SAN FRANCISCO, ANAHEIM and CHATSWORTH, Calif. – When it comes to being able to make member business loans, a credit union's looks can be deceiving. Take Patelco CU in San Francisco, for example. As the fourth largest credit union in California, it would be easy to assume the credit union could support a member business lending unit at the credit union. Furthermore, considering its size-$1.9 billion in assets-the 12.25% of asset cap on member business loans would still leave Patelco plenty of room to make MBLs before it butted up against the cap. "Absolutely not so," said Chris Oldag, senior vice president of lending for Patelco. "The people who work in member business lending are specialists, they have to know how to originate loans to that type of borrower and have the skill set to property underwrite member business loans. For us to go out and recruit that type of talent would be too expensive for us." In addition to attracting qualified staff to make MBLs, according to federal regulations credit unions making member business loans are required to offer products that support those services, such as business checking accounts and business credit cards. Then there's the fact that being located in San Francisco puts Patelco in the company of some big financial players. "We decided we didn't want to take on the San Francisco area, it was a management decision," said Oldag. Oldag said Patelco at one time considered bringing in the talent to staff its own member business operations. The attraction was certainly there, he explained, since the fee income potential from member business lending is very high. "But it's also horrendously expensive," he said. "The start-up costs alone are scary." With 345 employees to staff the credit union's 31 branches, three phone centers and a massive backend operation, "We decided we didn't want to be in that business," said Oldag. Instead, Patelco made the strategic business decision seven years ago to do member business lending through participation loans. It's had a participation loan relationship with Progressive Credit Union in New York City, a taxi medallion lender, since 1994. Patelco also does participation loans by pool with several other CUs such as Clark County Employees CU, Vancouver, Wash.; Mountain America CU, Salt Lake City; Bellco CU, Greenwood Village, Colo. Patelco most recent loan participation partner is Columbia Community CU in Vancouver, Wash., but at press time Oldag said Patelco hadn't funded any loan with them yet. At the current time, Patelco has only one participation loan in the San Francisco area. Patelco currently has about $107 million in balances in participation loans. Of these, 25% are church real property loans shared with three California credit unions – Evangelical Christian CU in Anaheim, American Baptist CU in Covina, and Nazarene CU in Brea. "It's not a matter of the size of the credit union, it's a strategic business decision based on the credit union's business model," Oldag stressed. It was precisely its business model that Evangelical Christian Credit Union considered when it strategically decided to focus exclusively on member business loans. "Member business lending is our business, we make no other types of loans," said President/CEO Mark Holbrook. "Member business lending is our sole focus." For $315 million-ECCU, member business participation lending provides the credit union "the ability to provide substantially unlimited resources to meet the lending needs of our membership beyond our own capabilities," said Holbrook. Holbrook noted that the demand for MBLs among ECCU's 26,000 members is four to five times the credit union's capacity – ECCU operates loaned out. That means every dollar the credit union loans out has to either come from a participation loan or from deposits from an outside source. "We wouldn't be able to fund three-fourths of the member business loans we make without the participation effort," said Holbrook. Twenty-five percent of the MBLs Evangelical Christian CU makes are to inner city ethnic churches across the country. ECCU makes MBLs in 30 different states. This is a market which other lenders have historically passed on, said Holbrook. It's one of the reasons why Holbrook has been a staunch advocate of Congressman Ed Royce's (R-Calif.) "Faith-Based Lending Protection Act. ", H.R. 760. The measure would amend the Federal Credit Union Act with respect to the definition of a member business loan by making loans made to non-profit religious organizations exempt from the 12.25 percent-of-asset cap on member business loans. At press time, the bill had 34 co-sponsors and was in the House Committee on Financial Services. Even smaller in size than ECCU, Telesis CU in Chatsworth, Calif. also has a dedicated business lending unit that represents a substantial portion of the $245 million CU's business. Telesis first got involved in participation lending about 10 years ago. At the time, it was a way for the credit union to boost its loan-to-share ratio which at the time was about 58%. Telesis started out making participation loans to churches and medallion taxis. For awhile, things were manageable. Then, when the credit union began taking in select employee groups to its membership, President/CEO Grace Mayo said dental professionals began inquiring about loans for their businesses and employees in the aerospace industry wanted to take out entrepreneurial loans to get started in their own businesses. That's when Telesis decided to form a wholly-owned CUSO, Telesis Partnership Inc. Now, instead of Telesis participating in other CU's member business loans, the credit union through its CUSO participates loans out. Telesis Partnership underwrites and services the loans. It doesn't do inventories or receivables. Telesis currently has participation loan arrangements with about 40 credit unions, one of which is Patelco. These loans account for about 80% of Telesis' member business lending property loans, said Mayo. The credit union's loan-to-share ratio is 99%. Mayo said many credit unions have approached the CUSO and inquired about the possibility of the CUSO going into their membership and co-marketing MBLs. "They don't have the expertise and can't afford to bring in the skill set. This is a way for them to offer member business lending without absorbing the costs that are involved," said Mayo. -

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