Business lending for credit unions presents great opportunities--it also presents some significant challenges. Saying "yes" to members for larger real estate transactions can be quite lucrative, but that "yes" carries considerable credit risk. Commercial real estate loans are often in the $1-$10 million range, and that is a lot for many credit unions to take on. In addition, with these larger-sized loans, other hurdles may immediately come into play. They include:
- A lack of liquidity, which many credit unions may be facing.
- The "loans to one borrower" limitation. This limits total business loans to one member to 15 percent of the credit union's net worth.
- A high loan-to-share ratio, which may make a large business loan less attractive.
- The cap on total member business loans, which is 12.25 percent of total assets--many credit unions are coming close to this cap nowadays.
Even if your credit union can overcome the above hurdles, it is still not smooth sailing. You have to offer pricing and loan terms that are highly competitive, and have the expertise to originate and service the loan, as well as the relationship. So, while these large loans are attractive, they are certainly less than easy to execute.
A new ballgame--private label business lending.
A private label business lending program works similarly to the consumer mortgage industry, where the credit union originates the loan and the loan is immediately sold to an investor on the secondary market. However, commercial lending is far more specialized than consumer mortgage lending, therefore only a handful of commercial programs are available today that fit the credit union industry.
A private label business lending program allows credit unions to utilize the pricing power of a large national bank. This puts your credit union in an excellent position to negotiate very favorable loan terms, rates, and other aspects of the loan with the borrower. A good private label program allows the credit union to offer terms such as 10 year fixed rate financing, 30-40 year amortization, no closing costs, and many other features depending on the program. Needless to say, private label business lending can significantly enhance the credit union's competitiveness and stature in the market.
So what does the credit union get for originating the loan? A big chunk of fee income! A benchmark level of fee income paid on a private label loan is 1 percent of the loan amount. That means a $30,000 payday to your credit union for originating a $3 million commercial real estate loan. And, at the same time you are saying "yes" to your members with more favorable rates and terms than you can offer in your existing standard business lending program.
Of course your credit union will want to originate the loan if it can be competitive and can take on a larger commercial real estate deal. However, if you can't overcome the hurdles with your in-house program, you can then opt over to the private label program and continue along. You can disclose the "investor" to your member anywhere along the way--most private label lenders mention early on that they work with secondary market investors, but do not provide specifics until the loan's closing time.
Another advantage of a private label business lending program is underwriting and due diligence. Since the private label lender is taking on the loan, they will typically bear the majority of the underwriting, due diligence, and other operational responsibilities and expenses. This fits very well with credit unions that often have a small business services department, or may rely on a CUSO or other outside parties for these efforts.
The key factors for a successful private label business lending program.
Private label business lending offers a world of options to credit unions. However, as you look at different available programs, some key things to consider include:
- Your credit union is, in essence, originating the loan for a commercial bank, so trust in this relationship is critical. You'll want to be sure the commercial bank is only in it for the loan, not to solicit and steal your members.
- Your credit union should get all related deposit accounts, and everything else in the relationship--the private label lender only gets the actual loan.
- Watch for large minimum volumes or quotas required by the private label lender. I have seen programs that have no minimums, and others that require as much as $5-$10 million in private label volume per month which is much more than most credit unions can produce.
- The program should offer flexibility in pricing and terms allowing your credit union to maintain some control over the final offer to your business member.
- Turnaround times should range from 30-60 days for specialized programs. The better the package submitted up front, the smoother and faster the process will go.
- Some private label programs offer full support for underwriting, origination and due diligence--others don't. Be sure you know what is expected of your credit union from a loan origination and workload standpoint.
- Above all, there should be no surprises along the way. Hidden costs or other "11th hour" issues can put your credit union in a tough position with the borrower. Make sure you fully understand every aspect of a private label business lending program before taking it public.
Credit unions face significantly more hurdles than banks in business lending. Offering a private label business lending program that complements the credit union's business program will certainly increase your odds of hitting a home run with your business members.