Coronavirus forces credit unions to rethink commercial underwriting
The coronavirus has credit unions rethinking parts of their commercial lending.
Even before the outbreak, many small businesses struggled to cover operating expenses. And the pandemic only worsened these challenges after consumers curbed their spending when officials ordered non-essential businesses to temporarily close in order to slow the spread of the disease.
Credit unions could look to change some of their commercial lending practices to better reflect these conditions and may find additional ways to help small business borrowers, experts said.
“I think there is a reasonable chance that there is some type of second wave [of the coronavirus],” said Greyson Tuck, a board member of the consulting business and law firm, Gerrish Smith Tuck. “If you are making a new commercial loan right now, certainly a part of your underwriting is asking what are your COVID-19 contingency plans. And it’s not just for restaurants but for any small business.”
Although the National Credit Union Administration loosened the rules governing member business loans several years ago, credit unions have largely remained consumer lenders. MBL outstanding balances totaled $71 billion in April, or roughly 6% of total credit union loans, according to the June trends report from CUNA Mutual Group, which uses April data.
MBL balances fell by more than 13% in March from a year earlier and then ticked up less than 1% in April year over year, according to CUNA Mutual data.
Still, credit unions are now considering tweaks to how they work with commercial borrowers.
For one, lenders could put more of an emphasis on commercial borrowers’ ability to withstand a significant event by reviewing contingency planning. These plans won’t necessarily have to relate to a pandemic since the coronavirus is probably a once-in-a-lifetime event. Instead, the credit union could look to see if businesses are prepared for other disruptions, such as natural disasters.
How formal and thorough the continuity plan is will depend on the borrower’s level of sophistication and size of the loan, said Randy Dennis, president of DDF Consulting.
“We are talking about real people who really work hard for a living,” Dennis said of many small business borrowers. “Your smaller banks and credit unions understand that. They won’t ask for a business continuity plan but they may ask, ‘Do you have a website?’ Things like that.”
Lenders may emphasize a business having a strong online presence going forward. Brick-and-mortar stores were already suffering as consumers completed more shopping online even prior to the pandemic, and stay-at-home orders issued to help slow the spread of the coronavirus accelerated that trend.
Now lenders must consider how widespread and permanent that change will be. For instance, a recent survey from Coresight Research found for the first time that more than half of respondents had bought groceries online, more than double the rate just two years ago. Roughly 63% of respondents said they anticipate buying groceries online over the next year.
Credit unions need to be aware of such changes across multiple consumer sectors and how they might affect the borrowers’ ability to repay a loan.
“It’s not, ‘Can they repay me on the day I make the loan?” Tuck said. “It’s, ‘Can they make the last payment they owe me?’”
Ideal Credit Union in Woodbury, Minn., is helping small businesses by providing webinars on various topics, such as retirement planning for business owners and advertising on Facebook. The institution has been doing the events since 2019 but moved them to a virtual format in the wake of the coronavirus.
A webinar in June covered social media marketing, a topic that business members requested the credit union address.
“The social media topic is very hot right now,” said Alisha Johnson, executive vice president of operations at Ideal.
“While social media has proven to be an effective way of increasing awareness and sales for certain businesses, there are many businesses who don’t know where to start,” she added.
Creating an online presence to drive sales is something most small businesses can improve upon, said Jim Clark, chief credit officer at the credit union service organization, Member Business Lending. He said whenever he checks a company’s website or LinkedIn profile they tend to be placeholders that the business owner never updated to make more functional.
“They aren’t proactive sales site,” he added. “They are just billboards.”
In addition to concerns about online presence, credit unions are likely to tighten their overall lending standards, Tuck said. Normally for a business loan some type of commercial real estate serves as the collateral in case the borrower defaults. But commercial real estate values could take a hit if businesses decide that more employees can work from home permanently and that they need less office space once the pandemic passes. That would make it more difficult for lenders to foreclose on that property and then sell it to recoup their losses.
“For all of these retail shops, if you are looking to sell something, what’s a better way to do it? Rent commercial real estate, buy inventory, pay people to be there from 8 a.m. to 7 p.m. manning the store all day?” Tuck added. “Or is it better to build a fancy website with a good Google ad and then you can go out in the industrial part of town where real estate is cheaper and rent a warehouse?”
So far Ideal’s commercial borrowers have held up well during the pandemic because they are “seasoned business owners,” said Rick Blood, chief lending officer. The majority of the $791 million-asset Ideal’s commercial loans are in commercial real estate. Only a few borrowers have requested accommodations for payments while others have asked about refinancing to take advantage of lower rates, Blood said.
Still, the institution is currently putting more emphasize on the liquid cash reserves that business borrowers have access to, Blood said. They are also asking those applying for commercial loans for more current financial information “to ensure business has not been interrupted by more than the borrower is disclosing,” Blood added.
Dade County Federal Credit Union in Sweetwater, Fla., has a commercial loan portfolio of roughly $100 million and has had roughly nine deferrals so far, according to CEO George Joseph. He attributes the credit union’s success to good underwriting combined with hiring an experienced group of commercial lenders. These lenders are not afraid to refer loan applicants who don’t fit their criteria to other financial institutions in the area.
Given that its loans have held up well through the downturn, Dade County FCU isn’t changing its underwriting right now, Joseph said.
However, the $836 million-asset credit union is hoping to now reach more small businesses by partnering with Miami-Dade County to provide $25 million in low-interest loans to local small businesses affected by the pandemic. The credit union will administer the program while a group of community development financial institutions will originate the loans.
Management hopes to work with other partners, such as large banks, to secure additional funding.
“This is going to be one of our goals, to really expand and grow in this area,” Joseph said. “We want to make it one of our major focuses to work with small businesses in Miami-Dade County.”