Loan Participations: The Winning Scenario for Any Credit Union’s Business Lending Strategy11.10.2014
Credit union lending activity remains strong and active. In fact, Callahan & Associates’ 2Q14 Trendwatch revealed that loans reached their highest level since 2005 in the second quarter of this year; while the growth was well spread, member business lending was up by double digits.
Still, many credit unions fear the ominous regulatory cap. The now infamous cap limits credit unions’ total business loan portfolio equaling up to just 12.25 percent of their total assets. (Loans under $50,000 do not count toward this cap.) Efforts continue to see the cap raised to 27.5 percent with bills active in both the House of Representatives and U.S. Senate. Should such legislation not pass, at least in the near term, are those credit unions with healthy business loan portfolios just out of luck? Not exactly.
A credit union executive recently compared the situation to a previous career in trucking where an operating system supplier served as a seamless conduit to swap strengths and weaknesses in truck-load capacity. The scenario is similar to the credit union industry’s current structure with member business lending: some credit unions are experienced business lenders, nearing the cap, and others are just looking to get started. In this case, participation programs are an effective option for the industry to join forces in a win-win scenario for credit unions, taking business lending share from banks.
Here is how it works: a single borrower receives a loan led by a single credit union. Said credit union then participates out the loan to other lenders by recruiting those other participants, each of them sharing in the risks as well as the profits. Credit unions have a role to play either as the primary lending institution or as a participatory funder. The terms of any loan participation agreement will vary, but regardless, offer credit unions big rewards on their balance sheets and allow inexperienced business lenders to participate from the underwriting prowess of more experienced lenders.
For credit unions with more mature business lending programs, loan participations allow for diversifying risk, expanding near-term revenue and member value, expertly maintaining regulatory limits and taking additional share from banks in their markets. Credit unions starting or growing out a fledgling program gain an opportunity to enter the market without bringing in all the resources, though still build expertise by collaborating with others in the process. This means also taking part in business loans’ value to members and to their profitability compared to other loan types.
A few other key reasons for credit unions to consider participation loans now include:
- Diversifying assets, and ultimately minding their exposure to potential loss
- Minimizing credit risk to a member or specific niche market that carries above average risk
- Maintaining greater share of members’ wallets, especially when acting as the primary institution
Traction with member business lending is not a trend. Banks and other lenders have not entirely tended to the small business and commercial real estate communities, faring off products or posing near impossible credit requirements. Credit unions’ culture primes them to work well with businesses, young and old, to provide a variety of services. The entrance of many credit unions into this space in recent years has been promising, as has the maturation of others’ existing programs. Participations create a winning scenario for credit unions to help offset liquidity challenges and concentration issues, and enable them to meet their members’ loan needs without exceeding policy limits or pressuring capital ratios.
Ryal Tayloe is regional vice president for Wilmington, N.C.-based nCino. Through its flagship operating system, nCino leverages the power of Salesforce to help small- to mid-sized financial institutions improve operating efficiencies across all business lines. For more information, visit www.ncino.com.