After the demise of several high-profile credit union business and commercial lending programs over the past few years, examiners are applying more scrutiny to the way credit unions conduct their operations.
And, with the recently amended CUSO rule that calls for the entities to file financial reports directly with the NCUA and the appropriate state supervisory authority, regulators are working harder to prevent any further losses to the share insurance fund.
To stay proactive, keep examiners happy and become more of a player in the small business space, CU Business Group, a Portland, Ore.-based business lending and services CUSO, offered 10 tips on how credit unions can keep their programs in check.
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1. Organize your loan files neatly and consistently.
From his experience, one out of three credit union loan files are in some state of disarray, said Larry Middleman, president/CEO of CUBG.
“If you have paper files, clean it up. Now, many have gone electronic. When you have examiners coming in, first impressions are key.”
2. A high yield on a business loan is there for a reason.
In this market, 4% to 5% is a pretty good rate right now, Middleman said. A credit union might be able to refinance at 6% if the business has a good track record and can prove themselves. Another good reason credit unions or certain entities like a CUSO would charge higher than market rates is when an establishing an effective niche.
Ultimately, when it comes to high yields, Middleman said, “I challenge you – ask, is it a risk we don’t want to take?’”
3. Have a meaningful risk rating system for pass rate loans.
Middleman said “this is a pet peeve” because when credit unions say “everything is a three,” it’s not good for the management or the board.
“Why do you have criteria where you cannot do a one-rated loan?” he asked.
The bottom line is credit unions can indeed have one-rated loans particularly in those cases when the member is “a very strong borrower that is rock solid with your credit union,” Middleman suggested.
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4. Don’t get emotionally attached to a loan request.
Credit unions that are relatively new to business lending, tend to have this problem, Middleman said.
“The length of a time as a member should not be a factor,” he urged. “It is not underwriting criteria. In 2008 to 2010, I was amazed at the number of heavy hitters that got too highly leveraged and everything they did in business lending had turned to gold.” That all changed when the economy took a turn and everything started to collapse, Middleman recalled.
5. Use written proposals to communicate the value you bring to the business relationship.
“This is something credit unions don’t do well,” Middleman said.
A written proposal of no more than two to three pages that specifically states how the credit union will save a business time, money and how to make them more money can make significant strides.
“If you put it in your written proposal, I guarantee it will add volumes to that business. Show at least a brief snapshot of a transition plan – who’s going to handle what.”
6. Maximize the business check program.
“I know some are saying ‘who writes checks anymore, they’re going away,’” Middleman said. “Yes, consumer checks are on the drafting block but businesses have a lot of reasons to write checks – for tax purposes, for audit purposes.”
The average business check order is $70 and a portion of that can be fee income for credit unions, Middleman noted. The typical rebate that check printers offer to credit unions is about 10% to 20%, he added.
“Get them hooked into (checks) when an account is opened. If you don’t, you’re missing out on fee income.”
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7. Identify your niche.
Credit unions should ask, “what are they doing better than anyone else?” Effectively communicate in 30 seconds or less what your niches are, Middleman said. The senior management team and board of directors should also know what they are too.
Identify where you want to be in lending — for instance, retail businesses or bigger facilities. Find out where you excel and go after it.
“During my banking days, we were known as the low cost provider,” Middleman said. “Our pricing on deposit products and services were lower than Bank of America and Wells Fargo. We led with ‘we can save you money. We also had a good branch network. Our target was a one to 20 mile radius of where the businesses were.”
8. Sophisticated small businesses will want everything.
Middleman said while he’s glad to see some credit unions serving “mom and pop businesses, because there’s a place for those,” but one goal would be trying to move up the ladder to serve businesses that will be more meaty and profitable.
He pointed to a focus group of 10 small businesses that convened to discuss their needs and where credit unions fit in addressing them. The most important request was being close to a branch, they said. Others valued access to credit. Roughly four of the participants said the deposit side was more important than lending services. As for technology, some used remote deposit capture religiously while others could not care less, Middleman said.
“The point is you need a nice package of services. Every one of those businesses had high value for service and having a point person when they needed help,” he pointed out.
9. Branch integration requires significant effort and it starts at the top.
There should be a nice balance of expertise to answer questions and talk about complete products such as remote deposit capture, Middleman said. Then, referrals can be made to the central area for follow-up, he added.
“I can tell you that credit unions struggle with this left and right. The answer is it starts at the top. If the CEO preaches every single week ‘we are going to have an effective branch network,’ it will get done.”
10. Change the perception of the credit union as a player in the business market.
Middleman said he learned this from that focus group of 10 business owners. Among their complaints were not getting timely responses from credit unions and not receiving adequate help, especially on the lending side. Some didn’t even consider credit unions when it came to their business service and lending needs.
“Step one is simple awareness. Step two is chipping away at businesses where you have a product or service advantage. The business owner might be an existing member,” Middleman offered. “Stay in touch. At some point, Wells Fargo is really going to tick them off and then the credit union will be right there” to offer relief.