CUSOs help ease the plunge in loan dividends

Source: CU Commercial Group

Credit unions have been active in loan participations for many years. But today, a convergence of beneficial market factors is making equity lending more attractive than ever to buyers and sellers.

If you’re ready to take the plunge, working with a CUSO loan company can help you dive into the pond of participation.

A world of opportunities awaits you

The regulatory environment for credit unions has become more conducive to commercial loan participations in recent years, as the NCUA has begun to offer increased flexibility designed to help credit unions grow their commercial loan portfolios. As of January 2017, credit unions can exclude all non-member equity loans from the statutory limit on member business loans of 12.25% of total assets.

The NCUA also gives credit unions greater flexibility to establish their own credit policy guidelines in support of their individual markets, member profiles and risk appetite. This means that credit unions are now free to purchase as many non-member equity loans of any size and in any market as they wish, in accordance with their internal policies and financial parameters. risk. The NCUA now offers buyers and sellers more opportunities to partner on mutually beneficial agreements.

The NCUA’s less prescriptive approach to governance makes sense, as the sector’s commercial lending capacities have evolved dramatically over the past decade. While still 10 years ago many credit unions were very new to commercial lending compared to their banking competitors, today they have seasoned staff, have experienced several volatile business cycles and are more comfortable entering into complex and larger transactions. CRE transactions of $ 5 million are no longer rare, and credit unions are also open to more specialized loans such as construction lines, government guaranteed loans, and well secured loans with limited personal guarantees or non-existent.

Of course, the flip side of this success is that many active credit unions lending to businesses are quickly approaching their MBL limit. According to CU Business Group analysis of all U.S. credit unions with a minimum of $ 2 million in commercial loans, the average MBL cap level (defined as member business loan balances as a percentage of total assets ) is 6%, roughly halfway through the cap. . More strikingly, 309 credit unions are reaching or exceeding 8% of their MBL cap, which means they are at risk of hitting their cap in the very near future. (Note that some of these credit unions are not subject to the 12.25% MBL cap due to a low income designation or grandfather status.)

A vibrant equity market is essential to facilitate the ability of credit unions to remain active in commercial lending, and will help maintain a strong flow of capital to small businesses in the communities they serve.

The fear factor

Yet entering the participating loan market is a daunting prospect for many credit unions. Those looking to purchase loans directly from a primary lender often struggle to find deals that suit their unique credit policies and risk appetite. The same goes for prime lenders looking to find potential buyers. The “number for dollars” approach that many initiators use can be inefficient and time consuming.

Even if a buyer and seller somehow manage to find each other, the issue of information disconnecting makes it difficult to know if the deal will work for both parties. Sellers know their home market and borrowers intimately, and sometimes are reluctant to provide the buyer with all of the due diligence information requested, especially if the loan is closed and on the lead books. Buyers, on the other hand, need to be assured of the validity of the deal and face greater risks due to their unfamiliarity with the market and the borrower.

Finally, credit unions on both sides of the equation may suffer from a lack of resources and staff expertise. First-time buyers often have limited experience with commercial loans among their staff. And sellers may not have the time or resources to devote to researching potential buyers, preparing and closing deals, and handling all of the monthly and annual reporting and reporting requirements. due diligence.

The CUSO advantage

Fortunately, CUSOs offer several distinct advantages when it comes to supporting and helping credit unions take advantage of the opportunity to participate. Here are three reasons why working with an experienced CUSO loan company is the best choice:

  • Independence from all parties: The asymmetric information problem described above is real. In such situations, a CUSO is in the ideal position to provide an unbiased and objective view and improve the level of trust on both sides. While the individual buyers and sellers in a transaction may have conflicting motivations, CUSO is committed to serving all of its credit union clients and making sure the deal goes through. All Commercial Services CUSOs provide some level of pre-screening of prime lenders to ensure they have a well-structured commercial loan program and can handle borrower due diligence, reporting, and accountability. documentation required to manage the transaction. For example, CUBG reviews critical factors such as the leader’s loan management capabilities, depth of experience, and historic success of their program. Before you are ready to dive in the pond, having your CUSO lifeguard do a thorough pre-screening of the primary lender will help build confidence.
  • Extensive and Established Network: Some CUSOs specializing in commercial loans work with dozens (or hundreds) of credit unions eager to buy and / or sell commercial loans. For example, CUBG has been in business for 17 years, and as the industry’s largest sales department, CUSO, works with 585 credit unions across the United States. Buyers and sellers can tap into this deep network with minimal effort instead of dropping a line into a murky pond. .
  • Unparalleled Expertise and Advice: For credit unions looking to test commercial loans by purchasing equity stakes, lack of expertise and staff resources is a critical barrier to entry. CUBG and other business loan CUSOs offer decades of experience working with lenders with varying risk appetites. By serving credit union clients in multiple regionally dispersed markets, these CUSOs are also able to develop in-depth industry and market knowledge over time. They can offer relevant expertise and advice even to the most seasoned commercial lenders.

In addition to the above benefits, CUSO also serves as a ‘one-stop-shop’ for buyers and sellers, leveraging their specialist expertise at every stage of the transaction, including prime lender screening, due diligence borrower, loan service participation and even help in workout situations. Most importantly, tapping into a CUSO-approved network of motivated buyers and sellers introduces a sea of ​​opportunity and establishes a higher level of trust.

Equity loans provide credit unions of all sizes and risk appetite levels with the opportunity to grow and diversify their commercial loan portfolios. Working with an experienced CUSO can help credit unions new to the process manage their risk and avoid some common pitfalls. There is no better time than now to dive!

Larry middleman Larry middleman

Larry Middleman is President / CEO of CU Business Group, LLC. He can be reached at 971-244-6394 or [email protected]

Trisha bartkowski Trisha bartkowski

Trisha Bartkowski is Assistant Vice President, Holdings for CU Business Group, LLC. She can be reached at 971-244-6314 or [email protected]

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