Determine how to measure success

As the board is responsible for protecting the credit union and its members, they must outline goals upfront, taking the inherent risks of developing or expanding an existing MBL program into consideration.

It is also necessary for the board to decide how an MBL strategy fits in to the credit union's overall strategy, including designating resources, ensuring adequate capital levels and determining a safe and sound growth rate.

The board must also ensure that risk management practices are commensurate with the level of complexity of the loan portfolio, according to the NCUA. Many credit unions underestimate the resources and expertise needed to implement a successful program without exceeding risk appetite.

It is also necessary to determine key performance standards to measure success. These include delinquency, losses, yield and growth. According to the NCUA, these key performance standards should be measured against actual performance to make adjustments if needed.

Evaluate the level of capital needed

To evaluate the level of capital needed, the NCUA notes, "Credit unions should complete a feasibility study for the program." This study should include industries, loans and collateral. These aspects should be considered based on the types the credit union plans to fund.

"In addition, strategic planning should establish projections that include but are not limited to pricing, operating expenses, delinquency and provision for loan loss," according to the NCUA.

The projections must be realistic, especially for credit unions in the beginning stages of developing an MBL program.

Analyze different approaches

It is also necessary to analyze different approaches based on personnel, operational and financial resources.

The NCUA notes, "MBL personnel should have experience specific to the loan and collateral types booked to the portfolio. In addition, an MBL department should have the appropriate mix between business development and loan underwriting personnel. The proper balance ensures adequate controls between loan sales, underwriting and administration."

Invest in capable systems

The NCUA reports that EDP systems designed for consumer lending often do not meet the requirements necessary to service an MBL portfolio.

When evaluating a system to purchase, the NCUA notes that systems must be able to "organize data for loan files, monitor credit relationships aggregately and on an account-by-account basis, prompt period reviews to identify deteriorating credits, aggregate watch lists and problem loans based on an internal risk-rating system, track compliance with loan covenants and make effective use of ticker systems."

With this in mind, it is never detrimental to start small and slowly begin to expand the MBL portfolio.

Libby Bierman is an analyst at Sageworks. She can be reached at 866-603-7029 or [email protected].