By Jim Devine and Bob Hogan
Business lending is one of the most complex and risk-filled services your credit union offers. Credit unions are seeing more losses than they anticipated in their member business lending (MBL) portfolio, and this trend will continue until credit unions shore up the credit analysis and credit administration skills of their business lending team. The advantages of having every player on your credit union’s MBL team using the same game plan and playing from the same playbook cannot be overstated.
State and federal regulators are looking to see if the credit administration component of the credit union’s MBL program is set up in a manner that will properly manage credit risk associated with member business loans once the loans have been approved and booked. Your credit union must be capable of demonstrating it can manage the related credit risk on an ongoing basis over the life of their loans. The organizational design of your credit union’s MBL credit administration process must enable this risk management capability.
MBL credit administration is organizationally complex. It involves the maintenance of related loan records and the need to revisit individual loans on an annual basis to keep the assessment of related credit risk current. Any loans that begin to show signs of ability-to-repay deterioration must be identified proactively so they can be put back on repayment tracks that make sense before they become problem loans of consequence.
Once these loans go into non-accrual status and are in need of a formal workout plan, your credit union must be in a position to proactively manage the workout/collection process in order to assure maximum recovery. You’ll also have to link the workout process to the proper calculation of the allowance for loan and lease losses so you can demonstrate your credit union has allocated sufficient reserves for any anticipated losses.
If your credit union wants to build a successful business lending program, be sure you are relying on the member’s ability to repay through the means of cash flow. Today, the average business loan is roughly $250,000. If you can prevent even one member business loan from going bad by having your staff properly trained, your credit union could save a ten-fold return on its investment. Through better business lending practices, your credit union will have a safer, sounder portfolio that will improve your credit union’s balance sheet and make regulators your true ally.
Jim Devine is co-founder, chairman, and CEO; and Bob Hogan is co-founder, president, and COO of Hipereon, Inc., Redmond, Wash.
Join Devine and Hogan at CUES School of Business Lending, a three-part program throughout 2013. School I: Business Lending Fundamentals, April 29–May 3, in Chicago. School II: Financial Analysis and Diagnostic Assessment, July 15-19, Cambridge, Mass. School III: Strategic Business Lending, September 9-13, Seattle.
