Elements of a Successful MBL Program. Creating And Sustaining Your MBL Competitive Advantage

Elements of a Successful MBL

Program

Creating And Sustaining Your MBL

Competitive Advantage

Jim Devine, CEO, Hipereon, Inc.

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Where are we Now?

• There are 2,000+ Credit Unions now

actively engaged in providing MBS/MBL

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• There is now over $34 Billion in MBL

on the Books of CUs

• MBL is one of the Most Rapidly

Growing Segments of CU Loan

Portfolios. Over 75% are linked to Real

Estatetransactions

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• What is the Driving Reason behind the

Desire to offer MBS/MBL Services?

• Does the Board of Directors clearly

understand the range of Risks involved

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Average Loan Size for MBLs is Much

Larger than Consumer Loans - +$200,000

• Average Loan Interest Rates are typically

Higher and Cross Selling Opportunities

are also Greater

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Average Deposit Sizes for MBs is

typically Much Larger than Consumer

Deposits

• Fee Income Potential is also typically

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Has the CU established Specific Targets

for their MBS/MBL Activities?

• Does the CU know How Many of it’s

Existing Members are Small Business

Owners?

Elememts of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Is the Primary Objective to Service

Small Businesses Owned By Existing Members?

• Is there desire to also Utilize MBS Services to Expand The Current

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Is the Primary Objective to Generate

Working Assets while serving Existing

Members?

• Is the Primary Objective to simply

Increase CU Revenue Potential?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• What Is The CU Value Proposition? • Nicer?

• Faster? • Cheaper? • Better?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• What Value Proposition constitutes a

Sustainable Competitive Advantage?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Your capacity for MBL will be driven by the

following factors:

•Regulatory limitations •Your capital structure

•Your ability to organize an integrated MBS/MBL game plan

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• What is needed to Successfully Deliver

MBS/MBL services?

•Competitive Product Mix

•Compatible Core Processing Systems •Business Credit Underwriting

Capabilities

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• What is needed to Successfully Deliver

MBS/MBL services?

• Viable Business Credit Administration • Ability to Manage Problem Loans

• Ability to Attract and Retain quality MBS/MBL staff members

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• §723 limits total MBL loan volume to 12.25%

of Total Assets $3,981,250 $1,990,625 $398,125 Net Interest Income @ 3.25% 584 Loans 292 Loans 58 Loans # of MBL @ $210,000 $122.5 Million $61.25 Million $12.25 Million Maximum MBL @ 12.25% $1.0 Billion $500 Million $100 Million CU Asset Size

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Other §723 limits -Total MBL loan volume

$2.5 Million $1.25 Million $250,000 Unsecured Single Borrower @ $100,000 or 2.5% of Net Worth $15.0 Million $7.5 Million $1.5 Million Total Construction &

Development Loans @ 15.0% of Net Worth $10.0 Million $5.0 Million $1.0 Million Unsecured MBL @ 10.0% of Net Worth $15.0 Million $7.5 Million $1.5 Million Single Borrower Limit

@ 15.0% of Net Worth $100 Million $50 Million $10 Million CU Net Worth Size

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Who developed the CU’s Member

Business Loan Policies and

Procedures?

• Does Everyone on the CU staff Clearly

Understand their MBS/MBL Policies and Procedures?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• How will the CU address its Member

Business Loan Underwriting Needs?

• How will the CU Review and

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Managing MBL Underwriting and Loan Review • MBL Loan Review process

• Who sits on the Loan Review

Committee? Do they have Business

Lending Experience?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Managing MBL Credit Administration • Ability to Administratively Monitor

MBLs on an ongoing basis

• Development of a viable MBL Risk Rating System

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Funding the MBS/MBL Program. What will

the Funding Commitment be to Develop the MBS/MBL Infrastructure?

• What is the Timeline the CU will consider

reasonable for Incubating the MBS/MBL

Program?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• MBL origination. Does it Matter If the

Loan is to a Local Business Entity?

• Will the CU consider Loan

Participation Opportunities to

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• What Comes First? The development of

Critical Massin the Loan Portfolio or the

development of an Experienced MBL

Staff?

• How does this “Chicken vs The Egg”

situation play out properly?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Many CUs have utilized Loan

Participations to create Critical Mass in

their MB Loan Portfolios

• Is the objective to create a Funding Sourceto justify the Development of

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• How do Loan Participations serve the

Existing Membership Base?

• If a CU is the Lead Lender in a MBL

Participation, does it Know How To

Manage the process? What are the

related Recourse Liability issues?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• CUs Are Typically Choosing One Of

Two MBL Delivery Profiles:

•In-House Underwriting

Elements of a Successful MBL

Program

• The NCUA established Minimum Staff Experience Requirements for CUs

planning to offer Member Business Lending services

•

Years Of Working Experience

Underwriting Business Loans - §723

•

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic

Concerns For Member Business Lending

• Internal underwriting requires

Adequately Trained Staff Members • They must have an Integrated

Underwriting Process that can be

Elements of a Successful MBL

Program

Let’s Discuss Some of the Strategic

Concerns For Member Business Lending

• Consistent underwriting processes

clearly define Primary and Secondary

Sources of Repayment

• Do All MBL Staff Membersutilize the

Same Underwriting Process?

Elements of a Successful MBL

Program

Let’s Define Some of The Strategic Concerns For Member Business Lending

• Who Designed the CU’s Underwriting

Process?

• Who is Training And Supervising the MBL underwriters?

Elements of a Successful MBL

Program

• Where Do Credit Unions go to find Qualified Staff Members that meet the NCUA

Minimum Staff Experience Requirements

•

Default Strategy for meeting the minimum experience requirements

•

Elements of a Successful MBL

Program

When Did They Start Their Banking Career?

• Prior To 1985 – Commercial Lending Officers Had Very Extensive

Internal Training and A Formal Career Path

• They Paid Their Dues – The terms

Banker and Lender were Almost

Elements of a Successful MBL

Program

When Did They Start Their Banking Career?

• Prior To 1985 – Most All Of The Bank Lenders That Went Through Formal Training Programs Are Now 50+ Years Old

• There are Not Many highly trained and experienced Commercial Lenders in the 30

– 50 Year age bracket – Succession?

Elements of a Successful MBL

Program

When Did They Start Their Banking Career?

• Since 1985 – Very Little Formal Commercial Lender Training Programs Have Been Offered • Most Underwriting is done in a

Centralized and Automated Loan

Center Environment

• Very little Business Expertise exists at the Point Of Sale for most Banks

Elements of a Successful MBL

Program

So, When did The New-Hire Candidates

from the Banks Start their banking careers?

• So, Who are the CUs Hiring?

• Do the “Experienced Bankers”they are

hiring Know Anything about

Underwriting Business Loans?

Elements of a Successful MBL

Program

Where do Credit Unions find Qualified Staff

Members to establish their Member Business Services?

• Are Existing Staff Members qualified?

• If not, Who is responsible for Hiring?

Elements of a Successful MBL

Program

• Is the CU Outsourcing its MBL underwriting?

• What are the Risks and Issues

associated with Outsourcing these

services?

Elements of a Successful MBL

Program

• How do you pick a Qualified Provider for

Outsourced MBL Underwriting?

Elements of a Successful MBL

Program

• How do you pick a Qualified Provider

for Outsourced MBL Underwriting

when you have Little If Any Business

Lending experience?

Elements of a Successful MBL

Program

• Can you Control the Outsourced

Underwriter Turnaround Time for an underwriting package?

• What Quality Control Measures does

the CU employ to Monitor Outsourced

Elements of a Successful MBL

Program

• Does the CU also have a Direct

Ownership Interest in the CUSO?

• To make the CUSO viable you need

Adequate MBL underwriting Deal Flow

• Are there any Conflicts Of Interest?

Elements of a Successful MBL

Program

• Is there a Formal Loan Committee in

place that Reviews And Approves all of

the MBL Underwriting Packages?

• Who serves on the Loan Review

Committee? Why?

• What Business Lending Experience do they bring to the process?

Elements of a Successful MBL

Program

• Have all of the Loan Committee

Members received Adequate Training

to be capable of Reviewing And

Approving or Declining MBL underwriting packages?

Elements of a Successful MBL

Program

• And Now The FUN Really Begins… • The Real Risks To The CU Come

AFTER The Member Business Loans Are Booked…

Elements of a Successful MBL

Program

• Who is Monitoring the Business

Loans once they have been Approved

And Booked?

• Is Credit Administration separated from Loan Production activities?

Elements of a Successful MBL

Program

• Is the CU utilizing a Loan Grading System for Monitoring Risk?

• In the event a Problem Loan arises,

Who is Responsible for Managing the

Elements of a Successful MBL

Program

The Loan Grading System should score the following factors:

• Ability to Pay

• Business/Personal Financial Condition • Management Experience and Ability

Elements of a Successful MBL

Program

The Loan Grading System should score the following factors:

• Existence of Collateral and Guarantees

• Business Loan Structure

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Put everything in Writing

• Always complete a formal Loan Application • Confirm all business loan Commitments in

Writing

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Complete all Negotiations before Closing

• Be sure to Fully Disclose all Conditions

before Closing The Loan

• Make all related Loan Documentation Available For Review 3-5 days before

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Confirm The Borrower has All Of The

Loan Documents before Closing

• Recommend the borrower Retain

Professionalsto help them understand the loan process

• Make sure to take Adequate Time to Close

The Loan properly

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Control Disbursement of The Loan

Proceeds

• Make sure that any subsequent Loan Agreement Modifications must be In

Writing

• Make sure to Listen Carefully to all

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Never Ignore any Loan Defaults

• Don’t interfere directly with The Borrower’s Business Managementpractices

• Stay off of The Borrower’s Board Of Directors/Advisors

Elements of a Successful MBL

Program

To mitigate potential lender liability CU lenders should make sure to:

• Utilize Legal Counsel whenever necessary

• Not make any Misrepresentations to The

Borrower

Elements of a Successful MBL

Program

• How does the CU monitor Business Loan

Performance and Loan Structure compliance?

• Is this effort Also being Outsourced?

Elements of a Successful MBL

Program

In The Event Of A Problem Loan:

• How will the CU Manage the situation?

• How will Performance Measurement and

Elements of a Successful MBL

Program

• Beware of the Loan To Value illusion for

Collateral

• Does the CU know how to transition the Secondary Sources Of Repayment

into the Primary Sources Of

Repayment?

Elements of a Successful MBL

Program

• So, what is the Collateral Conversion Plan? How will Loan Loss Provisions be addressed?

• Can the CU act quickly and decisively to

assure they Maximize the results of their

Elements of a Successful MBL

Program

The Loan Administration process for CUs:

• The Objective is to Monitor Actual

Business Performance Trends against

Business Plan Objectives

• Corrective actions may involve the need to

utilize Outside Consultants to Help

Execute Plans to adjust and recover

•

Reviewed to make sure everything is in proper order

Elements of a Successful MBL

Program

The Loan Administration Process For CUs:

• Make sure the Loan Files contain Adequate

Legal Protection regarding the lender’s

Collateral Position

• Collateral documents may be Incomplete

and they may also contain Improper Dates

or the dates may have Lapsed

•

Described, the lender May Notbe Legally

Elements of a Successful MBL

Program

The Problem Loan Administration Process:

• Identify Debtor Defenses

• Attorneys representing the borrower will most

likely Subpoena the Lender’s Credit File

Records

•

that indicates The Lender was effectively In

Control of the business

Elements of a Successful MBL

Program

The Loan Administration Process For CUs:

• Periodically review the Public Records to make sure the information furnished by the

borrower can be Verified

• The Public Record should verify that the Lender’s Interestsare Perfected as

Originally Intended

•

information on any Other Parties that may

Elements of a Successful MBL

Program

Specific records that should be checked include:

• Real Estate records should reflect the Legal Ownership of the properties

• The records will also reflect any Liens made

against the property and in What Name the

Liens Were Filed

•

Transfers as well as any Foreclosure

Proceedings made on the property by Other

Creditors

Elements of a Successful MBL

Program

Specific records that should be checked include:

• The UCC Filings will determine the Security

Interests Filed by Other Parties against the Borrower’s Personal Property

• There may be a need for the lender to file Continuation Statements to Extend the Lender’s interest in the collateral

Elements of a Successful MBL

Program

For MBS/MBL Credit Unions Need To:

is On The Same Page

• Determine if their MB Loan Officers

have the Background And

Experience to Also manage Problem

Loans

Elements of a Successful MBL

Program

Reality

– Business Credit Risk Is

A

Choice

…

• NeedTHOROUGH CONSISTENT

Credit Analysis

• NeedTRAINED Staff Members More Than Ever

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• Must establish the use of a Standard Business Credit Memorandum • Must use Consistent definition of

Cash Flow

• Must use Consistent definition of Debt

Service Coverage

Elements of a Successful MBL Program

So, When Is A CU Ready For Business Lending?

• Must use a Consistent Business Loan File

structure

• Must Monitor Business Loan

Performance closely and Act Immediately if Out Of Compliance

• Must create Viable Career Paths for

Business Lenders/Relationship Managers

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• Must develop a viable Loan Review Process

• Must have a Strategic Contextfor

Member Business Asset/Liability Planning

• Must establish Quality Controls and

Corrective Action Plans

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• Must realize that Depth In A Relationship is the Key to both

Profitability and Retention

• Bank Studies show at 4+ Product Relationships overall Profitability

Soars

• At 4+ product relationships Account Retention Levels Exceed 95%

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• Must Address The Things Small Business

Owners Want:

• Safety And Security

• Access To Capital

• Convenience/Multiple Channels Of Delivery

• Relationship Stability

• Advice And HelpFrom A Business Expert

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• CUs can’t simply utilize an Outsourced Underwriter and Limitthe rest of their

Internal Commitment to Member Business Services

• CUs must be internally capable of

Identifying, Soliciting, And Managing Member Business Relationships and

Elements of a Successful MBL

Program

So, When Is A CU Ready For Business Lending?

• CUs can’t make Commercial Real Estate Loans synonymous with

Member Business Loans

• CUs can’t simply believe ”If You Have The Dirt You Can’t Get Hurt!”

Elements of a Successful MBL

Program

What makes a Credit Union different? What

is their Sustainable Competitive

Advantage?

• They must be As Good or BETTER than their competitors

• The Ultimate Differentiator – The

Quality, Stability And Skills of their

Elements of a Successful MBL

Program

The Bottom Line is To Be Successful…

You Can’t Be A PRETENDER In MBS/MBL

Elements of a Successful MBL

Program

The Bottom Line is To Be Successful…

You must focus on Business and Personal

Financial Services needs and recognize business and personal financial services

Elements of a Successful MBL

Program

The Bottom Line is To Be Successful…

You must learn to Profile Needs and be both

Proactive and Anticipatory

You must learn to be a financial issues

Problem Solver/ Solutions Provider

Elements of a Successful MBL

Program

Questions Regarding Business Lending Training Can Be Directed To…

Jim Devine, CEO / Bob Hogan, President/ or Greg Devine, Vice President

Hipereon, Inc. 4048 148th_{Avenue NE} Redmond, Washington 98052 (425) 702-9200 [email protected] [email protected] [email protected]