Member Business Loans (MBLs) represent a large market share that has largely been overlooked by credit unions. With the right strategy, credit unions

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2 Member Business Loans (MBLs) represent a large market share that has largely been overlooked by credit unions. With the right strategy, credit unions can achieve successful results while helping small business thrive.

3 Why is the CU considering Member Business Lending? How risky is MBL for this credit union? Does the CU have adequate capital to launch MBL? How will success be measured? How will the CU market MBLs? Can the CU price these loans competitively and maintain revenue?

4 Before developing policy, the credit union should define its target market and consider underwriting guidelines and limits that will give underwriters flexibility, while holding them to the standard set by the board s tolerance for risk. Well defined concentration limits should be expressed as a percentage of net worth and should be calculated based on: Affiliated borrowers Industry codes Collateral types Geographic location

5 Must include the following elements: 1. Types of loans made; should also stipulate types of loans that will not be made. 2. Trade area; the geographical area that your MBL program will serve, must fall into field of membership. 3. Maximum MBL portfolio; can be stated as an absolute amount or as a percentage of assets, loans or net worth. 4. Maximum amount by category; must be stated in relation to net worth, total assets or total loans. 5. Maximum net amount loaned to one member or group of associated members; cannot exceed the greater of $100,000 or 15% of net worth. 6. Personnel qualification and experience; 2 years is required, 5 years is recommended. Underwriting may be contracted.

6 7. Loan approval authority; Board is responsible to establish membership, roles and authorities of loan officers and business loan committee. 8. Credit decision analysis; a credit memo system is recommended to summarize ability to repay, collateral value, financial statement quality, cash flow, and reconciliation of any inconsistent data. 9. Documentation requirements; listing of documents required for new loans, renewals, extensions or advances. 10. Collateral requirements; state collateral required on MBLs, LTV requirements, determination of value & ownership, steps to perfection of lien. 11. Appraisals; valuations must be performed and documented. 12. Pricing terms & parameters; states how pricing will be set.

7 13. Loan servicing; description of how MBLs will be serviced. 14. Loan review & supervision; how loans will be monitored to ensure payment. 15. Loan collection; collection process must be specific to business loans, do not recycle consumer collection policy. 16. Identification of ineligible management; MBLs must not be granted to CEO, senior management or their immediate family members. 17. Director/employee loans; cannot be granted on more favorable terms than generally available to public, no pecuniary consideration in connection with the lending, servicing or collection of a business loan.

8 Quality control procedures should be established to ensure integrity in the underwriting and documentation process. Periodic risk rating of loans should be reported to the ALCO and/or board. Collection procedures must be clearly established for business loans. Staff must be sufficiently trained on restructuring and/or liquidating delinquent accounts. Appropriate legal counsel must be obtained to facilitate business litigation or bankruptcy.

9 Underwriters must have a minimum 2 years experience in member business lending; 5 is strongly recommended All staff dealing with business loans should have experience specific to the loan and business types in the portfolio. A balance between sales and underwriting personnel should be maintained to ensure adequate control and caution are being exercised. Staff must be able to effectively merge MBL data with the overall portfolio and make a meaningful determination of its impact.

10 To optimize business lending, it is recommended that the credit union make an investment in a data processing system that is capable of managing MBL specific factors such as: Monitoring credit relationships aggregately, as well as on an individual basis Identify deteriorating loans and prompt review Aggregate watch lists and problem loans based on internal risk rating system, or automated model Track compliance with loan covenants Track UCC filings, updated financial statements and insurance requirements Manage and report on loans by credit grade, industry code, associated relationships and collateral types