Is Member Business Lending Right for Your Credit Union?

The credit union fervor over raising the member business lending cap seems to have taken a back seat to “Don’t Tax My Credit Union” and NCUA’s recent proposal to implement a risk-based capital rule, but many credit unions remain highly liquid and in search of revenue enhancement that just might include a foray into member business lending.

Successfully introducing any new product or service can be expensive; there are always capacity costs associated with concept development, creation of systems support and staff process training, and the inevitable cost of promotion. But, these costs may only be the tip of the iceberg for a new or expanded member business lending initiative.

Regulator expectations for member business lending are fairly well defined. Part 723 of the NCUA Regulations outline member business lending requirements for Federally chartered and most state-chartered credit unions. The Texas Administrative Code, whose rules are very similar to those of NCUA, defines rules for member business lending among Texas state-chartered credit unions.

Both the Federal and Texas Rules establish guidelines for operational structure of credit union member business lending programs; things like portfolio management, credit risk review, establishment and maintenance of a management information system, market analysis, credit underwriting standards, portfolio stress testing, and sensitivity analysis. Credit union boards of directors are obligated to establish policy guidelines and approve the credit union’s overall lending strategy. Operational management is responsible for implementing procedures and controls to adhere to and monitor compliance with strategies and policies.

The Rules say a third party (“a credit union service organization (CUSO), an employee of another credit union, an independent contractor, or other third parties”) can advise and even run the business lending initiative as long as the third party has at least two years direct experience with the type of lending the credit union engages in. The experience must provide the credit union “sufficient expertise given the complexity and risk exposure of the loans in which the credit union intends to engage.” But, regardless of where expertise is obtained, the board and management are responsible for the overall level of risk assumed by the credit union.

Building the infrastructure of a new or expanded member business lending program requires expertise from day-one. If current directors and management do not have the appropriate expertise, get an expert involved in the most preliminary discussions. Better yet, get a tenured, senior manager educated on the basics of business lending and then consider the credit union’s options. An informed insider will be invaluable for program development and in managing outside expertise if or when needed.

Expensive? Perhaps. What will be the cost(s) of making the wrong decisions?

Originally posted by Dean Borland, SCMS, CUDE, VP Product Development at Credit Union Resources on the Credit Union Resources blog.