CUSOs Help Ease the Loan Participations Plunge

Credit unions have been active in loan participations for many years. But today, a convergence of beneficial market factors is making participation lending more attractive than ever for both buyers and sellers.

If you’re ready to take the leap, working with a business lending CUSO can help ease your plunge into the participation pond.

A World of Opportunity Awaits

The credit union regulatory environment has become more conducive to commercial loan participations in recent years, as the NCUA has begun offering increased flexibility designed to help credit unions grow their commercial lending portfolios. As of January 2017, credit unions may exclude all non-member participation loans from the statutory member business lending cap of 12.25% of total assets.

The NCUA is also providing credit unions with increased leeway in setting their own credit policy guidelines in support of their individual markets, membership profiles and risk appetites. This means that credit unions are now free to purchase as many non-member participation loans of any size and from any market as they wish, in line with their internal policies and risk parameters. The NCUA now offers both buyers and sellers more opportunity to partner on mutually beneficial deals.

The NCUA’s less prescriptive approach to governance makes sense, as the industry’s commercial lending capabilities have matured significantly over the past decade. Whereas even 10 years ago many credit unions were very new to commercial lending as compared with their banking competitors, today they have seasoned talent on staff, have experienced several volatile economic cycles, and are more comfortable pursuing complex, larger deals. Five-million-dollar CRE transactions are no longer uncommon, and credit unions are also open to more specialized lending such as construction lines, government-guaranteed loans, and well-secured loans with limited or no personal guarantees.

Of course, the flip side of this success is that many active business-lending credit unions are rapidly approaching their MBL cap. According to CU Business Group’s analysis of all U.S. credit unions with a minimum of $2 million in commercial loans, the average MBL cap level (defined as member business loan balances as a percentage of total assets) is at 6%, roughly halfway toward the cap. More strikingly, 309 credit unions are at or above 8% of their MBL cap, meaning they are in danger of hitting their cap in the very near future. (Note that some of these credit unions are not subject to the 12.25% MBL cap due to a low-income designation or grandfathered status.)

A vibrant participation market is crucial to facilitating credit unions’ ability to remain active in commercial lending, and will help maintain a robust flow of capital to small businesses in the communities they serve.

The Fear Factor

Yet, entering the participation lending market is a daunting prospect for many credit unions. Those seeking to buy loans direct from a lead lender often find it difficult to source deals fitting their unique credit policies and risk appetites. The same goes for lead lenders looking to find potential buyers. The “dialing for dollars” approach that many originators use can be inefficient and time consuming.

Even if a buyer and seller somehow manage to find each other, the problem of information disconnect makes it difficult to know whether the deal will be the right fit for both parties. Sellers know their home market and borrowers intimately, and sometimes chafe at providing the buyer with all requested due diligence information, especially if the loan is closed and on the lead’s books. Buyers, meanwhile, need assurance of the validity of the deal and face greater risks due to their lack of familiarity with the market and borrower.

Lastly, credit unions on both sides of the equation may suffer a deficit of resources and staff expertise. First-time buyers often have limited commercial lending experience on staff. And sellers may not have the time or resources to devote to finding potential buyers, packaging and closing deals, and handling all monthly and annual reporting and due diligence requirements.

The CUSO Advantage

Fortunately, CUSOs offer several distinct advantages when it comes to supporting and helping credit unions capitalize on the participation opportunity. Here are three reasons working with an experienced business lending CUSO is the best choice:

• Independence from all parties: The asymmetric information problem described above is real. In such situations, a CUSO is in the perfect position to provide an unbiased, objective view and improve the level of confidence on both sides. Whereas the individual buyers and sellers in a transaction may have conflicting motivations, the CUSO is committed to serving all its credit union clients and ensuring the deal is done right. All business services CUSOs provide some level of lead lender pre-screening to ensure they have a well-structured commercial lending program and can handle the extensive borrower due diligence, reporting and documentation required to manage the deal. For example, CUBG reviews critical factors like the lead’s loan servicing capabilities, depth of experience and the historical success of its program. Before you’re ready to dive into the pond, having your CUSO lifeguard conduct a thorough lead lender pre-screening will help instill confidence and trust.
• An extensive, established network: Some CUSOs specializing in commercial lending work with dozens (or hundreds) of credit unions eager to buy and/or sell commercial loans. For example, CUBG has been in business for 17 years, and as the industry’s largest business services CUSO, works with 585 credit unions across the U.S. Both buyers and sellers can tap this deep network with minimal effort instead of dropping a line in a murky pond.
• Unmatched expertise and guidance: For credit unions seeking to test the commercial lending waters through buying participations, a lack of expertise and staff resources are critical barriers to entry. CUBG and other business lending CUSOs offer decades of experience working with lenders with varying risk appetites. By serving credit union clients in multiple, regionally-dispersed markets, such CUSOs are also able to develop extensive industry and market intelligence over time. They can offer relevant expertise and guidance to even the most seasoned commercial lenders.

In addition to the above benefits, the CUSO also serves as a “one-stop-shop” for buyers and sellers, leveraging their specialized expertise at every step of the deal, including lead lender pre-screening, borrower due diligence, participation loan servicing and even assisting in workout situations. Most importantly, tapping a CUSO-vetted network of motivated buyers and sellers introduces a sea of opportunity and establishes a higher level of trust.

Participation lending presents credit unions of all sizes and risk appetites with the opportunity to grow and diversify their commercial loan portfolios. Working with an experienced CUSO can help credit unions new to the process manage their risks and avoid some common pitfalls. There is no better time than now to dive in!

Larry Middleman is President/CEO for CU Business Group, LLC. He can be reached at 971-244-6394 or lmiddleman@cubg.org.

Trisha Bartkowski is Assistant Vice President, Participations for CU Business Group, LLC. She can be reached at 971-244-6314 or tbartkowski@cubg.org.