TREVOSE, Penn.–The business lending space can be a tough business—but business can also be good for a credit union that understands what a “large segment” is really looking for, that understands where emerging markets lie and which avoids some of the mistakes others have made, according to one person.
Mark Ritter, CEO of the business services CUSO MBFS and who has more than a quarter-century of experience in the space, is sharing his insights with other credit unions as part of the CU Daily’s Profitability Imperative series.
Here is what he shared:
The CU Daily: First, please tell us something about MBFS and why it was created?
Ritter: The original concept of MBFS was a regional CUSO for credit unions to share talent, systems, and resources so they could collectively assist in what was the newly emerging trend of small business members. At the time the regulatory box credit unions acted under was quite restrictive, so starting a collective to share costs was critical in that era because the costs of attacking this line of business individually was tough to justify.
The CU Daily: The CUSO is nearly 20 years old now. What lessons have you learned and how has the business lending space evolved? Have credit unions effectively responded to that evolution?
Ritter: I have 25 years of experience in the credit union business lending space. The industry is light years from those early years. Credit unions have a much stronger breadth and depth of talent to assist their members than the early years. Talent was also hyper focused on proper underwriting and not managing the business line or business development.
As a result, many credit unions had perfect underwriting and lousy results. Countless credit unions hired “someone with business lending experience” but that person struggled because they had experience in one particular area when you need sales, credit analysis, closing, and portfolio management skills along with proper checks and balances. CUSOs have helped fill these gaps but credit unions have also realized business lending needs to be a department and not a person.
The CU Daily: Given the rise of fintechs and other specialty lenders, where do credit unions find their most successful niches in the business lending space?
Ritter: For better or worse, credit union business lending is still dominated by real estate-secured lending. It is understandable, since loans can be sold to expand capacity in light of the regulatory limits. The most successful credit union business lenders are the ones who embrace “the middle” with members who value relationships. Ultra-large loan borrowers are looking at the numbers and only care about the bottom line. Credit unions are just another source of funds to them. Borrowers looking for fast automated loans typically will pay a significantly higher interest rate for a variety of reasons.
There is still a large segment of this country looking for relationships where they can talk to person and deal with someone who will not automate their loan decision.
The CU Daily: Are there any developing markets in business lending many CUs may be overlooking? What about the side-hustle market?
Ritter: The most underserved segment of business lending at credit unions is not business lending but non-lending business services. This segment takes an investment in people and systems and builds monthly, but there isn’t a credit union in this country that wouldn’t take more low-cost deposits that stick with the credit union. We continue to see growth in opportunities for the self-employed but you have to make it simple and not overcomplicate the loan process.
The lines sometimes blur between consumer and business purpose lending for credit cards and vehicle loans. These loans carry similar risk to consumer portfolio but credit unions sometimes create policies and procedures between the various departments that create gaps for servicing their members. Alignment between the entire credit union is crucial. I have said for years that credit unions shouldn’t have business members and consumers members. They just have members who sometimes need business purpose loans.
The CU Daily: What are some of the common mistakes credit unions make in this space?
Ritter: In today’s world the number-one mistake we see if hiring a jack-of-all trades person who has significant control the entire sales and credit process. Often times they steer the business loan portfolio to be whatever loans they funded at their previous position when it may or may not be the right fit. Also, when you have a longtime relationship with someone and can control the loan process it is much easier to waive normal procedures and documentation.
Executive management and the board of directors should guide credit culture and hire talent around the credit union’s goals.
The CU Daily: MBFS states that it can help credit unions serve the business lending market at a lower cost than they could on their own? How, and how much lower?
Ritter: MBFS focuses on getting credit unions to have a cost center that pays for itself very quickly. The CUSO does this by being the lowest-cost entry point in the credit union space to enter business lending. It can take time to build a program and loan volume, but by only paying for services as needed. MBFS utilizes nCino and LaserPro to assist our members. These systems combined can be $300,000+ to implement whether you fund a loan or not. That doesn’t include the basics of hiring a loan originator, underwriter, and processor, which can dramatically extend the timeline for the program to breakeven.
The CU Daily: An often overlooked piece of the business lending process is all that happens after the loan is made, which, unlike say an auto loan, can require an ongoing relationship? What’s involved in that relationship and how does a lender monitor numerous business loans/clients?
Ritter: Credit unions often overlook the exponential work created annually by managing business loan relationships. This is expensive and not properly supporting a portfolio has been a downfall for more than one program. Here at MBFS we continually monitor credit reports and other databases to identify red flags in the portfolio. Technology has allowed the management of clients to become more targeted. Veteran lenders who try to manually hand-hold all the relationships may eventually find someone with issues that they need to dig deeper into, but it is the proverbial needle in a haystack.
The CU Daily: What’s the best way for a credit union to educate its membership that it offers business loans, especially with would-be entrepreneurs and founders?
Ritter: Business members want to work with a lender where serving businesses is the normal course of business. You need to incorporate business lending into everything you do much like checking accounts and credit cards. Test yourself out and have someone call or walk into a branch to ask about business lending. If there is panic with the front line staff you have work to do. When everyone at the credit union can advocate for your business services the results are incredible.
The CU Daily: Finally, how do you view the MBL market for the next five years or so, and are there trends credit unions should be monitoring?
Ritter: Business lending is always the final frontier of technology. Unfortunately, many of the business lending experts are of the generation where technology is not at our top of mind. Being able to originate, underwrite, close, and service loans will not only be a differentiator, but it will also be the difference between a profitable and unprofitable line of business. Margins will get tighter from traditional results so costs have to kept under control.
Also, MBFS is seeing the regulatory limits for FCUs and portfolio limits for those exempt from the business lending cap start to come into play for the first time. If Congress doesn’t act with some relief we will have perfectly healthy credit unions with the capacity to lend turning down perfectly fine business members due to arbitrary limits set during the legislative process over 25 years ago.
