Treasury Report Says Member Business Loans Critical for Niche Markets

Business lending is a niche market for credit unions, is less risky than commercial loans made by banks and thrifts, and meets the needs of low- to moderate-income borrowers, according to a new Treasury Department report on credit union member business lending. The report, released on Jan. 18, 2001, was required by the Credit Union Membership Access Act of 1998. All 1,514 credit unions that reported member business loans on their June 30, 1999 call reports were surveyed.

 
 



Business lending is a niche market for credit unions, is less risky than commercial loans made by banks and thrifts, and meets the needs of low- to moderate-income borrowers, according to a new Treasury Department report on credit union member business lending. The report, released on Jan. 18, 2001, was required by the Credit Union Membership Access Act of 1998. All 1,514 credit unions that reported member business loans on their June 30, 1999 call reports were surveyed.

Highlights of the Report:

About 14 percent of federally insured credit unions had member business loans outstanding on June 30, 2000, totaling $4.3 billion.

Few credit unions are active business lenders. Only 92 of 10,477 credit unions had total member business loans outstanding exceeding their net worth, as of June 30, 2000, but they accounted for more than 46 percent of total member business loans outstanding.

59 percent of member business loans had balances less than $50,000 and 2 percent had balances greater than $500,000. These loans amounted to 14 percent and 17 percent, respectively, of the total outstanding principal balance of all the loans reported by survey respondents. Over half were collateralized with non-agricultural real estate; 23 percent were collateralized with taxicab medallions; and 12 percent were backed by agricultural collateral.

Over 50 percent of member business loans were made for businesses with assets under $100,000 and 86 percent were made to businesses with assets of less than $500,000.

Loans to service-oriented businesses and for rental property made up nearly 55 percent of the total number of loans. In addition, 29 percent of member business loans were to agriculture-related business and 12 percent to ''other business type.''

Over 70 percent of the total dollar value of member business loans outstanding went to either service providers (largely loans for taxicab medallions) or for rental properties.
Almost 70 percent of the value of member business loans was made to businesses with total assets less than $500,000.

Credit unions appear to be meeting the needs of low- and moderate-income individuals, with 25 percent of member business loans made to members with household incomes of less than $30,000 and another 20 percent of loans to households with incomes between $30,000 and $50,000. These loans totaled 13 percent and 15 percent, respectively, of the outstanding member business lending balances.

Ongoing delinquencies are lower for credit unions than for banks and thrifts. At June 30, 2000 member business delinquencies stood at 1.84 percent, compared to 8.20 percent at yearend 1993.

Conclusions:

NCUA's member business lending regulations appear to be ''quite effective'' at limiting the credit risk associated with these loans. NCUA's requirements concerning personal guarantees, portfolio limits and collateral requirements ''are much more stringent than those faced by banks and thrifts.'' Still, Treasury found NCUA enforcement of member business lending regulations fell short of the requirements set forth by examiner guidance.

Member business loans are generally less risky than commercial loans made by banks and thrifts because they generally require the personal guarantee of the borrower and must be fully collateralized.

Credit union business lending currently has no effect on the viability and profitability of other insured depository institutions.

BUSINESS LOAN DEFINED: NCUA defines a credit union member business loan as any loan, line of credit or letter of credit where the borrower uses the proceeds for commercial, corporate, other business investment property or venture, or agricultural. Excluded are loans fully secured by a primary, 1-4 family residence and loans the total of which to an individual is less than $50,000. In 1998 Congress codified the definition and limited a credit union's member business lending to the lesser of either 1.75 times net worth or 12.25 percent of total assets.

 

 

 

Feb. 5, 2001


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