Credit Unions Give Small Business Owners Relief

Credit unions are gearing up to help business members survive the coronavirus pandemic, reducing the economic damage to their workers and ultimately to the lenders.

Loan modifications are the first and most common step for most credit unions, most typically involving three months of deferred payments, followed by three months of interest-only payments, according to experts participating in a recent webinar sponsored by CU Business Group, a CUSO based in Portland, Ore.

They also advised eliminating fees for modifications.

“You need to do what you can to help members get through these crazy times,” said Jeff Stone, CU Business Group’s regulatory and compliance expert based in San Diego.

NCUA data showed Member Business Loans accounted for just under 3% of total loans in 2004, and rose steadily even through the Great Recession to reach 7% by 2017. Since then they have remained at that level. They are also about 7% measured under the 2.5-year-old NCUA commercial loan classifications.

BECU, headquartered in Seattle ($22.2 billion in assets, 1.2 million members) is the credit union movement’s largest commercial lender with $1.8 billion in commercial loans as of Dec. 31, 2019 accounting for 12.3% of its total loan portfolio.

All credit unions held $83.8 billion in commercial loans at the end of 2019, accounting for 7.5% of loans.

BECU also had $861.3 million in business member shares at the end of 2019, up 19.5% and representing 4.8% of its total shares and deposits. Nationally, credit unions held $41.8 billion, up 17.2% and representing 3.2% of deposits.

Dana Gray, BECU’s SVP of commercial and business services, started the year with a plan to reach out further to recruit more businesses to become BECU members. As the scope of the coronavirus pandemic became apparent, BECU shifted to developing a program to help its existing business members ride out the crisis.

For small business owners, BECU is developing a Member Relief Program, which includes two levels of support:

• Modifying existing small unsecured lines of credit, term loans and credit cards, which might allow members to skip as payments for as long as two months and receive a temporary interest-rate discount.
• Providing relatively a small pool of funds as a “Business Member Assistance Loan” to support eligible small businesses experiencing hardships from the COVID-19 pandemic. This loan will be scheduled at a very low rate of interest, primarily interest only for the first year converting to a two- to five-year term loan at the end of 12 months, depending on the dollar amount of the loan.

For commercial real estate loans, BECU is offering support on a case-by-case basis, and is considering payment forbearance perhaps up to three months.

“Depending on the duration and severity of the COVID-induced recession, coupled with the property type, location and tenant profile, we may need to consider a longer forbearance option on some loans,” she said.

Among these commercial real estate members, BECU has “developed a strong relationship-focused program, so many of our borrowers are repeat, relationship borrowers.

“New borrowers over the past few weeks have been those we’ve been in conversation with over the weeks or months prior,” she said. “We are not ‘closed’ for new business, but are applying a more conservative approach to underwriting as we assess the state of the market and what lies ahead over the coming 12 or more months.”

Gray continued, “We don’t want to put a borrower into a situation today that could pose a problem for them in the future in meeting an annual debt service covenant, for instance.”

On the small business side, BECU’s new members are typically walk-in members through the branch network.

“We are starting up a more traditional business banking focus, where we’ll prospect new business members, but that focus has been back-burned temporarily as we seek to support our existing small business membership in any way we can,” she said.

BECU is offering these measures through member contact with the credit union, and is not soliciting participation through marketing.

The CU Business Group (CUBG) experts assembled for the March 27 webinar said credit unions can expect great regulatory leeway and more federal government support for their business members.

“They want us to go out and help the borrowers, and not worry about all the standard rules,” Stone said.

Stone worked 19 years in banking, and retired in 2014 as EVP and chief credit officer from North Island Credit Union, which is now California Credit Union of Glendale, Calif. ($3.2 billion in assets, 165,408 members). During his 16 years there, he helped build its business lending and services program.

He has since served on the board of the credit union, which held $337.6 million in commercial loans as of Dec. 31, up 8.8% from a year earlier and accounting for 14.1% of its portfolio. It also has $236.1 million in commercial shares, representing 8.9% of its total shares and deposits.

He and other CUBG experts recalled helping steer the credit union through the Great Recession, but they said the current crisis requires different approaches.

While the 2007-2009 recession came on like a wave, the current crisis “is more like a tsunami,” Mark Olague, a CUBG consultant based in Phoenix, said.

Olague said credit unions must act quicker and rely on remote services to complete paperwork.

They should be setting up standard modification plans that can be used immediately for small loans, and free more time to consider modifications for larger ones. Even in those cases, the presentation to the loan committee should be abbreviated.

“Hit the hot spots: Where they’re at, how this loan will help them and the justification for making the modification,” Olague said.

One caution stated by the CUBG experts was to avoid unnecessarily creating Troubled Debt Restructurings. “But even if you do create a Troubled Debt Restructure, it’s better than a default,” Stone said.

In those cases he said, “Get complete financial information so you can analyze their situation, and their ability to get through this crisis.”

A TDR is triggered when the lender grants concessions it would not normally consider due to the financial difficulties of the debtor. A TDR, once established, requires some kind of a write-down or provision expense.

The preferred alternative is a modification, which has no loss of interest or principal.

“You’re basically taking the payments and moving them to the end of the loan, or re-amortizing them at the end of the loan with some kind of balloon payment,” Stone said.

Modifications can also include interest rate reductions as long as they aren’t cut “to the point it would be below what you would be offering a new borrower,” Stone said.

In Call Reports and credit reports, borrowers with modified loans who would have been classified as delinquent under their original terms should be classified as current if they are meeting the terms under the modifications.

However, if the loan was already 60 days past due at the point of the modification, the loan would continue to be reported as 60 days delinquent.

Lenders are also getting 30 more days to file their first-quarter Call Reports.

“They’re taking all these steps trying to make it easier for lenders dealing with their members, and their issues, as opposed to paperwork,” Stone said.

The first step credit unions should be taking is reaching out to the most vulnerable borrowers, Mike Mucilli, a CUBG representative based in Albany, N.Y., said. “It really shows you care about them,” he said.

It also allows credit unions to triage its borrowers: Identifying the borrowers who have the most urgent needs and who will most benefit from early, intense intervention. And it allows credit unions to determine which borrowers have enough liquidity to weather the current crisis, “which is probably the next three months or so.”

And, for some borrowers, credit unions will determine that any relief over the next three to six months will probably not be enough to help them. In those cases, the credit union can consider asking the owners for additional collateral or an additional guarantor.

And as dire as the current crisis seems, some businesses will be seeking new loans. “Some businesses are solid right now; they’re actually expanding. Those might be pharmacies, grocery stores, hardware stores,” Mucilli said.

When giving new loans, consider raising the debt coverage ratio.

“If you’re at 1.2 consider raising it to 1.25 or 1.30. And loan-to-value thresholds should be lowered. If it’s typically 80%, consider lowering that,” Mucilli said. “You don’t have to be overly cautious, but there’s definitely going to be a period of both crisis and recovery.”