With most of its business loans coming due in 2011, West Community Credit Union was seeking ways to assist its members with renewals when it came across a Missouri program aimed at creating and retaining jobs.
The $126 million credit union in O'Fallon, Mo., is among the first cooperatives in the state to partner with the Missouri Linked Deposit Program. Banks and credit unions go through an approval process to be able to provide low-interest loans to small businesses, expand the economy and strengthen communities statewide. Lenders can lower the interest rates to the borrower by two to three percentage points. In place for nearly 25 years, the program has $720 million available, according to Clint Zweifel, Missouri's state treasurer.
"Small businesses and family farms in Missouri can use the interest rate savings provided by the Missouri Linked Deposit Program for investing right back into their businesses," Zweifel said at the time legislation passed in 2009 that expanded eligibility guidelines.
The way MLDP works is a credit union or bank approves the borrower's loan application by applying its normal lending standards. The lender then submits the application to Zweifel's office for approval. Lenders need to have sufficient collateral. The total market value of collateral must be equal to or greater than the collateralization margin set by the state treasurer of the total amount of state time deposits including accrued interest to maturity plus demand deposits with the depository, less the amount, if any, which is insured by the FDIC or the NCUSIF.
Borrowers that have employees may need to complete additional immigration documentation. Some may have to submit a Department of Revenue request for tax clearance form if the MLDP loans are over $250,000.
Jason Peach, chief financial officer at West Community, said the credit union was approved as a designated lender in July. The strategy now is to identify members who have business loans that are nearing renewal to see if they qualify for a MLDP loan at a reduced rate.
The benefits of participation include West Community getting a low-cost deposit from the state that is matched off by the loan, Peach explained. It was important to have some protection through the program. He said for the credit union to offer a lower than market rate, it needed a guarantee on its spread.
"We heard about the program and saw it as a way to not take on interest rate risk and help business members," Peach said. "It may help grow businesses and it helps the members. It all feeds on itself."
Peach said West Community is one of the top originators of business loans among credit unions in Missouri. Business members have been served for some time but a focused ramp up occurred in 2006, he added. Today, there is about $12 million in business loans in the portfolio.
"In 2006, we felt like we weren't going to get the volume on the business side unless we did what banks were doing and that was putting people on the street," Peach said referring to the business development representatives hired to help generate sales volume. "Referrals have been big for us especially with commercial loans."
Being able to offer lower rates to small business owners has been a draw for many of Missouri's financial institutions, according to the state's treasurer's office. The interest rate for the deposit with the lender providing a MLDP loan is based on a formula set by state law. The interest rate is set off of the market rate, which is computed based on the average CD rate quoted by Missouri lenders for the comparable term. When the market rate is above 5%, the treasurer's office may reduce the yield on the deposit to the lender by as much as 3%. When the market rate is below 5%, Zweifel may multiply the rate by as much as 60%. State law requires that the amount of the interest rate reduction must be passed on to the loan applicant for a MLDP loan
Peach said it would like to generate more new loan relationships within the small business community but West Community, like other credit unions, are having to navigate under the 12.25% of assets member business lending cap.
"That's the reason we're starting with loan renewals because we're capped at the amount of loans we can do," Peach said. "We have a lot of members that have small businesses. We will serve the ones that we have worked with in the mean time."