Q: Is my credit union big enough to do business lending?
A: 70 percent of credit unions over $50 million in assets have at least one commercial loan on the books. That doesn’t include business purpose loans under $50,000 or residential rental properties that do not meet the regulatory definition of a business loan.
In 2017, the NCUA also provided small credit unions regulatory relief that are looking to assist members with business-related needs.
Q: What if we don’t have anyone in-house to do business loans?
A: NCUA Regulations permit the use of a CUSO that is independent of the loan transaction to assist the credit union with business lending. Like other vendors, the credit union must conduct due diligence along with understanding risks associated with business lending relative to size and complexity of the loan portfolio.
Q: Are residential rental properties still business loans?
A: Yes and No. In 2018, Congress amended the Federal Credit Union Act so that loans secured with any 1-4 family residential property are no longer classified as a member business loan. However, credit unions must still properly underwrite, close and manage the risk associated with this category of loan. Residential investment property loans have many of the same risk characteristics of business loans and should be managed differently than residential mortgages.
Q: Why are SBA loans so difficult?
A: Loans guaranteed by the Small Business Administration are an excellent way to complement your business lending program and provide financing to the local community. However, unless the credit union has extensive in-house resources and experience in underwriting, closing, and servicing these loans, it can be a frustrating experience. The SBA loan process can be quite different from traditional business loans. It is highly advisable to utilize a third party who specializes in this type of financing to make the process much more pleasant for the borrower and credit union.
Q: Can I buy participation loans?
A: Credit unions can purchase a portion of other credit unions’ business loans as an excellent way to diversify risk, build income, and assist other credit unions. Credit unions purchasing loans need to exercise the same level of diligence in originating and closing the loan as if they were making the loan to one of their members. Participation loans should have the same credit criteria as other loans and should be viewed as a “loan” with credit risk and not an investment.