Stalled Lending Leads Senate FCU to a CUSO
After seeing a prolonged period of stalled consumer lending, Susan Enis knew it was time to go shopping.
"Like with a lot of other credit unions, consumer business is drying up. Rather than stare at an empty bread box, we had to go to the pantry," said Enis, president/CEO of the $482 million United States Senate Federal Credit Union in Alexandria, Va.
That search led to the June launch of CU Strategic Services LLC, a CUSO that will assist credit unions of all sizes on the East Coast with the process of buying member business loan participations. CU$$ will offer consultative support to develop procedures for loan participations, to solicit lenders and loans and to offer an opinion about the validity and the quality of each opportunity.
Formed by USSFCU, the CUSO officially opened for business in September and recently signed on its first credit union, said John Hayes, executive vice president and chief operations officer, who will also head the new subsidiary.
A May meeting with other credit unions revealed an interest among most of them to become involved in loan participations even though they lacked the expertise. Hayes said that's when the light bulb came on. USSFCU would not only use the networked loan model but also offer it to other credit unions.
CU$$ will not originate, sell or service the loans, Hayes said. The CUSO will help credit unions develop their policies and procedures, identify the types of loans requested, point out risks and then connect buyers with credit unions and CUSOs looking to sell. Credit unions cannot become owners at this time. The loan participation consultative services are available to those in all assets sizes, however, many of the inquiries have come from those in the $150 million range.
A credit union's board of directors must adopt specific business loans policies and review them at least annually, according to the CUSO's website. CU$$ will offer guidance in the development of the policies without charge. If the credit union prefers to have CU$$'s draft policy, a charge of $2,500 applies. The CUSO will negotiate the servicing fee and contract terms at a flat fee of $2,000. Minimum participation is $500,000. If participation is less than that, fees will be negotiated.
CU$$ plans to keep its focus on loan participations, Hayes said. There has been some discussion about possibly adding business services. However, the industry already has many CUSOs filling this need and CU$$ does not want to compete in this area, he noted.
Hayes brings more than 35 years of financial services experience to the table having originated over $100 million in commercial loans and supervising commercial loan officers. His professional affiliations include chairman of the Metropolitan Area Credit Union Management Association and past president of the Mortgage Bankers Association.
That experience has helped Hayes to know that it is critical for credit unions to be able to touch and feel the property they plan to invest in. So far, loans have been bought in New York, North Carolina, South Carolina and Pennsylvania.
"It's kick the bricks," Hayes said. "It's being able to touch the loan. I've actually gone to look at properties and decided against them. I want to be able to drive or catch a short flight to the property."
Having a visual is especially important given that some states may have a glut of fallen properties yet have pockets of financially strong developments in other parts of the state. Hayes pointed to his hometown of Albany, N.Y., which has an 8% decrease in property value. In other areas it could be as high as 40%.
Enis said USSFCU has traditionally stuck to consumer lending. In addition to serving the Senate and its support staff, the credit union also has SEGs that include the Supreme Court and the U.S. Government Accountability Office. The pullback on consumer loans caused the credit union to look in different directions for portfolio growth.
"What's going to get our economy going is helping small businesses," Enis said. "At the same time, we're exploring member business loan participations and using cash to put them in our portfolio. Even conservatively speaking, they provide great diversity and an uptick in yields."
Enis cautioned that potential transactions will undergo strict due diligence. She said the NCUA is right in requiring credit unions to absolutely know what they're buying before putting a loan participation on the portfolio. A balance is still needed with embracing change and tradition.
"If you keep expecting the previous model to work while the world is changing around you, you'll find that model may not work anymore. But you have to stay true to your values."