBL Coin Toss
Is your CU ready to manage member business lending’s risks and rewards?
Like the flip of a coin, member business lending (MBL) can lead to two outcomes. On one side, credit unions can see an increase in lending—a rarity in a down economy. On the other, without properly addressing risks, business lending (as with all types of lending) can lead to losses.
Fortunately, it’s not just an odds game. MBL makes sense when credit unions implement the additional standards for monitoring and maintaining the book of business. The right practices, policies, and procedures can safeguard against risks and make commercial lending a smart business strategy, not a game of chance.
All credit unions, even those with wildly successful consumer lending portfolios, should realize commercial lending is not simply mortgages and auto loans on a larger scale. Commercial lending involves a limitless variety of business projects where everything—from valuation to the risks of operation to the funding proposition—is different.
There’s also a disparity in information available to vet loan applications. Unlike consumer lending, easily accessible sources of relevant data aren’t always available for commercial lending.
A brand new business, for example, won’t have a track record or credit history to review, and basing loan decisions on the member starting the venture isn’t always sufficient. A member could be very responsible in making timely mortgage and auto loan payments and yet struggle with running a business.
Commercial lending simply has more unknowns.
Business lending experience is another consideration. Credit unions entering into MBLs may have a staff with limited commercial lending experience.
They may need to look outside the credit union to obtain that expertise, even institutions with established retraining and promote-from-within policies.
While many credit union operations are learned on the job by multi-function employees, that won’t work for MBLs. More importantly, NCUA requires credit unions to have someone with at least two years of experience in business lending.
Likewise, the agency requires credit unions to develop thorough policies and procedures specific to the MBL program. Simply adapting current consumer lending policies and procedures won’t adequately address or protect against unique risks, both in nature and in scale, inherent in commercial lending.
Policies and procedures should detail how the credit union will handle exceptions. Commercial lending involves more variables—which invite more deviation—than consumer lending. Thus, credit unions need to determine how to handle deviations and how to document and communicate them to the board.
This latter point is especially critical to preventing fraud. Without disclosure to the board, it would be too easy for an employee to bend rules for a friend or family member.
Of course, fraud isn’t exclusive to MBLs, but the scale of these loans warrants close scrutiny. A business funding a speculative housing development, for example, could default on dozens of mortgages, not just one.
Plus, the unfinished homes would be a tricky asset for credit unions to sell—and protect against vandalism in the meantime.
Scale also affects the periodic loan review process, which involves site inspections and reviews of insurance requirements, payment histories, property tax payments, and more. Site inspections alone can present unique challenges.
Credit unions inspect collateral to ensure it is maintained and that any funds lent to improve properties are actually invested to that end. This can be difficult, however, if the MBL venture is outside the credit union’s operating region.
While blanket exclusions against out-of-town endeavors are unnecessary, that risk must be balanced in the portfolio.
Losses and lawsuits aren’t the only risks inherent in MBL. Commercial loan scandals draw media scrutiny—and even the hint of fraud can erode hard-earned goodwill. Credit unions caught up in a commercial lending debacle could suffer a serious blow to their reputation and bottom line.
Ultimately, sound practices and proper due diligence will keep most credit unions in the clear and provide new sources for revenue and member expansion.