Does it have to be this way? While it's true that jumping into the MBL marketplace can be a risky and expensive proposition, with the help of outside expertise such as that offered by a seasoned CUSO, even small credit unions can enjoy solid returns in this lucrative and exciting arena.

Partnering with an experienced CUSO can benefit your credit union's growth strategy and help you unearth opportunities in the business lending marketplace.

Benefits of Partnering With a CUSO

Partnering with an experienced CUSO will enable you to:

Outsource high-priced functions. To start up a new business lending operation, you need to hire highly specialized staff, including originators to go out and get the business, credit analysts to spread the financials, and administrators and servicing specialists to support the myriad documentation and reporting needs. It can easily cost your credit union several hundred thousand dollars before you even book your first loan.

Outsourcing these responsibilities is a cost effective alternative. Back-office functions such as financial spreading and credit underwriting can easily be delegated to a CUSO, many of which also offer other support services including document generation, loan servicing and annual reviews.

Build a loan portfolio. Purchasing member business loan participations is a great way to get started in business lending. It allows you to build a portfolio quickly with little of the initial overhead expense. But to minimize risk, engaging a CUSO is a crucial early step.

A CUSO can help in a couple of different ways. First, by conducting the actual spread analysis and underwriting functions, the CUSO serves as the independent review factor required in the purchase of any loan.

Secondly, some CUSOs also assist in finding loans through their network of clients and participation networks, serving as a matchmaker between buyers and sellers.

Train your staff. Top business lending CUSOs hire the best and brightest commercial lenders. Staff typically have decades of experience working in the field as loan officers, credit underwriters and analysts. Some even bring a workout or collections background, so they're familiar with the common warning signs of bad credit.

With this type of in-house expertise, it's no wonder training and development is a core competency of many of these firms. Training may be offered as an additional benefit of an onsite consultancy engagement. Or it can be provided in a more formalized and structured multi-day workshop setting.

Assist with compliance challenges. Without a doubt, business lending is a risky business. Some credit unions get in too deep, too fast, and need help digging out. For instance, I recently worked with a larger credit union. Although the organization was considered generally safe and sound, once it started originating business loans, its portfolio grew very quickly and the lending operation had a tough time keeping up.

As a result, staff training was put on the back burner, annual reviews began stacking up and delinquency began to rise. Once the NCUA discovered some issues during a regular exam, the credit union was slapped with a cease and desist order, requiring it to obtain outside help to clean up the portfolio before taking on any new business loans.

Fortunately, senior management quickly brought us in to help. We met with the management team, interviewed their staff, and put a project plan together. We implemented a development plan for their staff and helped them get caught up with their annual reviews. Within nine months of the original exam period, the NCUA released the cease and desist order and the credit union was back in business.

Choosing the Right CUSO for Your Credit Union

So, you've decided to engage a CUSO to help your credit union start up or grow an MBL program. What now?

Conducting thorough, up-front due diligence is critical for ensuring a smooth and beneficial working relationship with a CUSO. Here's where to start:

Investigate the CUSO's track record and lending philosophy. In your earliest conversations with the CUSO's management, you'll want to ask some direct questions, such as:

• How many loans has the CUSO underwritten?

• How many have gone delinquent?

• How many, if any, have resulted in a charge-off loss to the originating or participating credit unions?

• What has the CUSO learned from these experiences? Has it changed its lending philosophy or underwriting policies and procedures?

It is important to compare your policy and procedures with those of the CUSO before you sign on the bottom line and ensure that your general approach to risk is compatible.

Interview the staff. Treat the due diligence period of vetting a new CUSO, or any vendor, as if you are hiring a new employee. The CUSO will be working for you now. Does it have the necessary expertise, as well as mindset, to be a good fit with your organization? Or will you be butting heads at every turn?

Check references. It is standard practice to ask for references up front. If a CUSO is reluctant to provide them to you, that is an obvious red flag. But don't just file the references away in a drawer; you can learn a lot by speaking with a CUSO's clients. Ask questions like:

• How long have you been a client?

• How has the CUSO helped you to meet your organizational goals?

• Does it meet deadlines consistently?

• What is your business lending risk appetite?

• What is your lending philosophy?

Ensure it inspects every property personally. This is critically important if you are considering purchasing participation loans through a CUSO. Surprisingly, not all MBL CUSOs physically inspect the collateral as part of their due diligence process. If the CUSO is underwriting the loan for their credit union client, or even re-underwriting it for sale and putting their stamp of approval on a loan, they should have a good, solid understanding of the local market where the loan originated. Visiting the property is considered a standard best practice of the underwriting process.

Dig Deep for Nuggets of Business Lending Gold

If your credit union is ready to explore the member business lending goldmine, consult with an experienced CUSO to help you get started. It is a cost-effective and low-risk way of entering the market, allowing you to scale up your operations in accordance with your available resources and appetite for risk. With years of experience and specialized expertise on staff, top MBL CUSOs are in the business of helping you select the richest veins of opportunity, while guiding you away from the riskiest and most costly mineshafts. Happy digging!

John Hayes is CEO of CU Strategic Services, LLC. He can be reached at 571-366-4792 or [email protected].