–Proactive Approach May Aid Auto Loan Growth

Having more than enough money to lend would seem to be a good problem to have.

For many credit unions, however, the economy's stalls and starts to recovery in 2011 kept members more focused on paying down debt and trimming expenses. Taking out new loans? Not so much. 

Still, the NCUA reported that credit union lending increased to $567.1 billion at the end of the third quarter, the latest period tracked. That figure is a $3.1 billion increase over the second quarter last year. On the other side, credit unions had $819.2 billion in shares as of Sept. 30, with nearly $7 billion in deposits for the third quarter.

In the midst of it all, member business loans, had the highest growth with a 12-month increase of 5.9%, according to Callahan and Associates Inc. Despite that status, last summer, the firm reported an easing of overall balance growth due to fewer credit unions starting new MBL programs. 

Credit Union Times asked several experts what the industry can expect to see this year in the MBL realm including where the strongest competition will come from, the challenges to growing portfolios and if raising the MBL cap has a chance to become a reality in 2012.  

Frank Amantia
President/CEO
Mid-Atlantic Financial Partners LLC (wholly-owned CUSO of Mid-Atlantic Federal Credit Union) 
Bethesda, Md.

Credit Union Times: How do you think commercial and business lending will fare in 2012? 

Amantia: As more and more commercial and business lenders come back on line, competition will heat up. At the same time, while we will still be experiencing limited market recovery, demand for these loans will increase.

CUT: What challenges will credit unions continue to face? 

Amantia: Credit unions will face three principal challenges: retention of deposits received as part of the flight to safety as banks slowly return to favored status; erosion of commercial and business lending as a result of increasing numbers of commercial and business lenders returning to the marketplace.

As a result of the return of banks and non-banks to the commercial and business lending market with aggressive terms and rates, credit unions will no longer have unfettered access to "A" tier credit so they will need to increase their underwriting skill level, and their willingness to fund lesser credits, if they want to continue to grow this line of business, or maintain existing portfolios which will experience runoff due to the increased competition and a regulatory lack of a prepayment penalty.

CUT: Do you think the 12.25% cap on member business lending stands a strong chance to be raised to 27.5% in 2012 and if so, why?

Amantia: Banks, especially small local banks, will continue to do everything possible to block the measure, to limit the impact of credit union competition. Credit unions will continue to push to raise the limit as increasing numbers of them see member business lending as a critical part of their business development plan.

CUT: Is the NCUA doing enough to ensure that credit unions adhere to safety and soundness when it comes to commercial and business lending? 

Amantia: NCUA is adding trained personnel to their examination staff. While this is a welcome change, this effort is being diminished by the fact that NCUA has done nothing to correct a fundamental regulatory problem that allows credit unions to hire MBL staff that has no more than two years of experience.

CUT: Given the economy, what advantages do credit unions have over other financial institutions when it comes to meeting the lending needs of small businesses? 

Amantia: Those credit unions that have partnered with the U.S. Small Business Administration to offer government guaranteed business loans, have a measurable advantage over other financial institutions.

While many banks are also partnered with SBA, most are unwilling to fund business loans that are not secured by real estate, which does not benefit the bulk of small businesses that tend to lease the space that they occupy. In addition, though banks and non-banks imply that they are lending to small businesses, they are often defining small businesses to exclude many truly small businesses that actually represent the bulk of small businesses.  

Linda Jekel 
Director of Division of Credit Unions
Washington State Department of Financial Institutions  
Olympia, Wash.

Credit Union Times: How do you think commercial and business lending will fare in 2012?

Jekel: According to [a] Washington state economist, "We continue to believe the Washington economy will outperform the U.S. economy. Washington is benefiting from strong export growth and hiring a both Boeing and Microsoft."

However, the economist still classifies the economy outlook as uncertain and Washington state forecasts with flat to low economic growth in 2012. Washington state credit unions are making member business loans with caution. Total member business lending for Washington state credit unions grew 7% for the 12-month period of September 2010 to September 2011.

CUT: What challenges will credit unions continue to face?

Jekel: Credit unions' main challenges in 2012 are working with a weak economy, preparing for potential interest rate rise in the future, and covering the cost of compliance. The good news is that Washington state credit unions are well-capitalized and earnings continue to improve.

CUT: Do you think the 12.25% cap on member business lending stands a strong chance to be raised to 27.5% in 2012 and if so, why?

Jekel: Changing the MBL cap is in the hands of Congress. I know there have been hearings in the House and Senate on the issue. We'll have to wait and watch.

CUT: Are state regulators and the NCUA doing enough to ensure that credit unions adhere to safety and soundness when it comes to commercial and business lending?

Jekel: NCUA has increased its scrutiny of MBLs and added experienced commercial lenders to its examination staff. In Washington, we also have examiners who have several years of examining commercial lending over several economic cycles. In addition, we can borrow a bank examiner for any complex commercial lending exam. I expect credit unions to manage their member business lending programs in a similar safe and prudent manner as a bank of similar size and complexity.

CUT: Given the economy, what advantages do credit unions have over other financial institutions when it comes to meeting the lending needs of small businesses?

Jekel: Credit unions have the advantage of knowing their members over several years, including small business owners. They also have the ability to book the smaller loans that many big banks do not want. It provides opportunity to prudently serve a niche market and help in the economic recovery. Credit unions can help each other through the purchase or sale of participations. Several credit unions in Washington State have been making member business loans for many years over several economic cycles. Credit unions in Washington demonstrate that member business lending can be a profitable and safe loan program. 

Richard Guillot
President /CEO
Business Alliance Financial Services LLC (owned by seven Louisiana credit unions)
Monroe, La.

Credit Union Times: How do you think commercial lending will fare in 2012?

Guillot: I believe that those credit unions that have postured to provide business services will see consistency in applications and increases in relationships. This consistency would be the result of continued business development and some decisions made by the banking industry during 2011.

CUT: What challenges will credit unions continue to face?

Guillot: Economics will continue to be a challenge for the foreseeable future.  The business climate appears to be somewhat volatile, and that volatility sometimes is dependent upon industry segmentation.  A commitment to best practices within business loan underwriting and credit administration will be increasingly important.

CUT: Do you think the 12.25% cap on member business lending stands a strong chance to be raised to 27.5% in 2012 and if so, why?

Guillot: I am not sure if the cap will be raised to the extent proposed. I do feel the cap should be raised in an effort to allow the credit unions the opportunity to compete, as well as foster relationships with existing and new business members.  I also believe the cap becomes an important issue for those credit unions that have exhibited prudent lending practices, and taken the steps to build a well-performing business loan portfolio.

CUT: Is the NCUA doing enough to ensure that credit unions adhere to safety and soundness when it comes to commercial and business lending?

Guillot: I am really not in a position to speculate on the NCUA's internal makeup, but in my opinion, I believe that the NCUA would be more effective if specialization within the business lending arena were more prevalent. Analysis of commercial and business lending programs requires a skill set that traditional examination professionals do not normally possess.

CUT: Given the economy, what advantages do credit unions have over other financial institutions when it comes to meeting the lending needs of small businesses?

Guillot: I believe the credit unions have a distinct advantage in relationship building versus other financial institutions. While prudent lending practices must be in place, and all other elements being equal, the credit union still maintains that sincere [and] personal relationship with borrowers and prospective borrowers that other financial institutions have lost.