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EAU CLAIRE, Wis. – It’s not what credit unions know – or think they know – about SBA lending that can hurt them, it’s what they don’t know. That’s why, say credit unions that are veterans in making Small Business Administration loans, newcomers should take it slow and first learn to walk with member business loans before they run with SBA loans. Charles Grossklaus, president/CEO, Royal CU, Eau Claire, Wis., and a member of CUNA’s Business/SEG Services Committee has this word of advice for credit unions that are considering getting into member business services: “Don’t start with SBA loans. Credit unions have enough to learn about doing member business loans without having to deal with another layer of compliance and complexity that SBA loans add. Credit unions are facing a recipe for disaster if they don’t do SBA loans right.” Grossklaus said CUs’ knowledge and expertise with handling member business lending “is getting better, but there’s still a dearth of experience among credit unions in what’s involved.” Larry Accola, senior vp, business lending for RCU said the number one misunderstanding most credit unions have about SBA loans is they equate an SBA guarantee with collateral. “It’s absolutely not the same and shouldn’t be treated like it is. The SBA guarantee should be used as a structuring vehicle. It’s a tool that can allow credit unions to make riskier loans and gives a credit union flexibility. A credit union shouldn’t look at the guarantee and think it means the credit union doesn’t have to worry about its cash flow. It’s a tool that lets you go out further, but everything else should be in place,” he said. Accola has been involved with business lending for 31 years, the last 10 of which have been with credit unions. He witnessed first hand what happened when small banks and S&L’s jumped on making SBA loans “because they thought it was the thing to do.” Unfortunately, said Accola, they didn’t do the loans properly, many of the loans defaulted, and the SBA was forced to tighten up its lending. `The same things could easily happen to credit unions,” he said. “An SBA loan should stand on its own merits regardless of the guarantee,” Accola stressed. “An SBA guarantee does not mean that if the borrower defaults on the loan then the credit union is safe. Even if the SBA guarantees 80 percent of a loan and the loan defaults, a 20 percent loss for a credit union is still substantial. The guarantee should not give a credit union a false sense of security about an SBA loan,” he said. Accola advised credit unions, “Don’t start out making a business loan with the attitude that it’s going to be an SBA loan. It should only become one if it’s absolutely necessary. “Considering that four out of five start-up businesses fail within the first year, credit unions as the lender have every right to be cautious,” Accola said. Accola also recommends CUs that want to offer member business services and make SBA loans to hire outside experience “because these types of loans are too complex. Credit unions won’t get it right if they don’t hire someone who has outside experience in these areas.” Joanna Bruno, a principal of J.R. Bruno & Associates, specialists in SBA program assistance agrees with Accola’s concerns. Bruno has consulted with several credit unions such as Vision One CU, on SBA lending. Bruno said her biggest worry is that credit unions are not aware of what’s involved with SBA lending and do not have the established processes in place to handle SBA loans, so CUs might inadvertently wind up improperly documenting and closing the loan and risk a repair – SBA wouldn’t pay a certain percentage of the guarantee. “It’s the responsibility of the credit union to document and close the SBA loan properly to protect the guarantee,” said Bruno. A repair factor can range from the total loss or a percent loss of the guarantee depending on the impact of the loan. Completing the required documentation for an SBA loan is a laborious and technical process that takes considerably more time than loan applications most credit unions are familiar with. Royal Credit Union, for example, has a business loan operations supervisor who has about 20 years commercial lending experience, and she still needs one full day to complete SBA loan documents. Credit unions considering getting involved in making SBA loans should also make applicants aware that the approval time from the SBA depends on the size of the loan and can typically take anywhere from one to two days for loans under $150,000, to three to five weeks for larger loans. Smaller loans are processed through the SBA’s two LowDock centers in Hastert, Ky., and Sacramento, Calif. Bruno said she hopes she doesn’t see credit unions develop the attitude of thinking that just because they have an SBA guarantee on a loan, then collateral isn’t important. Like Accola, she encourages credit unions to use a member’s collateral if they have it. “If the member has collateral, take advantage of it,” she advises. Even in legitimate situations, though, collateral isn’t always available, says Robert Schultz, president/CEO, Vision One CU, Sacramento, Calif. That doesn’t necessarily mean there’s something wrong with the business, it’s just the nature of the operation, he says. The $25 million credit union, formerly known as California Optometric CU, has been making SBA loans for about two years since Schultz, who formerly worked with commercial lending on the banking side for 20 years, became the credit union’s president. Vision One CU was chartered in 1951 to make business loans to eye doctors and is exempt from federal member business lending regulations. About 10% of its MBL loans are currently SBA loans, and Schultz said that figure is increasing because of the growing number of business acquisition and practice improvement loans members are applying for. “SBA lending gives you the flexibility to do loans that might otherwise be too risky for a credit union to do because it gives you a secondary source for repayment when there is none,” said Schultz. “SBA lending is a tremendous tool, but you need to know when to use it,” he added. Schultz describes SBA loans as “a good risk mitigator for certain types of loans,” especially loans that are collaterally deficient such as for start-up businesses. But before credit unions consider offering SBA loans, Schultz says they need to understand what their market is and either have employees on staff who understand SBA rules and what the agency will and won’t approve, or outsource to a business that specializes in SBA lending. “Credit unions need to understand their market first, the tools they need to make SBA loans and how to manage the risk,” Schultz said. “SBA loans are a loan enhancement, but they only work in certain circumstances.” Having said that, Schultz adds that he supports the credit union trade associations’ lobbying efforts with the SBA for the agency to reverse a policy interpretation that limits CUs’ access to the SBA loan guarantee program. The current SBA policy limits CUs’ access to SBA loans to community credit unions. “If credit unions are getting into making business loans, they need to be able to look at SBA lending, assuming it works for their market.” -

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