MBL Cap Not Stopping CUs from Offering MBLs, but Could Become an Issue

From the perspective of the Pennsylvania Credit Union Association, NCUA’s new member small business lending rule opens up significant opportunities for credit unions in the small business loan marketplace. Although not a panacea for those who were already actively involved in business lending, the new rule is certainly positive news for credit unions of all shapes and sizes that originate or seek to originate member business loans. While the most talked about provision of the rule is the 12.25% cap, it’s been our experience through CU BizSource that most credit unions have either just begun making small business loans or are at the point of contemplating whether they want to do so. For these credit unions, the cap is not currently an issue although it could become one as they become more fully engaged in member business lending. For credit unions that have already been actively originating small business loans, the cap can be a very real obstacle to serving members’ small business needs. Perhaps, one alternative for those credit unions with little room under their cap will be to create a CUSO to originate member small business loans as is now expressly permitted by the new NCUA member business lending rule. From our experience, most credit unions that are just making the decision to enter the small business lending market initially prefer to originate loans themselves and hold them on their books. Or, in the case of larger loans (loans that exceed $250,000), originate the loan, hold some of it on their books and participate a portion out to other credit unions. After all, most of these credit unions are liquid, know and understand their members’ businesses, and want to derive interest income over the life of the loan. It is only when the cap comes into play that the issue of originating small member business loans through a CUSO appears to make more sense for credit unions than originating those same loans directly. Again, most credit unions have the liquidity and, generally speaking, the cost of funds is lower for the credit union than it would be for the CUSO, which has to raise those funds either through equity instruments or in the debt market. Likewise, if a credit union can rely on a third party like CU Biz Source to provide a loan analysis; score the loan; and if originated, service that loan and/or participate a portion of it out, we have found that model works extremely well for credit unions without any cap issues. Interestingly, as we created CU BizSource we too looked at whether we wanted to form a CUSO, but the Association’s Board of Directors decided against it initially in order to bring our product to the marketplace more quickly. As our product has matured, we are again conducting some due diligence analyses to see if forming a CUSO would become more appropriate as we continue to grow. To date, the jury is still out. However, as credit unions approach their lending caps, and unless there is a future change to that member business lending cap, many credit unions will be faced with the decision of whether or not to form a member small business lending CUSO. As usual, each credit union must do its own due diligence and draw its own conclusions regarding forming a CUSO – there is no “one size fits all” approach.