Credit unions may be turning to member business loans as asource of growth, especially in light of this year'sprinciple-based MBL rulings. On Tuesday, Nov. 29, the NCUA providedadditional clarity around the definition of MBL loans versuscommercial loans, and expectations for how credit unions willeffectively manage the increased and different risk that comes withbusiness lending compared to consumer lending.

Whether the institution has an MBL concentration to grow or willbe starting a new lending segment, credit unions can begin gearingup today for the Jan. 1 commercial lending rule. This includesprocuring the right staff and technology as well as developingsound policies and controls that reduce risk.

Here are four ways credit unions can gear up for commerciallending growth.

Prepare the Board of Directors

Ultimately, it is the responsibility of the credit union boardto protect the institution and its members, so it is important fordirectors to outline up front the goals behind increasing businesslending and the related risks. This includes strategy around nicheor geographic targets of commercial lending and how the riskscreated by MBL will be mitigated to ensure sufficient capitalcoverage. This also extends to due diligence in the selection andoversight of outside parties used in the commercial lendingprocess, including software vendors, loan review firms, etc.

In addition to the loan policy for commercial lending, the boardis also tasked with understanding the institution's portfolio riskthrough regular reporting from senior executives who understandMBL.

Build Out MBL Policy

Once strategic decisions are made, they can be translated intothe institution's commercial lending policy, which requires annualreview with the board of directors at the credit union. Policyshould outline but not be limited to concentration limits, tradeareas, staffing requirements, procedures for analyzing andapproving these loans, collateral requirements, requirements aroundthe use of CUSOs, if applicable, and procedures for theadministration of the loans and the portfolio.

The November updates in the NCUA examiner handbook clearlyoutline a number of commercial industry sectors and recommend usingNAICS codes to more granularly define the institution's area offocus. NAICS can also be used to ensure benchmark data isappropriately leveraged for business comparisons and is required bythe institution's MBL policy.

In the event that loan policy undergoes material change in thecredit union or there is a significant change in the credit union'smarket, the policy must be re-approved by the board.

The new MBL policies could seem like a big departure from thenorm for some credit unions. As one example, if the institution hasfocused on consumer lending to date, loan administration for MBLcan require significant change management. For consumer loans, theinstitution may primarily rely on delinquency metrics and creditscores. However, business lending requires regular review, and manycredit unions' systems aren't necessarily designed to monitor lienfilings, update cash flow estimates regularly and track compliancewith loan covenants.

Train the Staff

As another preparatory step for the Jan. 1 guidance,institutions can grow staff-development programs to morecomprehensively cover member business loan analysis. Some principleareas to cover include:

• Understanding business financial statements and tax forms;
• Global cash flow analysis and double counting adjustments;
• Data gathering for commercial loans;
• Loan documentation;
• Using business credit scores or probability of default;
• Commercial risk ratings ;
• Business valuations and collateral appraisal management;and
• Industry resources for the niches the credit union will serve(check with industry associations, which often produce benchmarkingstudies and newsletters).

Consider Technology for Efficiency andConsistency

For the origination of new business loans, institutions mayconsider expanding loan decisioning technology – which many creditunions leverage in consumer loans already – to commercialportfolios.

Loan decisioning software allows credit unions to prescribespecific templates for different loan types, so data-entry screens,calculations and decisioning rules are streamlined and customizedto the credit union's policy. This technology allows theinstitution to quickly screen loans and identify applications thatshould be approved, rejected or reviewed further through acomprehensive spread and global analysis.

The automation and consistency of loan decisioning technologyalso reduces the risk of manual error, which can be higher atinstitutions new to MBL. With clear instructions on the data toenter and automation for calculations, loan decisioning technologybecomes business process management and can be a training tool thathelps allocate experienced credit analysts' time to the creditsthat need more attention.

Business lending is not an area in which all credit unionsshould enter, as the risks and requirements are different. Yet, inreading through the regulatory expectations and tackling the abovefour preparatory steps, institutions can begin to gear up for theJan. 1 MBL rules.

Libby Bierman is an analyst at Sageworks. She can bereached at 866-603-7029 or [email protected].