Royal CU takes business lending seriously, advises others to do so too

<p>EAU CLAIRE, Wis. – If there’s one thing Royal Credit Union President/CEO Charles Grossklaus has learned about member business lending since being involved with it for 15 years it’s this: you can’t be involved with it half-heartedly. You have to be committed 100%. After nearly two decades of making member business loans and building a reputation on the level of experience and professionalism of its business lending staff, Royal CU is considering setting up a CUSO that could advise other credit unions on setting up the proper controls to do business lending themselves or possibly originate business loans for them. Grossklaus said the $575 million credit union has gotten calls from credit unions around the country looking for assistance with doing business lending. The credit union will hold a planning meeting in May to discuss the options on the types of services the CUSO would offer. One of the possibilities involves having a fee-based system for handling the paperwork for the CUs including reviewing the loan applications from their members and originating the loans. The credit unions would be allowed to hold the business loans in their portfolios. Grossklaus said there is a lot of opportunity for credit unions to make business loans, but he first strongly advised that, “Credit unions considering going in to business lending need to know it’s not like making real estate or commercial loans. “It scares us when we see the naivete some credit unions have about what’s involved with making business loans,” said Grossklaus. “The credit unions don’t understand the commitment they have to make if they’re going to do business lending. For starters, you have to hire qualified people with business lending experience to work full time on business lending. You can’t pull someone out of mortgages or consumer lending for a few hours a day or week to work in business lending.” Grossklaus speaks from experience. When Royal CU began offering business loans, the credit union tried using staff it already had, even though they didn’t have business lending experience. “We figured out pretty quickly that wasn’t working and we needed to hire experts from outside,” said Grossklaus unabashingly. That expertise came from the banking industry. Royal CU’s five-member business lending team-all of whom came out of the banking industry-has more than 100 years business lending experience among them. Add to that the 15 years of experience each that Grossklaus and Royal CU’s CFO, COO and Vice President of Operations have between them in business lending, and that adds another 60 years of experience. Grossklaus said Royal CU got involved with member business lending 19 years ago in response to member demand. “As a community charter, we were getting requests from many of our members who are small business people. If you’re going to be a community chartered credit union, you have to do business lending.” The typical size business loan Royal CU approves is less than $80,000. They’ve been for a variety of businesses such as garages, residential and commercial rental property, or golf courses. Grossklaus credits the initiative the state Office of Credit Unions took years ago of including a member business lending rule its credit union statute allowing state-chartered credit unions to offer member business lending services. The Office of CUs is proposing a rule to simplify the process of regulating member business loans for SCCUs, and plans to hold a hearing on April 12 on a proposed revision to the state’s MBL rule The change would be the implementing provision under state law authorizing credit unions to make MBLs. The rule change would provide certain exemptions, prohibitions, procedures, collateral, and record keeping requirements for member business loans. Earlier this year, the NCUA Board approved the Wisconsin business lending rule, which allows the state regulator to have final authority on the business lending activities of Wisconsin’s state-chartered credit unions. Grossklaus estimates that about 1,200 of Royal CU’s nearly 100,000 members are business members. “Part of the challenge in making business loans is learning about the members’ businesses,” said Larry Accola, senior vice president of business lending for RCU. “You have to get out, visit the business site, and see how they conduct their business. The more we visit the business site, the more we understand.” Accola has about 30 years of business lending experience – the last 10 with Royal CU and prior to that making commercial loans for banks. Compared to other types of loan which he referred to as “transaction loans,” Accola said, “Business loans are more relational types of loans because they require frequent contact with the borrower during the year.” It’s because business loans are more complex that credit unions involved with making them need to have quality, well-trained staff dedicated to working on them. To underwrite a business loan, for example, Royal CU requires the borrower to show financial statements for the business for the past three years, a projection for the next year, and a copy of the business’ most recent tax return. In addition, the owner has to show their personal tax return for the past three years and their personal financial statement. Grossklaus said “98% of the loans the credit union makes are by personal guarantee, so we want to make sure the borrower has the personal assets to back up the business loan.” Accola said this is especially important given that “80% of small businesses fail within the first five years.” Again speaking from his many years of business lending experience on both the banking and credit union side, Accola saids, “Lenders are partially responsible for the high rate of failure of small businesses because they put people in business who shouldn’t.” Once the loan is approved, Royal CU still requires the member to provide the CU with a monthly financial statement and a monthly aging of accounts renewable report. Credit unions have to be just as thorough even if they participate with other credit unions in business loans. “You have to know who you’re participating with,” Grossklaus stressed. “Ask to see the credit unions’ call report data for the last two to three years, make sure they’re doing things right.” Royal CU participates in loans with other credit union business lending CUSOs such as the Business Lending Group. Contrary to banks’ allegations that credit unions shouldn’t be involved with making business loans because they are taking commercial lending business away from banks, Accola said Royal CU “regularly loses” business loans to commercial and community banks “because they underprice us. Our tax exemption as a credit union doesn’t let us price low. Whatever the bankers say to the contrary is rhetoric and misinformation.” But it’s not just the pricing of loans that Accola said makes it difficult for Royal CU to compete with some area banks, it’s also the business lending restrictions that credit unions have to deal with that other financials don’t face. “Credit unions are the only financials that have a separate financial rule for business loans. It makes it more difficult for us to serve our business members,” said Accola. In addition, credit unions making business loans have to ask for collateral from the members they’re lending to. “The banks are willing to offer lines of credit without collateral,” said Grossklaus. “This makes it difficult for us to compete with them.” Both Grossklaus and Accola would like to see federally-insured credit unions get some regulatory relief for business loans. -</p> <p>[email protected]</p>