Small Business Loan Exams - Regulators Lighten Up

The National Credit Union Administration, along with federal and state banksand thrift regulators, earlier this month spread the message that financial institutionsthat comprehensively review a small business’s financial condition before lending tothat business will not be subject to overly restrictive supervisory criticism.

Recognizing that many small businesses are having issues obtaining credit, theagencies said that their examiners “will not discourage prudent small business lendingby financial institutions,” will not “criticize institutions for working in a prudentand constructive manner with small business borrowers,” and, for the most part,“will not adversely classify loans solely due to a decline in the collateral value belowthe loan balance.”

The regulators also encouraged financial institutions to look beyond “nationalmarket trends” and base their lending decisions on a borrower’s “plan for the useand repayment of borrowed funds” while maintaining “an understanding of thecompetition and local market conditions affecting the borrower’s business




From CUNA Credit Union News Watch

Bank Pain, Credit Union Gain. Commercial Property Forecast : Forget the Umbrella, Bring a Lifeboat.

The credit union industry can thank their lucky stars that the NCUA didn't raise the 12.5% commercial loan cap (yet). Plenty of small and medium-sized banks loaded up on developer loans just as their big brothers scarfed up home mortgages during the housing bubble. But that's not to say that some credit union's didn't take the bait and jump into the "profitable" commercial loan ocean as well. Many more banks and maybe a few credit unions will likely end up in Davy Jones' Locker because they took the plunge.

The outlook: vacancies are rising causing rents to fall, and it is estimated that up to $300 billion in loans will mature this year; commercial loans are often written with a balloon note. Even if the loans are generating sufficient P&I payments, property values have fallen so much that the lender may not or cannot re-write the loans. As a result, according to The Kiplinger Letter, defaults will soar from about 1.6% in 2008 to 5%.

It is highly likely that a good number of your competitors are on the ropes. They are forced to charge more for loans, if they are lending at all. Do some homework; what are their weaknesses? Find out. No need to take unnecessary risk, but you may find that this is a perfect time to pick up some market share. Yes, you need to watch your expenses, but don't stop advertising. Just make sure that the advertising you are doing is effective. Demand that the people who you pay to do your advertising can quantify the expenditure.

Collections, Colonoscopy. What's the Diff?

It's a fact of life. No one likes to talk about a Colonoscopy or Collections. It just seems too unpleasant. But like that unmentionable medical procedure, it is hard to understate how important a good collection department is to your (fiscal) health. It's no fun, but you should thoroughly review the collection process on a monthly basis. Set up a sub-committee if you don't have the time.

If you have been around the financial industry for any length of time, you know that an effective collections policy and procedure often makes the difference between operating at a profit or a loss. That said, please keep in mind that your collectors are not miracle workers. While collectors are often your unsung heroes, if a loan is bad when you book it, there is little a collector can do to rescue the day.

Some basic effective collection rules: 1. Your telephone is your most effective collection tool - make a courtesy call as early as ten days delinquent. A follow up call AS SOON AS the member misses a "promised payment" is imperative. 2. Be nice and treat people with dignity and respect. Bad things happen to good people and in many cases, your member may just need some coaching to get through difficult times. 3. It's collections 101 that "your first loss is your smallest loss". Be careful when restructuring a loan, if you have to repossess the property at a later date, you could end up with a higher deficiency balance. 4. Do a charge-off "autopsy" on all charged-off loans. Why did the loans end up as a loss? Look for trends by loan officer, lack of collection follow-up, high loan-to-value, liberal loan policies, poor underwriting, etc. The key is to avoid making the same mistakes over and over.

Just a rhetorical question, please do not answer . . . how does one decide that one wants to become a Proctologist? Or a collector for that matter.

Dern-Near Free Money From the SBA.

Could your Loan Department manager sell an SBA loan product that is interest-free to the borrower, has deferred payments for 12 months, and has no SBA fees associated with them? What if the loan has a five-year payback . . . remember we are talking zero interest here. What if I told you that the loan is 100% guaranteed by the SBA - AND the SBA pays the credit union Prime plus 2% on behalf of the borrower? You'd say "it sounds too good to be true", yes? Oh, but you have wandered into Obama Land where life is wonderful all the time.

It's called America's Recovery Capital (ARC) Loan Program. The ARC loan, which began in June 2009, is meant to help small businesses pay on existing debt and provide temporary financial relief so they can keep their doors open. There is a maximum loan amount of $35,000. What's more . . . non-SBA lenders can become ARC lenders. True story.

This is an excellent time to dip your toe into the business loan ocean. Even if ARC loans are the only business loans you ever make, it's hard to argue that this isn't a product your credit union should seriously consider offering. Not just offer, but SELL! Better hurry, the program runs out in September, 2010 or until funding runs out, which ever comes first.

You can find your nearest SBA district office at www.sba.gov/localresources/index.html.