PALO ALTO, Calif. – With its bustling university surroundings and amalgamation of wealth and real estate development, Palo Alto has reached its maturation point when it comes to home construction. That's part of the reason the $644 million Stanford Federal Credit Union (SFCU) has expanded its three-year business lending program beyond residential construction to commercial construction. Members now have access to construction loans up to $10 million, Demand is already starting to build, said Brian Thornton, SFCU vice president of real estate and business lending. "We're right in the middle of Palo Alto and the city is just overbuilt on residential," Thornton said. "Part of our membership includes Stanford University's alumni association and they're buying and building businesses." Those members are wealthy ones and since the 1990s, they have been asking the credit union when it would offer business loans, Thornton said. SFCU rolled out its program in July 2003 and has roughly $60 million in outstanding business loan balances and another $1 million in SBA loans. It is also "very active" in loan participations, working with a network of eight credit unions and looking to form even more alliances. Most of the construction loans emanate from Palo Alto and extend outward 150 miles to cities like North Bay and Newark. In fact, SFCU is in the final stages of closing on a $1 million strip mall project in Newark with two more deals in the pipeline. The credit union continues to receive loan requests from $50 million and beyond but that's where it pulls back on the reins. "Not this credit union," Thornton said. "We're an almost $700 million credit union and to do a $50 million deal? That's not us. Those deals are for the (Washington Mutual) and Bank of Americas." It's not that SFCU couldn't pull it off but Thornton said construction loans are "risky" and should not be taken lightly. What helps though is having a "low risk" member base, he added. The average FICO score is over the 700 threshold and most of the members are affluent faculty, alumni and physicians at Stanford University Hospital not college students as is often misperceived. Its FOM also includes more than 130 companies including law firms, Palo Alto's Chamber of Commerce, realtors, AT& T and the American Red Cross. In the history of its business lending activity, SFCU has only taken one $20,000 loss, Thornton said. "Residential has always done extremely well for us," he reiterated, saying most are now modifying their homes with home equity lines of credit. "Everybody is getting into commercial lending now and you just have to be better." Standing out among competitors such as Washington Mutual, Bank of America and Wells Fargo means "outselling efficiencies." SFCU's loan professionals constantly hear stories of "long and frustrating" waits at traditional construction lending institutions on loan application approvals and denials. "I hear, `Tell me yes or tell me no, but tell me something,'" Thornton said. "We have the luxury of carefully selecting our partners and moving things along without bureaucracy." SFCU said it can respond to an application within 48 hours. During that time, a member has received an answer and if it's a go, an electronic cash flow statement and the rest of the process is on its way, Thornton said. The CU "is not the lowest shop in town" and "doesn't want to be" because of the high risk factor associated with the deals. "We mitigate problems," Thornton said. "A lot of big lenders have a lot of red tape. We meet people on their own terms. We have to be about relationships because it's how a credit union survives. This is an elite, one-on-one service. That's the expectation. There's a higher standard for service these days. Waiting for answers is considered unacceptable. Frankly, waiting to provide answers is unnecessary." Another standout point is SFCU can not charge prepayment penalties and does not charge loan fees but that may change in order to cover certain costs, Thornton said. The credit union recently received an NCUA waiver to do non-member loan participations and is working on becoming a SBA preferred lender, which would allow it to do streamlined loan approval, closing, and most servicing and liquidation. In addition to its newest loan offering, SFCU currently offers business and commercial real estate loans up to $10 million; SBA 7(a) and 504 loans; lines of credit; business checking and credit cards; equipment leasing; and money management accounts among others. Right now, members tend to favor fixed rates and the most popular loan is a five-year balloon, Thornton said. Whatever their choices, the refinancing boom may have reminded credit unions of the balancing act between loan-to-share. "Business, residential and consumer – they're not always going to be clicking all of the time. You need to always make loans, you need to loan out to your members," Thornton said, adding because SFCU has built its business lending operation slowly but carefully, it has reached a comfort level with its very strong borrowers – all while "daily" managing the 12.25% MBL cap. Indeed, the California Credit Union League said it is crucial that communities have access to reasonably priced construction loans. "There are too few such programs," said outgoing President David Chatfield. "Stanford Federal Credit Union is taking the lead as one of the first to recognize the need and fill it." [email protected]