Fewer Delinquencies, More Expertise, Alliances
Depending on who you talk to, the credit union business lending landscape could easily be a mix of record loan growth peppered with a drop in delinquent debt to an environment that is thriving better than what bank competitors are experiencing.
Credit unions may be entering a new phase of lending recovery as they tweak traditional methods to grow loans and explore new areas to start and expand their business lending programs. One area that may see a revival is in the area of participation loans.
Michigan Business Connection underwrites and originates commercial loans and manages more than $250 million in credit union business loans. The CUSO in Ann Arbor, Mich., was recently involved in the financing of a multi-unit residential and retail property and a wellness center that it says proves how the state’s credit unions continue to reduce the financing gap caused by reduced lending by banks and non-bank lenders.
In total, the two loans have 18 combined credit union participants, with MBC providing the construction administration and loan management, according to the CUSO.
"Risk sharing is critical to safety and soundness, and these two projects illustrate the important role that credit unions are playing with economic development, affordable housing and quality healthcare," Beardsley said.
For MBC, it’s further proof that collaboration is an advantage that credit unions have over other lenders.
"I don’t think I’ve ever seen other financial institutions able to sincerely put their competitive differences aside in order to collaborate for the greater good like credit unions can," Beardsley said. "CUSOs help make that happen by providing expertise, but more importantly, a framework for the efficient exchange of risk and reward."
Indeed, there was a run-up in participation loans from the days when that type of shared financing was easy to buy into, said Larry Middleman, president/CEO of CU Business Group LLC, a Portland, Ore.-based business lending and deposit service CUSO that serves 420 credit unions in 44 states. At their peak, they numbered nearly $7 billion making up 25% of all business loans, he added. But when the recession hit in 2008 and 2009, participation loans started down the same rocky road as business loans.
"A lot of bad loans have gone through participations. Now, we’re seeing more interest in buying participation loans," Middleman noted. "The loan-to-share ratio is far lower than they’ve been historically. Today, the average loan is $430,000 compared to $305,000 in 2007."
These days, credit unions want to do a bit of everything from expanding strong commercial lending programs to include deposit services to building a niche with smaller business loans, Middleman said. As a whole, stronger expertise is coming into the industry more and even if credit unions are opting to partner with CUSOs, they are still leveraging that in-house expertise to help manage their business lending programs.
While there may be a positive shift in business lending for credit unions, Biz2Credit CEO Rohit Arora is not convinced. The New York firm connects small businesses with lenders for financing.
"Despite the surge of loan approvals by credit unions from late 2011 and early 2012, they are rejecting more than half of the funding requests from small business owners," Arora said. "They are lagging behind as traditional banks are becoming more aggressive in the small business lending space."
One of the culprits may be credit unions either not making better use of their technology or having systems that are too slow to process loans, Arora offered.
According to its most recent Biz2Credit Small Business Lending Index, which is a monthly analysis of 1,000 loan applications, credit union approval of small business loans slid for the ninth consecutive month to 45.9% in February, down from 46.9% in January. Arora said approvals have dropped more than 20% in a year’s time.
Meanwhile, Biz2Credit found that banks with less than $10 billion in assets are making more loans through entities such as the SBA’s Small Loan Advantage program, which require little collateral and offer loans from $50,000 to $350,000 – a range considered a sweet spot for some credit unions. Ironically, that same niche is gaining attention among large banks such as Bank of America and TD Bank.
"Small business lending is a profitable business. I’m surprised it has taken so long for some players to get back into the game," Arora said.
Still, when comparing bank chargeoffs and delinquencies to those at credit unions, Middleman said the latter group still has the edge.
"Banks took early hits in 2009 and 2008 mainly through a lot of speculative and construction loans, especially from a lot of community banks," Middleman said. "That’s a big reason why credit unions didn’t have a huge spike."
Looking back to 2004, 60-day loan delinquencies hammered financial institutions, peaking in 2011 at more than $600 million brought on by a sluggish economy and lending practices, Middleman said. Participation loan and member business loan chargeoffs at credit unions were $25 million in 2006 compared to $375 million in 2011. The good news is that in 2012, credit unions experienced a decline in both delinquencies and chargeoffs, he noted.
"We’re now entering a third cycle of recovery where we protect what we got and do more with fewer resources," Middleman said.