MBL Policy Updates Are Crucial, Say Experts
Ideally, one of the end-of-the-year items that should be checked off the list for credit unions with member business loan programs is a review of policy.
“It shouldn’t be too detailed but also not too light,” Larry Middleman, president/CEO of CU Business Group LLC. “We hear from credit unions all over the country and understand what issues are critical to effective MBL risk management.”
The Portland, Ore.-based CUBG said it serves 392 credit unions in 43 states.
One of the major revisions to CUBG’s policy this year was a revamp of the risk rating system to segregate commercial real estate income property lending from commercial and industrial lending, Middleman said. This aims to create a better match of cash flows to the risk rating, he added.
The CUSO’s upgraded credit presentation now focuses more on balance sheet analysis and includes more details on business history, marketplace and management information, risk monitoring and loan exit strategies, according to CUBG.
“We’ve refined this over the years through the economic times and heightened examiner scrutiny,” said Jim Brekke, CUBG senior vice president and chief credit officer.
In spite of the how and when MBL policies are updated, it remains to be seen how business lending will fare for the rest of the year given the latest slowdown in employment. On June 1, the Department of Labor reported that the nation’s unemployment rate increased to 8.2%. In May, employers added only 69,000 people to their payrolls, which was the smallest increase in a year.
The employment sector is the center of economic growth and credit union loan demand as consumers defer their spending behavior during times of perceived job insecurity, falling home values and volatile stock markets, said Brian Turner, director and chief strategist at Catalyst Strategic Solutions, a subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas.
A 1.4% decline in loans outstanding in 2010 and a modest 1.2% increase in 2011 at credit unions may be closely linked to how members feel about the economy and jobs.
Turner said the nation’s underemployment rate, which combines those unemployed with those working part time but desire full time work and those who have given up their search for lack of jobs, increased to 14.8%, or approximately 22.9 million people.
“The Fed currently estimates consumer spending growth in 2012 to be only slightly higher than 2011, therefore the outlook for consumer loan growth for the remainder of this year and probably the first half of next year to be rather moderate,” Turner said.
Meanwhile, business lending may be continuing its fall, according to Biz2Credit, a New York firm that links lenders with small business owners.
In its May analysis of 1,000 applications, it found that loan approvals by big banks–defined as those with more than $10 billion in assets–dropped from 10.6% in April to 10.2% but was up slightly from the 9.8% approval rate one year ago.
The loan approval rate of credit unions during May increased to 57.6%, up 0.2% from April and up more than six percentage points higher than in May 2011, according to Biz2Credit. Banks with less than $10 billion in assets also experienced a drop, going from 45.9% in April to 45.5% in May.
It was the alternative lenders, which includes accounts receivable financers, merchant cash advance lenders, community development financial institutions and micro lenders, that beat out credit unions and banks, Biz2Credit noted. They increased their lending to 63.2%, at the market tightens on traditional funding.
Biz2Credit CEO Rohit Arora said small business lending activity could continue to be impacted based on the recent poor jobs report, economic jitters in Europe and uncertainty on Wall Street.
All more reasons for credit unions to keep their MBL policies fresh. Middleman said it’s critical for a credit union’s board of directors and business loan committee to fully understand credit.
“It’s not just about doing a simple income property loan and calling it good. Credit unions are looking to diversify, to get into C& I loans, and into full deposit relationships,” Middleman said. “This updated credit presentation allows us to accommodate these types of requests.”