CUs Find Participations Can Provide Them Some MBL Ceiling Wiggle Room
RALEIGH, N.C. -- Earlier this year, the $2 billion Coastal Federal Credit Union, once again, found itself nearing its member business lending cap.
As both banks and Wall Street conduits either scaled back or completely stopped their commercial lending activity in reaction to the subprime credit fallout, the credit union has seen a significant increase in loan activity, said Pete VanGraafeiland, vice president of mortgage and business services. Around February and March, however, Coastal FCU had to turn down "very high quality" loans to keep under its 12.25% of asset member business lending cap.
"We were between a rock and a hard place," VanGraafeiland said. "At certain times during the year, we get close to the cap. It requires us to sell participations to credit unions to free up capital, then we can go back in and pick up the pace."
Coastal FCU is now actively making commercial and participation loans, which permits credit unions to purchase up to 90% in a nonmember loan originated by other credit unions. NCUA requires that the originating credit union retain at least 10% of the loan.
Of the $350 million in commercial loans serviced by Coastal FCU, roughly $115 million of that is participated out and serviced by the credit union.
Keeping under the cap continues to be a growing concern for some credit unions but lately, navigation has taken on a more pressing tone as traditional lenders pull back the reins, said Larry Middleman, president/CEO of CU Business Group LLC, a Portland-based business services group with more than 250 credit unions. In the first few months of 2008, the volumes of loans sent to CUBG have almost doubled from late 2007 levels, he added.
"What's driving that is the tightening credit market. Banks and other traditional lenders are not able to lend like they did before mid-2007 when we saw credit standards lowered by banks, not credit unions," Middleman said.
Other drivers of the increased activity are the maturing of credit union business service programs and more brokered loans shopped by credit union brokers, Middleman pointed out. All of these factors had led to an upshot in participation loans. Brokered loans, which Middleman said he is not a real big fan of, are typically larger and credit unions often need to share the risk. The dollar volume inevitably pushes credit unions towards their caps.
Still, the squeeze on credit has been an advantage for some credit unions, Middleman said. CU Business Group has reviewed each of its clients' 5300 Reports and the majority have reported strong loan volume and minimal losses.
"The really good news is, looking at the credit quality side, in the past, most credit unions were the third choice," Middleman noticed. "Now, we're seeing very solid deals."
The danger here is neglecting to conduct stringent due diligence on those credit unions that a credit union may want to enter into a participation loan agreement with, VanGraafeiland warned. He advised knowing as much as possible about the seller, ensuring that the loans are performing well and asking for a list of participants.
For those credit unions that are considering offering or dabbling in commercial loans, VanGraafeiland suggested either buying from another credit union with a "good reputation" that can sell the participation loans or seek out an alternative like CUNA Mutual Group's CU Systems Fund, which is an investment fund that will allow for the purchase of business loans from credit unions and the sale of shares in them to other interested credit unions. NCUA gave the green light a few years ago for the fund to move forward.
"If you're in a cap deficit situation, [these options] are an attractive way to serve members and have loan diversification," VanGraafeiland said. "It's sort of self-serving--you're helping yourself but you're also helping your members."