The member business lending market for credit unions is on the cusp of change, with revisions to National Credit Union Administration regulations (NCUA 12, CFR Part 723) slated to take effect Jan. 1, 2017. Among the most impactful changes are removing loan-to-value limits, lifting aggregate limits on construction and development lending, and giving credit unions discretion in determining the necessity of personal guarantees.
According to Jim Devine, CEO of Hipereon Inc., Redmond, Wash., these changes level the playing field as credit unions go head to head with banks in a competitive, rate-driven environment. Devine leads CUES’ schools of business lending, including CUES Advanced School of Business Lending™: Commercial Real Estate Lending, slated for September in Santa Fe.
“Credit unions have felt [they were in] a disadvantageous position because they couldn’t previously book loans without getting waivers for LTV issues and personal guarantees,” he says. “Now these two issues are going to be removed.”
Even so, credit unions have begun to experience downward pressure on margins in the commercial real estate arena, driven by banks that have recovered from the recession and are offering refinance deals at highly aggressive rates.
“There’s a lot of erosion in portfolios that have been dominated by real estate these last couple years because of that refinancing reality,” Devine explains.
Fortunately, that erosion is being offset by a strong uptick in construction activity. “So, you’re starting to see construction loans become a bigger potential new addition to the loan portfolio that wasn’t the case in the last couple years,” Devine adds.
Current NCUA regulations limit construction loans to 15 percent of the net worth of the credit union; however, that limitation is set to go by the wayside when the new regs take effect.
“Fundamentally, what is happening is that the NCUA is stepping back from a lot of the infrastructure that Part 723 forced onto credit unions and saying, ‘We’re going to hand you the ball and let you run with it.’ So, there is going to be a lot of discretion placed in the hands of credit unions,” Devine says.
With this discretion, however, also comes concern about how credit unions will adapt. Alan Harrison, VP/member business services for $1 billion Arkansas Federal Credit Union, sees the lifting of limits on construction and development loans as a means of fueling growth by leveling the playing field. He observes that it has been tough to compete with credit unions being restricted to a 75 percent limit on construction and development loans while banks can go up to 80 percent.
“So, put yourself in the shoes of a builder or developer,” Harrison says. “Where are you going to go for that loan? More often than not, you’ll go where you have access to the most funds.”
Obviously, then, that revised regulation is a real positive for Arkansas FCU and other credit unions. “But candidly, I’m a little on the fence with respect to some of these other revised regs,” Harrison admits. “Credit unions have not been doing MBL lending all that long—I still consider us a bit in our infancy—and it worries me that we’re lifting restrictions on the personal guarantee requirement and the LTV requirements.
“It’s almost like opening up a banana in front of an ape. We’re saying to the credit union industry as a whole, ‘You come up with your own subjective MBL requirements and just be able to defend them.’ That’s not so easy to do when it comes time to sit face to face with the examiners. And the personal guarantee is a perfect example. I can’t imagine an instance where I would want to do a loan without a personal guarantee.”
Thus, it’s important even with these regulations to show some discipline and restraint. “I think that we as an industry should move forward and be prudent,” Harrison says. “I can go along with the 80 percent loan-to-value. It’s worked in the banking industry for decades, and there’s no reason it won’t work for us. But we absolutely want to have the borrowers have some skin in the game. As an industry, I hope we move forward with that in mind.”
Diane Franklin is a freelance writer based in Missouri.