By Naseer Nasim
The NCUA board’s decision to finalize changes to the member business lending (MBL) rules on Feb. has gained significant, industry-wide attention. Initially proposed last June, this change will effectively eliminate the waiver process and allow credit unions to independently develop commercial underwriting standards based on their own, individual appetite for risk.
Many credit unions feel this evolution levels the playing field with banks by allowing them to diversify their MBL capabilities. Many have already set the wheels in motion to expand upon their traditional, commercial real estate activates and explore areas such as commercial and industrial lending.
As credit unions consider how, as a result of this rule change, they can better serve their local business communities and reach new growth objectives, there are several factors they should be considering. While the rule does not go into effect until Jan. 1, 2017, credit unions should use this time to ensure they are equipped to grow their portfolios and take on more complex loans in a way that is just as sound as it is successful. Expanding business lending capabilities and enhancing portfolio risk management practices should be top of mind.
Historically, for many credit unions, credit and loan policy was fairly structured per regulation. Updating these policies is a critical starting point. Technology will certainly have an important role, but it isn’t enough for credit unions to simply plug in new systems. As credit unions develop their new MBL goals, they must first and foremost seek strategic advice to write the policies that will drive the configuration of any technology they use. These new and updated policies should spell out acceptable underwriting and creditworthiness criteria and serve as the foundation for processes, software configurations and overall business operations moving forward.
Credit unions need to start by determining underwriting criteria. There are many types of criteria based on different loan structures and collateral that credit unions will now be able to offer. Considerations and decisions around updated policies should not wait if credit unions hope to come out of the gate strong once the rule is in effect.
Once revised policies are in place, credit unions have a better basis to select the technology and decision support tools they will need to successfully expand their MBL capacity. Relying more heavily on solutions that provide a comprehensive picture of loan applicants will be paramount. While additional data for decisioning will come into play, understanding the member’s entire relationship with the institution is a significant component of the decisioning process.
Portfolio Management To Be Critical
Credit unions should also evaluate a platform’s ability to handle the added volume and complexity of a diverse MBL portfolio. Once credit policies and decision strategies are in place, the right technology with efficient workflows will assure loan requests are managed consistently.
The NCUA has already indicated that with this rule change strong portfolio management will be critical. Beyond the origination of a loan, this new regulation addresses the board and senior management reporting that must accompany expanded MBL activities on a regular basis. When assessing technology, credit unions should have confidence that the system can facilitate the needed reporting around loan performance and profitability. This is especially true, as the institution’s portfolio changes and grows.
Credit unions have long been comfortable with real estate lending. Now, they are able to ask, “What else can we offer? How can we better serve the local business community?” This MBL rule change is a great step in the right direction for the industry.
For credit unions working to add or expand their offerings around MBL, the initiative should start now with two important steps: seek strategic council to modify and create new policies and procedures, and identify technology solutions that will enhance the loan origination and risk management capabilities of the institution. These steps will assist in building and nurturing strong member business lending relationships for years to come.
Naseer Nasim is CEO of Baker Hill, a provider of SaaS solutions for common loan origination, relationship management and smart data analytics. Mr. Nasim can be reached at naseer.nasim@bakerhill.com.