MBL Delinquencies at Core of Examiner Scrutiny, NCUA Says
The huge spike in member business loan delinquencies coupled with several troubling scenarios that continue to come up during examiner visits was the backdrop for a NCUA-hosted Webinar last week.
More than 1,000 people tuned into the Nov. 18 session facilitated by NCUA Board Member Gigi Hyland. The Webinar featured a myriad of items, including an overview of the MBL economic outlook and financial trends, best practices, weaknesses and examples from the field at the state and federal level.
Hyland kicked off the session with a poll question asking attendees if they offered MBLs. Roughly 80% said yes, another 2% do so through loan participations and nearly 17% said they do not but are interested.
Since December 2000, MBL activity has grown substantially from $4.7 million to $32 billion as of June 30, 2009. With that growth has come an upshot in delinquencies.
"This is cause for consternation at the examiner level," Hyland noted, adding more questions are being asked about risk monitoring and collections.
Some of the MBL weaknesses that examiners are seeing are inadequate management systems, inappropriate risk-rating systems given the size of a portfolio, uncontrolled growth and insufficient due diligence with third party providers, said Linda Vick, former agricultural and commercial lending specialist who currently serves as problem case officer for NCUA Region IV.
Through their existing consumer lending systems, some credit unions mistakenly believe that commercial loans can be processed through those same channels, Vick said.
Problems can arise because commercial loan payments tend not to be steady, she pointed out. Consumer loan systems may also have problems producing reports if there are troubled commercial loans in the portfolio.
While credit union boards may be excited about the high volume of MBLs coming in, the capacity also poses risks, said Linda Jekel, director of credit unions for the State of Washington, Division of Credit Unions. She recalled one credit union that decided to get into MBLs by doing loan participations. The problem was the cooperative did not set an appropriate limit.
"By the time examiners arrived, the credit union had taken on more participations than it could handle," Jekel recalled.
Both Vick and Jekel agreed that even though credit unions may partner with CUSOs or third-party providers for MBL processing, ultimately, it is their responsibility to stay in the loop on managing the loans.
Jekel said a "well-managed" Washington credit union used a CUSO to make commercial loans. When state examiners came to review the records, the credit union could not find any paperwork, including documentation on payment history and delinquent loans.
"They didn't know the cash flow," Jekel said. "The credit union was treating [the program] like an investment. We asked the credit union to stop doing MBLs until they could have proper controls in place. Now, they are 'best practice' because they're doing it properly."
Most of those polled during the seminar used in-house underwriting rather than outsourcing. Nearly 30% said they used a combination of both.
Another area crying out for improvement is the risk-rating system, Jekel has found. The credit rating is the primary measure for risk exposure and an important element in having a program that emphasizes safety and soundness, she explained.
In a poll question during the Webinar, Hyland asked attendees if they have a risk-rating system to assess areas in member business lending. Nearly 77% said yes, 9.7% said no and 13.3% said they do not offer MBLs.
Meanwhile, a good portion of the Webinar was spent on the examination process, and the NCUA requirement that executives have at least two years of commercial lending experience.
"Having the right people working for you is really critical," Hyland said. "Obviously, that's associated with the type of loans you're doing and specific experience with those in the portfolio, concentration limits" and the due diligence needed with buying or selling loan participations.
Jekel suggested looking within the community to find successful business owners to join a credit union's board who have intimate knowledge of the region's makeup. She said one mistake is placing a MBL manager under a vice president who has no commercial lending experience.
Vick said many credit unions will seek out retired commercial lenders from banks.
"The caution I would make is be sure you're consulting with a variety of people," Vick said. "Don't consult with someone who did just underwriting or just sales."
A series of checks and balances within MBL management should be an ongoing procedure, said Erika Eastep, member business lending program officer with the NCUA's Office of Examination and Insurance.
She recalled a situation where a loan officer processed a very high volume of MBLs in addition to other loans.
"That officer could have created fictitious loans," Eastep said. "The volume was so high it could have been overlooked by the credit union."
Indeed, examiners will expect to see well-qualified managers in place. Vick said management should be able to explain how the MBL is structured, identify any holes and what steps will be taken to fill them in. Collateral monitoring and the appraisal process are also key areas of review.
During the Webinar's question and answer period, someone asked if all examiners are trained to review MBLs. Hyland said to the best of her knowledge, it is not part of the core training.
However, the NCUA board was scheduled to vote at its Nov. 19 board meeting on a budget that would ensure each region has resources for MBL training.
While not every examiner in Washington is trained in commercial lending, Jekel said the regulator will call on those with the expertise to review MBL portfolios.
Another attendee asked if it is necessary for good credit risk to be reviewed annually. Eastep said it is recommended. Vick said because commercial loan scenarios can change quickly, credit unions need to ensure that the financials are up to date and reviewed.
There were several questions about whether legislation that would raise the MBL cap to 25% and the threshold for a loan to be considered a member business loan to $250,000 will move forward.
Others asked if the NCUA had taken a position on the legislation, which is currently in the House. Hyland said while the regulator had not issued an official stance she felt that the cap should be under regulatory purview and not a statutory issue.
The "two large caveats" are everything that is an MBL should be reported as an MBL on the 5300 Call Report and the NCUA should have the regulatory authority to make sure credit unions are safely implementing MBL programs, she noted.
"Some credit unions are moving very quickly and sometimes we don't see it until 12 to 18 months later. By that time, it's hard to harness," Hyland said. "You have to crawl before you walk and walk before you run."
Hyland said that would probably be the key take-away from the Webinar: go slowly.
"We're not saying credit unions shouldn't do MBLs. On the contrary, it's a great opportunity but you have to do it right and you have to know what you're doing."