SAN DIEGO — It's been a little over a year since USA Federal Credit Union launched its business services division, but an even earlier entry into loan participations set the foundation for any navigating it would have to do to stay under the 12.25% member business lending cap.

For credit unions with high business lending activity that are pushing close to the regulatory threshold, options to stay in compliance are few with loan participations leading the pack. A typical loan participation transaction that credit unions enter into is where the originating credit union sells a 90% participation in its loans and retains the servicing rights as well as a 10% interest in the loans. All the rights to the underlying loans are consistent with the ownership percentages of 90% and 10%. However, the originating credit union may retain a small subordinated interest, generally 5%, in the pool of loans against which losses are initially allocated and will provide reserves for the expected losses, which is usually significantly less than the limited subordination.

The $711 million USA FCU launched its business services program in September 2005, but began loan participations in February 2000, said Jennifer Ventimiglia, vice president of business services. Since then, it has done more than $68 million in loan participations and its new business loan portfolio has nearly $7 million. On the deposit side, business accounts are just under $2 million–a figure the credit union is strategically trying to grow by bringing in larger deposits, Ventimiglia pointed out.

“The real focus is on the deposit side,” she said. “That [focus] will allow us to free up money we can lend.”

The credit union has leaned on its healthy loan participation portfolio to make room for any future business loans it may want to enter in to by selling off matured loans going forward to make more room to accommodate members and continue to keep under the 12.25% cap, Ventimiglia said.

“We're 100% loaned out. For us, getting into MBLs wasn't a need to just get loans on the books,” Ventimiglia explained. “We are trying to increase deposits.” Other Cap Options

Beyond loan participations, there's a move from some in the industry to create other innovations to help credit unions stay in compliance and expand their business lending activity. One such effort is coming from Portland-based CU Business Group, LLC, a business services CUSO owned by eight corporate credit unions and more than 200 credit union clients. The CUSO is working on a “pooling” project that would pool loans with similar characteristics with credit unions having the option to buy a percentage on the buying end, said Larry Middleman, president/CEO. One of the benefits is if a loan is paid off early, a credit union would be able to add a new loan to replace it.

“It keeps rolling with 'X' amount of dollars,” Middleman explained. “It's a pretty straightforward model.”

Another option for credit unions pushing up against the 12.25% cap is not as widespread as loan participations, but Middleman said he's starting to see it here and there. It's a “private labeling” concept where another lender like a commercial bank or other entity will actually be the grantor of the loan, but the loan is made through the credit union and it keeps a portion of the interest.

“Everything looks like the credit union on the front end,” Middleman said. “It's still very new but I see it as a strength because banks have the experience [in commercial lending]. I see [this concept] growing.”

Still, loan participations easily account for 99% of MBL cap alternatives and they are a good fit for credit unions “especially in these days of high loan to share and tight liquidity,” Middleman suggested. Like USA FCU's strategy of building its business deposit portfolio to be able to have more room for business loans, Middleman said this method can help credit unions get past liquidity and asset liability management issues.

“You grow your asset base but you can also grow that cap,” Middleman said on coupling business deposits and loans.

While the 12.25% cap is not a concern for USA FCU, Ventimiglia said like many credit unions, they are strongly behind the effort to raise the lending limit.

“Our local PAC is pushing to get the constraint removed and we're doing our part to make a difference,” Ventimiglia said. “Most credit unions that have gotten into full-service business lending did so to bring over deposits. The cap has not prevented us from growing and in a perfect world, it would be the same for other credit unions.” For the last seven years, Grace Mayo said she has been working with others in the industry to bring other options to credit unions beyond loan participations. Mayo, president/CEO of $601 million Telesis Community Credit Union, which launched the highly successful Business Partners, LLC in 1995, said she would like to see more corporate credit unions–or even other investors–get involved in the creation of a secondary market for larger business loans. At a recent Business Partner's training forum, there were a few that said they might commit, but discussions are still underway.

“The concept has always been there because there are a few [credit unions] that do big business loan volume,” Mayo said. “We're looking for niche purchasers that understand that credit union MBLs are very good products.”

There are some restrictions on a secondary market such as credit unions having to commit to a certain lending volume, having its own standard underwriting ratio to give strength to loan portfolios and the need for prepayment penalties–something federal credit unions can't do, Mayo said.

Meanwhile, some in the industry, including Mayo, are noticing community and regional banks turning their focus back to serving the small business market with loan amounts currently being offered by credit unions.

“The dialogue has been credit unions are starting MBL CUSOs but it's taking several years to become profitable,” Mayo said. “The CUSOs have to collaborate. It has to take place if we want to compete.”

While popular for some credit unions, loan participations “are only looking at high yield and that poses risk,” Mayo said. If it is higher than the typical pricing of a loan product, there's more risk associated with it. Whatever options are presented, the industry must ensure that they are appropriate for credit unions' ALM.

“We have to be cautious,” Mayo encouraged.

For quite some time, there has been an ongoing press to increase the MBL cap. The Credit Union Regulatory Improvements Act contains the key component that would raise the limit to 20% of assets, which is the equivalent to the business lending limit for savings institutions, according to CUNA. Another piece of CURIA calls for raising the member business loan limit from $50,000 to $100,000.

Middleman said for now, collaboration is the edge that will keep the window open for credit unions to compete.

“You might have one credit union that runs up on the cap but you can continue to make loans [with participations],” he said. “The whole concept of participation is great because it makes all of us stronger.” –[email protected]