By Bill Mullally
The USDA rural lending program can trace its roots to the First 100 Days of the first Franklin D. Roosevelt administration, when Congress passed the Farm Security Act in 1935. During that same period, as many banks were closing, credit unions had arguably their best growth period.
Today, many of the programs that make up the USDA lending focus more on business and industry in rural areas and not just helping family farmers. CU Capital Market Solutions (CMS) has teamed up with the 2016 top business and industry (B and I) lender in the US to participate out B and I loans nationally.
Who is this lender? The exciting news is Greater Nevada Credit Union (GNCU) was the top B and I lender in 2016 nationally, and recently received the Louisiana Economic Development award as the top lender in the state of Louisiana for rural lending.
While we all support lending in metropolitan areas, especially as it benefits community development, rural communities are sometimes overlooked by banks and other lenders. Credit unions have traditionally supported all types of community development; we believe USDA lending is an additional way for credit unions to support development in rural areas. Specifically, the USDA business and industry program bolsters the availability of private credit by guaranteeing loans for rural businesses.
Program Outgrows the Credit Union
Jeremy Gilpin, head of Commercial Services at GNCU, has been involved in USDA lending for 19 years. Prior to his arrival at the credit union, Jeremy spent the majority of his career at community banks. GNCU’s USDA lending program has grown from $0 in 2013 to more than $120 million last year, and it expects to hit the $300 million mark in underwritten USDA loans in 2017. While GNCU would like to hold all of these loans, this program has been so successful, it’s outgrown the credit union.
Enter CMS and the CUSO concept of participation. Once again, the credit union model fits well with this type of program. GNCU underwrites the loan and retains the USDA required minimum percentage of each loan. CMS coordinates participations of the non-guaranteed portion to credit unions and, in addition, can sell the guaranteed portion to credit unions as well. Normally the USDA will guarantee up to 80% of a rural business loan. Credit unions that participate in the loan receive a quality loan to hold, a piece of the underwriting fee, and a pro rata portion of the premium from the sale of the guaranteed portion.
The Details
Here are some details regarding how loan guarantees work in the B and I program:
•80% USDA guarantee for loans of $5 million or less
•70% USDA guarantee for loans between $5 and $10 million
•60% USDA guarantee for loans exceeding $10 million, up to $25 million maximum
While credit unions would appreciate the opportunity to underwrite these loans themselves, participation in the GNCU/CU CMS program is a great alternative, because USDA underwriting expertise takes many years to develop. Recently credit unions have approached GNCU to do the underwriting on referred loans, rather than hire a full-time underwriter.
Lastly, by all accounts it appears both Republicans and Democrats support the USDA lending program, an important point for credit unions planning in turbulent political times. According to the USDA website, “This program improves the economic health of rural communities by increasing access to business capital through loan guarantees that enable commercial lenders to provide affordable financing for businesses in eligible rural areas”.
Sounds like a perfect fit for credit unions.
William “Bill” T. Mullally is senior managing director of CU Capital Market Solutions. He can be reached at bmullally@cucmsllc.com or 678-960-2905.