NCUA Webinar: Micro-Enterprise Lending – Making Loans to Small Businesses (7/13/2016)


Kathryn Baxter: Good afternoon, everyone. Welcome to our very interesting webinar that we have for you today on “Micro-Enterprise Lending –
Making Loans to Small Business. ” My name is Kathryn Baxter. Of course, I’m your moderator for today. And, I’m joined by Tom Penna, who’s our host. Before I give the console over to Tom, I’m going to make a few administrative announcements. Please give your attention to the slide in front of you and notice that you’ll
need to adjust your volume as loud as needed so that you can hear everything in this particular presentation. If you need to resize the slides, please drag the bottom corner. From this site, you will need to allow popups. At any time during the webinar we would like to encourage you to ask a question. In fact, throughout the
webinar we would appreciate if you would ask questions. Don’t wait until the end. In fact, if you know the name of your speaker, address your question to that speaker. We have a survey that we’re going to push out at the end of the webinar, and in three weeks, approximately,
we will close caption this webinar for on-demand viewing. As I mentioned earlier, this is a very interesting webcast. It’s on microenterprise lending. And during this webinar we will also offer a certificate of training,
and Tom will give you the specifics on what you’ll need to do in order to receive that. So, without further ado, I’d like to turn the webinar over to Tom Penna. Tom? Tom Penna: Well, thank you, Kathryn. Well, it’s once again my pleasure to host OSCUl’s
monthly webinar. Today we will learn more about microenterprise lending, also known as making small-dollar business loans. A little about myself, I have been an Economic Development Specialist with OSCUl for the last four years, so I have a total now with NCUA of over 30 years. Man, am
I getting old. Prior to NCUA I also spent five years with the USDA Office of Inspector General. Today we’re providing this webinar because over the last several years we have seen many credit union’s loan volumes start to shrink, and negative earnings occur as a result. Offering new and competitive
loan products may help you reverse these trends. We are providing this learning opportunity to help you decide if small business lending may be a way to build your loan portfolio and also build member relationships. With these products, you may help your members also save money by offering better rates
and terms than a lot of other commercial lenders out there. This webinar is not designed to make you a small business lending expert. We’ll provide you with information that will allow you to decide if this product may be good for you and your members. If at the end of this webinar you elect to
offer these loans to your members, we encourage you to obtain additional training and expertise to build a safe and sound business lending program. As always, NCUA will never require a credit union to offer products or services that the board of directors are not comfortable
to offer, nor do we expect the credit union to take unwanted risk. We encourage you to understand and manage the risk you take. We do not want you to eliminate the risk. Let me give you our standard NCUA disclaimer. Of course,
this webinar is offered for informational and educational purposes only. NCUA does not endorse any particular credit union or vendor or their employees, products or services. As Kathryn mentioned, we will give a certificate of completion
upon the conclusion of this webinar. To get the certificate, you must listen to the presentation for a minimum of 45 minutes, answer 12 of 15 questions correctly from our provided quiz, and answer two of the three poll questions we have for you today. Today we have
some great speakers. They have been involved with small business lending for several years. So let me introduce the team to you. From NCUA, it is my pleasure to introduce William MacMaster, a Regional Lending Specialist. Hi, Bill. William MacMaster: Hi,
Tom. Tom Penna: And from Genesee COOP Federal Credit Union, we have Melissa Marquez. Hello, Melissa. Melissa Marquez: Hi, Tom. Tom Penna: And, lastly, but not least, and from Seaboard Federal Credit Union, we have Dan Kelley. Hi, there, Dan. Daniel Kelley: Hi,
Tom. Tom Penna: Okay, so let’s begin with a general poll question. We’d like to find out who’s listening with us today. So, if you could could you answer the appropriate question based on the asset size that you are, and, of course, if you are not related to or affiliated with a credit union,
please respond N/A Not a Credit Union. We’ll give you a few minutes to take care of that. And we’ll give a couple of seconds. Kathryn Baxter: I want to remind the audience again, Tom, to submit questions as we get into the webinar. And please state the name of the speaker that you’d like to address
the question to. All right? Tom Penna: Thank you, Kathryn and our results look like – well, most of our credit unions are coming from a $10 to a $100 million category, which is really good for us. We also have a number, we have 28 percent from
the $100 to $500 million category. That’s a pretty good representation for this webinar. So, now here’s our agenda. Today this presentation will discuss making small business purpose loans to your members. We will concentrate
only on the small loan program where the aggregate loans to your members do not exceed $50,000. We’re limiting that level, too, because what we don’t want to do is make this a presentation of member business loans, and once you exceed the $50,000 threshold
you’ll be responsible for following NCUA member business loan rules. Bill will comment on that in greater detail as we go on. So, by the way, for those that do make member business loans or want to make member business loans, it is our understanding that
E&I plans to provide a webinar on the recent changes to the member business loans rule later this year. So, it is now my pleasure to bring on regional lending specialist Bill MacMaster, who will provide his perspective on making these small business loans. He will provide
guidance on building a strong business loan policy and practices. Bill, let’s move right into the presentation. Tell us about the difference between making small microenterprise business loans and the NCUA member business loan. William MacMaster: Thanks, Tom. Let’s start with the
microenterprise loans we have seen in consumer portfolios. The following are some examples: a loan to a carpenter to purchase a $10,000 compressor; or we have a loan to an operator of a salon that purchased a chair and a sink for $15,000; or we have a seamstress borrowing
money to purchase an industrial-grade sewing machine for $4,500. Now let’s look at some of the general definitions. This is very important! Member business loans are generally for commercial purposes that are equal to or greater than $50,000.
On the other hand, microenterprise loans are for loan relationships that are less than $50,000 with a commercial purpose. In some cases the aggregate loan amount in the borrower relationship may exceed $50,000. In these cases, the loan
amount causing the aggregate loan balance to exceed $50,000 would be reported as an MBL. Let me share with you a great example. There is a bakery that purchased two delivery trucks. They applied for and received two separate loans of $35,000
each, for an aggregate total of $70,000. The first loan is under $50,000 and would be a microenterprise loan. However, once the second loan is approved, the borrower’s second loan would now be considered an MBL, because the aggregate balance now exceeds
$50,000. The first loan would still not be considered an MBL for reporting purposes. Therefore, unless the loans are real estate secured, microenterprise loans, also known as business purpose loans, are reported on Page 2 of the
Call Report, Line 24, Total All Other Loans/Lines of Credit, unless reported in another section of the loan reporting such as auto loans or vehicles. This slide represents
the best practices for developing a sound microenterprise program. Getting started, first and foremost, the board must establish the goals and define the level of risk they are willing to take for what they want to accomplish
from the program as part of the strategic planning process. Who will be responsible for the program? These people would be the board, the CEO, depending on the size of the credit union a supervisory or loan committee member, and the loan department that is responsible for
facilitating the microenterprise loans. This involves understanding what type of training and personnel will be involved. With this said, it is key to keep in mind that the training and personnel would greatly depend on the size and complexity of the loan program
being offered. At a minimum, the loan officer must understand basic cash flow, balance sheet analysis, and what is expected to manage the business loan relationship. The next box we’re looking at the strategic plan. This must identify what the credit union wants to accomplish
with the program. A good place to start is to survey your membership to determine the demand for small, commercial-purpose loans. You may be surprised at how much demand for small business loans there are within your field of membership. Once you identify the types of loans you want to grant, you
need to identify the following. You want to identify the dollar amount and types of loans the credit union is willing to grant; the dollar amount of individual and aggregate limits to a borrower; establish risk parameters, such as the trade area, debt service coverage ratio
and loan to value. Also, you want to look at your levels of delinquency and charge-offs. As the strategic plan is the foundation, the policies are the roadmap that provide the structure and limits of the microenterprise lending program. I will discuss
this in more detail in the following slides. Marketing is simply getting the word out to the target and potential members of the new products offered by the credit union that meet the field of membership requirements. Underwriting is simply the process
of evaluating the repayment risk of an applicant. Credit administration is how to manage the business, loan relationship, and monitoring the repayment of the loans. There is a saying in the commercial lending world that 20 percent of
the risk is in underwriting and 80 percent of the risk is in managing the relationship. The next slide is a list of minimum parameters that are needed in a loan policy. A lending policy must not be a static document but must be reviewed periodically and revised
in light of changing circumstances, especially surrounding the borrowing needs of the credit union members as well as changes that may occur within the institution itself. To a large extent, the economy of the community served by the credit union will dictate the composition of the
loan portfolio. The widely divergent circumstances of regional economies and the considerable variance in characteristics of individual loans are key in the establishment of sound lending policies. While not all inclusive, these two slides provide guidance of key elements that
should be incorporated into sound business lending policy. The board and management must define what each policy standard should be included within the policies. Keep in mind, loan policies are a tool used by the institution to standardize and monitor
the loan process. This graph denotes why credit unions are in a unique position to serve and facilitate economic growth in their communities. As the graph illustrates, it is challenging for small businesses to obtain loans.
Considering 25 percent of all the employers in the US are small businesses, with 88 percent of them with one to four employees, I would guess many of these businesses are in your communities, and who knows your communities better than you? Notice that 58
percent of these businesses are seeking loans of $100,000, with less than 41 percent of them seeking loans less than $50,000. This slide shows an example of cash flow analysis. It’s key to understand where the
business cash flow comes from and is a necessary practice for the lender. It is important to analyze the cash inflows and outflows of the borrowers to meet its financial obligations. The income statement also helps the
lender identify if a borrower is adding personal funds into the business to keep it operating. This may be a sign of financial trouble. This is why understanding basic cash flow fundamentals is one of the most important functions in microenterprise lending. Now, keep in
mind, debt service coverage ratio is the inverse of the debt-to-income ratio, which is commonly used in consumer lending. For example, the debt-to-income ratio is simply debt divided by income, and the debt service coverage ratio is cash available to service
debt divided by total debt. The slide shows the debt service ratio is increasing, which means that the relationship between the cash available to service debt and the increase in debt is improving over the time period reviewed. This slide is an
example of the balance sheet analysis. It is also important to get periodic balance sheet updates of the principle owners responsible for the debt and repayment of the business. By doing this you will understand if the borrower is maintaining strong financial
backgrounds or their position is deteriorating. The financial well-being of the owners determines their financial capability to repay you. This slide is an example of collateral valuation analysis. Understanding the collateral and its depreciation schedule
is very important. The key is to determine the collateral value exceeds the loan balance during the life of the loan. Some common mistakes that we have seen and some examples of common
exceptions that we have identified during examinations include the following: underwriting a loan like a consumer loan, with debt to income and credit scores of the borrower versus cash flow and the debt
service coverage ratio of the business. Another one would be not filing liens on collateral correctly, for example, like we talked about earlier, the salon chair and sink. Filing a UCC-1 on furniture, fixtures and equipment with the county
or secretary of state is essential. Not putting conditions to a loan as a rider to the promissory note, such as loan covenants. Basically, putting in parameters that explain the cash flow requirements, financial statement requirements and
stuff like that within the promissory note is essential. Another mistake is incomplete or inaccurate cash flow projections, and, as we have discussed earlier, this is one of the most important areas and a KEY area in underwriting. Another important
area that we have noticed is inadequately trained loan officers and personnel. This is very important in setting up a program. You must make sure that you have the proper training and the proper experience in place when you
start your program. Thank you, Tom, as my time ran out and I turn it over to you. Tom Penna: Thanks, Bill. That was an awful lot to cover. The recap slide basically summarizes Bill’s presentation for you, but it’s important to recap it, as well, is
before you get into the lending program it is important that the credit union management and board of directors really understand the risks and rewards when undertaking such a program like this, and the need to adjust the strategic plan is extremely important so that everyone understands the role
of what the program is doing. What’s the purpose of it? What do we expect to accomplish from it? So, not only for the board as well as outside reviewers, they know what direction you want to go. And, of course, collateral and personal guarantees are necessary to offset any business risk that you
have. But last and not least, we really need you to ensure that the credit union properly measures the success of the program through effective monitoring reports, like Bill said. Delinquency and charge-offs are critical to understanding the impact of whether you’re going the proper direction or not,
and if not what’s causing the change. There are also other resources and tools, available from government agencies and local nonprofit organizations that can help you develop the small business lending program and also help your members with their business operations. Some of these programs will
actually work with your members to help them develop strategic plans, help them work with budgeting, so that they can maintain a sound fiscal operation. Every area is different, so you’ll want to check with your local area to see what is available for you and your
members. Well, we have another poll question for you. Okay, are you currently making business purpose loans, and if so what kind, such as small business loans less than $50,000, or member business loans greater than $50,000? So take a few seconds
and please click the appropriate item for your credit union, or if you’re not a credit union member or official please click the Not a credit union. Kathryn Baxter: Hey, Tom, this would be a good time to give Bill a question. We have some for him. Bill, do you want to answer a question? William MacMaster:
Oh, I’ll be more than happy to. Kathryn Baxter: Okay, so here’s what one credit union said. They said an example that you gave where the borrower had two $35,000 loans, the first is not an MBL, but the entire balance of the second is, or just the portion of the loan balances to the member over $50,000 is
reportable? Which is it? William MacMaster: Yes. According to Schedule A of the 5300, what would happen is is the first loan in its entirety would be reported as a non-MBL. The second half or the second loan of $35,000 would be
reported in its entirety as an MBL. And, as I mentioned, you could find this in the 5300 on Page 15, Section 4, under Business Loans. Kathryn Baxter: Fantastic. Tom Penna: Thank you, Kathryn and Bill. Now
let’s see the results of our poll. Oh, pretty well we have it mixed. We have many of you just offering both types at 42 percent, and we have 32 percent offering small business loans. I think that’s a
really good percentage from the participants today. So, as a result, now let me introduce Melissa Marquez, from Genesee COOP. Before we begin, Melissa, will you just tell us a little bit about yourself, your credit union, and why
you got in the program? Melissa Marquez: Thank you, Tom. I’ve been the CEO at Genesee COOP in Rochester, New York, for 11 years, and we are a low-income designated credit union with $18 million in assets and 3,600 members. In the picture with me is our
Mortgage Officer, David Knoll, who was the founder of our credit union and who first established our microloan program in 1999. In the last 15 years we have made 200 microloans totaling $1.25 million, and we have been certified as a
CDFI since 1998 and have received grants from the CDFI Fund, which have helped our credit union tremendously. We started our microloan program because we had a lot of self-employed members who wanted personal loans for their business,
and we developed specific policies for microenterprise lending, which I am happy to share by email with anyone who’d like them. Our microloan program currently has 36 loans and 80 business lines of credit totaling $335,000, and we
have $100,000 in available credit for our business lines of credit. Our average business line of credit is just $2,500, with a maximum limit of $10,000, and our average loan is $6,500, with a
maximum limit of $25,000 unless the loan is secured by an auto or real estate. We make secured and unsecured microloans to our members. Our secured loans are typically for a business vehicle, for equipment
or inventory, and we use our business lines of credit for working capital needs, which is how we do most of our unsecured lending. We try to obtain collateral every chance we get, and for new equipment and inventory we do file UCC liens.
I just wanted to give one example. We have a borrower who might – who wanted to upgrade their website, and it was going to cost about $5,000, and that was their business was online. So, in that case, because their credit score was below
640, we asked for an auto as security for the loan, and that was the way we were able to do the loan and get security for that. We – while we have solid underwriting and good microlending policies, what we’ve learned is that our focus is on
our relationship with our member. When a business owner has their business account with the credit union, it’s much easier to extend a business line of credit to that member and in turn do a term loan when they are looking to expand or purchase something for their
business. When we see good account management with their business account, That is a big factor for us in making a microenterprise loan. I should mention that for unsecured loans less than $3,000 and business auto loans we do not require or review
a business plan, but for larger loans and for existing businesses we do review two years of tax returns. Our priority is not to focus on the credit score. We don’t use a minimum score to determine approval or denial, and in fact 40
percent of our microloans were made to members with subprime credit scores. We use risk-based pricing, except for our lines of credit, and we also have a partnership with a local church that provides pledged shares as a guarantee to help offset some borrowers who
have lower credit scores, which is especially helpful when the loan is for a new member without that established relationship with us. If the business is a startup, and we do do quite a bit of startup financing, and by that, that means that the borrower is –
the business is under three years old, we do require a business plan. We want to see their plans for marketing, management, their understanding of the competition and their plans for sales growth. We analyze their projections, typically looking
at how the cash flow will be if sales are 50 percent less than projected and expenses are 10 to 50 percent more than anticipated. We have found most business plans over-project the sales growth and don’t fully anticipate their costs. I can tell
you that we have found our rule of thumb works and almost always is accurate. This helps the business owners and the credit union plan for the needed working capital for the business, which I believe is one of the reasons for our repayment success. We do
require personal guarantees, although most borrowers have a DBA, so the loan is under their Social Security number. We have found for credit reporting purposes we have to make sure the member’s name is first and the DBA name is in a joint owner
section, or else the loan does not properly report to the credit reporting agencies. We refer members to local organizations that provide technical assistance for startups and expansions, and one way to know who those organizations are in your
community is to check with the Association for Enterprise Opportunities at microenterpriseworks. org. Through our partnership with the Unitarian Universalist church, members of the church volunteer their services to provide mentoring and support to business owners. The church has a deposit
with the credit union that can be used as a 50 percent share secured guarantee to a loan that we might not otherwise approve. This partnership has helped us by strengthening the businesses and provide risk sharing for borrowers with blemished credit. Training
of our staff is very important, and one of the ways we increased our expertise for reviewing the cash flow and doing a business credit analysis was by participating in the business lending training program offered by CUNA, for which we got grant money
from the CDFI Fund. It also helps that our loan officer was a business owner herself in the past and has valuable insights into the challenges and opportunities for microenterprise owners. Microenterprise lending is seen as a risky endeavor, and in our early years we did take
some hits that were difficult. However, we have really focused on staying in touch with our members as soon as they are late on the payment, which has helped us manage our delinquency. As of December of 2015 our delinquency was 1.8 percent, and we had
a net charge-off for the year of 0.76 percent. At the end of March we had no delinquent loans over 30 days, and as of the end of June we have 2 percent delinquency and loan losses of 600 dollars. So you can see it varies through the year. One
of the things I really did want to emphasize is that our loan yield for our microenterprise loan program was 9.7 percent in 2015, and in the first six months of 2016 it’s at 9.5 percent. And that yield is very
important to our profitability and makes it a very worthwhile loan product to offer our numbers. As I already showed, our delinquent loan position is well controlled, and we want to know what is going on with our members and
the business, especially if the business income is our member’s primary source of income. So we really do communicate a lot with our members. I want to mention that when two payments in a row are late, we prefer a face-to-face conversation. For larger lines of credit
we also ask for current income tax records to determine if there’s been a change in the business, and often we also review their credit. We do offer modifications as we would a consumer loan when necessary, and if we find that the line of credit is always tapped out and
not really providing cash flow for seasonal business flow, we have converted them to term loans, typically using collateral for security. I have a couple of success stories that I want to share. In 2012 we provided a $36,000 loan with a five-year term to a
locally owned bike and sporting goods shop that was moving into our area. They had been in business for three years at a downtown location, and they needed a loan for their relocation to our neighborhood. We used a business van and a motorcycle as collateral. The business had a
good track record, and all three owners were invested in the success of the business. And at the halfway point we restructured the loan through a modification to extend the term and lower the payment. This was especially helpful with the seasonality of the business, since in the winter months the cash
flow is much lower. The business has grown, and it’s doing very well, and the business owners were extremely grateful with the assistance provided, and, really, the credit union is actually making more income than originally planned. In the picture that
you can see, we did a business loan just over a year ago and provided a $4,500 loan to help Tonya establish a hair salon. She had already an established clientele for customers with significant hair loss, but she did not have a shop of her own. She found a
good location and needed the funds for renovations, but she had a D credit score. We secured the loan with an auto and had her also work with our church microenterprise partner for some marketing support. She got great press coverage for her grand opening, and the business has been very successful. The
partnership has also pledged 50 percent of shares on the loan, since Tonya was new to the credit union. Some of our business owners have grown so much that they need a larger loan than what we currently provide. We have referred some of them to other larger credit unions in the area and another larger CDFI that
makes commercial loans. In turn, we have received referrals from the larger credit union and the CDFI when there is a borrower looking for a smaller loan amount. If I had two words of advice, it would be don’t rush. Don’t rush into the program, and don’t rush the loan if being pressured by the applicant.
Sometimes we have people come to the credit union as a last resort, and no one else would lend to them. They had already signed a lease or made a commitment when they needed cash for the business but didn’t have adequate financial projections. Don’t let the member’s financial pressure or opportunity push
you to make a quick decision before looking at the business plan and analyzing the projections. Take the time you need, and make sure the member understands that good loans take time, and the time we spend thinking about what the business needs will help the business succeed. Those are my words of wisdom, and I
appreciate the opportunity to share our experience. Tom Penna: Thank you, Melissa. That was some great advice. But I want you to do one thing for me again. Will you tell me again what’s your yield on your loans? Melissa Marquez: Nine point seven percent. Tom Penna: All right. Thank you. All right, that leads us
to another poll question. What we’re looking for here is what type of small business or business loans are you making? In this question you can actually answer more than one type, so feel free to answer as many that you’re currently offering. Kathryn Baxter: And, Tom, we have a question for Melissa. You have
quite a few questions, Melissa, but we’re going to save some of the other ones for later. Your yield is very impressive. It really is. So you have a credit union that wants to know how you manage your delinquency. How do you keep them so low? Melissa Marquez: Really we, right
at the forefront, we’re paying attention if they are even 15 days late, we’re going to be paying attention. So we do very early collecting, and we just think it’s really important for our members that we approach it that way. Kathryn Baxter: And what did you say your
delinquencies were through the first quarter of the year? Melissa Marquez: We didn’t have any delinquency in the first quarter. It was 0 percent. Kathryn Baxter: Wow. Tom Penna: I guess that’s success right there. Kathryn Baxter: That is success. Tom Penna: All right. That brings us to the results of our poll question. And it looks
like a lot of you out there do primarily secured credit with vehicles and machinery or equipment followed by the unsecured lending brings up about 50 percent, as well. So it looks like there’s plenty of different types of loans being made to those members being served by you all. Okay, going forward,
now let me introduce Dan Kelley, from Seaboard Federal Credit Union. Dan, will you please tell us a little bit about your background and the credit union itself, as well as how the business loan program works at Seaboard? Daniel Kelley: Sure, Tom. I’ve been the Vice President of Finance and
the CFO with Seaboard Federal Credit Union here in Bucksport, Maine, since 2003. And in this position, like a lot of you folks, I probably wear many hats. I’m responsible for the accounting department. I do all the investments for the credit union. I’m also the compliance officer. But amongst all that I also manage the member business loan function, which
includes our small business lending program. And this is a good fit for me, because I’ve always been interested in small businesses. In fact, I grew up working at my family’s small automobile business. Then after earning an accounting degree I was a tax accountant in New York for several years. But the next 12 years found myself in the commercial banking field, where I worked in a variety of positions, including
a senior credit analyst, a commercial loan officer, and then I was a manager of a commercial loan department. So it was really pretty exciting for me to help our credit union be able to offer business loans. A little bit about our credit union, Seaboard Federal Credit Union, it’s a $118 million credit union. And we had been a SIG Charter to a local mill here in our town, but
we expanded into a Community Charter. And about the same time as we expanded into the Community Charter the credit union was looking to increase its outstanding loans, and at the same time some of our members were asking about small business loans. So in 2006 that’s when we started out our member business loans, both for over $50,000 and for
the microloans. And we did both because we didn’t want to just concentrate on the larger loans. There’s a lot of commercial banks in the area that were – the competition was pretty tough, and we felt that some people were overlooking the microloan-sized loans. So today we have about $650,000 outstanding in our microloan program and we’ve got about
$8.9 million in our total member business loan program. And although these microloans might seem small, these businesses are a large part of our local community, and to be successful we felt that we needed each other. Some types of loans that we offer, we offer members both secured and unsecured types
of small business loans. We do most things like vehicles, the equipment loans, working capital and real estate. Really the only type of business loan that we didn’t want to get involved with was floor planning. That’s kind of a specialized type lending that we didn’t want to devote the time to, so if someone
wants to do that type of financing, we’ll look at it only if we can have alternative collateral and make it some type of term loan. When we do our underwriting, we try to keep safety and soundness in mind, and we do look at FICO scores for the responsible parties, but we don’t have any minimum scores to approve a loan. What we do is when we review our credit
report if there’s any negative items on it it may require an explanation from the applicant, but the score is only one tool used in the overall analysis of the application. We do incorporate what is known as the Five C’s of lending, included the character or credit, the capacity or cash flow, capital, conditions and collateral. Now, for business loans, although
they’re all important, I always felt that the capacity or the cash flow is the most important, and what we like to see is a debt service-to-coverage ratio of 1.25 percent or better. However, in certain cases we also look at other sources of income, and strong personal income is considered, as well. For all these loan requests we do require
some financial information. We require three years’ business tax returns for all business loans. In addition, we require three years’ personal tax returns for any owner or guarantee that will be on the loan, and we also require a personal financial statement for all those owners or guarantors. In regards to the collateral,
it depends on how we validate the collateral value. We kind of do it on a case-by-case basis. We consider factors such as financial strength of the business, history with the member, what type of loan they’re actually requesting in the loan amount, and then we determine what should be required for review. We always document how their collateral
is valued and determine if that valuation is sufficient. For the larger loans, we will do physical inspections, or we may require an appraisal. Again, it depends on what type of property it is, as well. We do require personal guarantees on all of our loans for anyone that has the 10 percent or more interest in the business. The
only exception to that rule is for a business like a church, nonprofit organization and municipalities we do not require any guarantees on those. Startup businesses – the credit union enjoys trying to help a startup business. I find them personally really fun, but they can also
be risky. The idea was we didn’t want to alienate any future good member relationships, but we understand they do require more work, and as has been said earlier in this webinar, we do require startup businesses to provide projections for 12 months into the future as well as a detailed written business
plan before we consider a new loan. And, like you’ve heard before, we consider a new business any business that’s been in operation for less than three years. The only exception to the whole business plan, again, would be if it’s a small piece of equipment or maybe a vehicle where there’s other personal
income to the borrower where the credit union would grant that loan under the consumer lending requirements and the other income is going forward. On the terms of our loans, our maturity terms are generally short for the microloans. We offer both secured and unsecured lines of credits, and these are 12-month terms with
interest only, and they renew upon satisfactory review of financials. We offer unsecured loans up to 60 months. Equipment loans we generally do for up to 60 months, but we will go longer if it’s a larger loan and if the equipment estimated life is longer than the requested term, such as like a bulldozer or a backhoe. Real estate loans we do
up to a 15-year term, with up to a 20-year amortization, and with those longer amortization periods they would have a balloon payment. Interest rates, we do offer both variable and fixed-rate products. Our line of credits, we price them all off the Wall Street Journal prime, plus we use a margin, which our margin currently is between 0 and 5
percent, depending on the strengths and weaknesses in the loan application. Other loans up to five years, the term may be fixed, and for over five years we will fix the term for either a three to five year period and then reprice the loan every three to five years based on the same index spread. We set our rates on the creditworthiness of
the request and not just a FICO score alone. Overall, our average rates on microbusiness loans, they’re about 150 basis points higher than our consumer loans. And with the two-year Treasury being under 70 basis points rate now, a well-run microbusiness loan program can provide a decent return to the credit union.
Training – training obviously is important, and we look at both training and lending experience as part of our success in the business lending program. And, in addition to the training, what we do is we do not allow one person to approve any business loan. It requires two parties, and the way it works is a person with loan
authority will write up a loan presentation for the loan request with a recommendation that we do the loan. That presentation is given to another lender with member business loan authority, and they would have to sign off on it, as well. The way we look at it is more eyes are better, and that way there, if you’re
looking for a risk, make sure nothing’s been missed, and we think it helps in the underwriting process. Our training is completed in a variety of ways. Some of it is done in-house. We also send personnel to either CUNA training or webinars or other classes as they’re offered, whatever’s
appropriate. Our trainings have included underwriting classes, understanding tax returns, business loan documentation and SBA training. Delinquencies – luckily for us, this doesn’t happen often, but when it does the best advice I can give is communication is the key.
And here’s just what our credit union does. When a loan is less than 30 days past due but usually over 15 days we either send letters in or make a phone call directly to the members, and this is kind of a friendly reminder just to see if they have any problems, and maybe they overlooked a payment. If a loan goes over 30 days
but before it hits 60 days, we have the lender that actually approved the loan will contact the member directly and try to get a commitment for payment. And here it’s just important to remember follow up on that commitment. If they tell you they’re going to be in next Monday with $500 and Tuesday comes around and there’s no payment, then contact them again to find out what
happened. And then generally before a loan hits 60 days and it doesn’t look like they’re going to make a payment, the credit union management team that works with business loans will meet to discuss the loan in detail and determine what the best options might be to take. And for members that hit the 90-day mark and they do not have a feasible plan in place, then
we turn the loan over to an attorney for collection. Fortunately for us, we’ve had a very good success rate and we’ve had no delinquencies over 60 days in the past three years. For referrals, we understand that there are some times that members need some additional help, and we have referred people to either SBA or SCORE.
And sometimes a local organization, like here in Maine we have Coastal Enterprise, and what we like to do is we love to help our members, but there’s one thing we draw the line at and won’t do for them is we won’t actually prepare the projections or the business plan for them. Those are something that they have to
come up with themselves. For any product or program that’s been successful, our credit union likes to talk about them. And one success for the microlending program is when members succeed and they move on to a larger type of loan or they have to go to another lender because they’ve outgrown us. And we’ve had cases where several
loans, they’ve simply outgrown our maximum loan ability, and they’ve gone to a commercial bank. However, on those cases we’ve retained the member for their personal programs, and their employees have continued to utilize us, as well. And, although we like to see businesses grow, we also call it a success when
a small microloan business remains a small and viable business and continues to use our program to meet their business needs. And, like Melissa, we have a couple of success stories we’d like to share. The first one is we had a member that wanted to start a business in a field that they had previously been employed for a number of years,
but they left that business to try a recreational vehicle business. The business failed, and the member filed for bankruptcy. So while trying to restart another business after being denied at several banks, the credit union was able to grant a loan for only $3,500 for the member to purchase a used van to be used in the new business venture. And over the next
five years that business had over 12 term loans and a line of credit with the credit union and an aggregate total of over $450,000. And that business today for 2015 grossed over $8 million, and the member has stayed with the credit union all because of that initial $3,500 loan. And now they have the commercial banks knocking
at the guy’s door wanting to do business with him. And, fortunately for us, he remembers that they denied him in the beginning. The second success story is we had two engineers that they wanted to start a business selling insulated blocks for buildings. And what was different about their request is they only were going to do the business part time so these
two moms could spend time with their young kids. The credit union was able to give them just a $15,000 line of credit that was secured by a vehicle. The business has grown, and as they grew they required larger increases in the line to front the front costs on larger orders. And our credit union was able to increase the loan amounts as they grew. This business was turned down by a local bank,
but in the past year they did over $4 million in sales, and both owners are taking a good salary from the business. The business has gained recognition at the SBA as a minority-owned business, and that has been very helpful in them obtaining some municipal contracts. And, finally, words for wisdom. I don’t know how wise they are, but here are some of my
thoughts. When starting a microenterprise loan program I would suggest you be careful with the lines of credits. And why I say that is many members do not know how to use them, or they use them for inappropriate uses, and then they cannot pay them back as agreed. Therefore, you may want to consider offering lines of credit with a low limit
to start. My second point would be with the income tax analysis. I’ve seen some lenders look at a most recent year tax return, and if it looks good they want to do the loan. However, many businesses have fluctuations or cycle in their business operation, and it’s important to look at some trends. Sometimes maybe even using an average is appropriate. And also when
you look at the owner’s personal financial statement compare it to what they report for income. You should determine if the net worth makes sense in relation to what they reported for income. And along that lines, watch out for that business owner that claims they have unreported income, because if they are committing tax fraud, is that really a type of member you want to lend to? One
following point I’d like to make, and it’s been mentioned before, but that is to make sure that the board and the upper management are involved in strategic planning for the business loans to determine what the credit union wants to accomplish and at what level of risk they find it acceptable. This is important, because it’s not unusual for loan loss from a business loan that went
bad to be greater than a consumer loan. For example, if a car loan to a person goes bad you pretty much know what the value of a car is, but in some of these small business loans it may be specialized equipment like a laser engraver that we financed once, and that might have a very small market of people that would be able to use that type of equipment, so you may not
realize what you think it’s worth. I’d also recommend that you expect slow growth, and with the general short term of many of these microenterprise loans it takes a lot of work to maintain a portfolio and more work to grow. However, business loans can be personally rewarding for the employees working with small businesses. To me, it’s fun to visit these businesses
and have the owners give you a tour. Many times, the business will have additional needs, and a lender forms a friendship with them and you have more contact with them versus the average consumer. And if all that is done properly the program can actually be financially rewarding to the credit union. Tom Penna: Thanks,
Dan. Actually, I think those are some great words of wisdom. And you mentioned another great point. You can build a friendship relationship with your borrower, but you establish some good internal controls by having more than one person process the loan and approve the
loan to give you that sense of security that the friendship doesn’t turn into a giveaway. All right, that concludes pretty much the presentation. I want to inform you of a few webinars coming up in the future. We have one a month. Marketing and Social
Media, reaching out in the digital age, is our next webinar on August 10, as well as some High Impact Community Partnerships being developed in September. Please keep reviewing the e-Focus Newsletter to maintain the information available
on each webinar as they come due. And are you aware of the terrific search engine that we have at OSCUl? We call it FAQ+. It’s located on our NCUA.gov website. It’s in the Small Credit Union Learning Center. And
what you would do is let’s say you want to research a topic involving credit unions, type it in and ask OSCUl. If our database is complete and has information on it you can get a reference to that location immediately. It also allows us to build our data
profile when you ask some information that we may not already have, but we will research it and get back to you within 48 hours. Our contact, if you need to reach us, of course is provided. Feel free to ask us any information about any of our webinars, and of course our
webinars are also archived. And I’m going to turn it back to Kathryn, who’s going to tell you a whole lot more about the question and answers. Kathryn Baxter: All righty. Thank you, Tom. We have a few questions. I’d like to encourage the audience to submit some more questions.
We’re going to get into our Q&A in one minute. Don’t forget that if you’d like to get a certificate of completion that you had to be on this call for 45 minutes, you had to answer two of the three poll questions, and to get your certificate you will have to answer 12
of 15 quiz questions correctly. If you look in the right-hand corner of your console you’ll see two magenta icons. The one to the right is the one where the quiz is. The one to the left will let you know what your progress is. So if you answered two of three poll questions, it’ll
show that. If you’ve been on the call for 45 minutes it’ll show that. And then once you pass the quiz it will show that. Now, what I’m going to do as we go into the Q&A is I’m going to push out the survey, because we’d like to get your responses to this particular webcast. And
while you’re doing that – there it is – so while you’re doing that, the first person that I’m going to give the question to is probably the one that thought he didn’t have any, and that’s Tom. Tom, you have a question. Tom Penna: Oh, boy. Kathryn Baxter: You ready? Tom Penna: Sure. Kathryn Baxter: All right. So, Tom,
this is something that has to do with CDFI. So the credit union wants to know if they have to be low income designated in order to get a CDFI grant. Tom Penna: At this time I believe yes, you do. Kathryn Baxter: Okay. Tom Penna: And we can provide more information on that if you want to email us, and we can send you more
information on how to qualify. Kathryn Baxter: We also recently had a webinar that was promoting our CDFI collaboration with the Fund, CDFI Fund. So you should be able to view that webinar, if you didn’t get a chance to. In approximately one week it should be posted to our
website. So that will give them some more information. Tom Penna: Good. And one more place, of course, you can also use the FAQ+ and put in CDFI or Community Development Financial Institution. Kathryn Baxter: That’s right. That is correct. So, now, Tom, don’t go away. That wasn’t your only question. Here’s another one for you. Tom Penna: I
wasn’t a speaker. Kathryn Baxter: Okay. I’m going to give some questions to the speakers, as well. So one credit union talks about there’s a lot of constraints on staffing, especially for a small credit union, so they want to know is there a program that credit unions can take advantage of that’ll allow them to partner with other credit unions to offer microlending.
Tom Penna: There probably are, okay, and one of the best ways maybe to also contact your local leagues that may provide you with additional information on that. There’s other CUSOs that are out there that do member business loans or small business lending. Sometimes
if you go into the CUSO registry there’s an organization on CUSOs. I would have to get you that information later. But that might be one place to find CUSOs in your local area that may be participating in the member – either member business loans or even the small dollar business
loan programs. Kathryn Baxter: Okay. Awesome. So now I get to put our speakers in the hot seat. Tom Penna: Thank you, Kathryn. Kathryn Baxter: You’re welcome, Tom. Bill was the first speaker, so, Bill, I’m going to ask you a question. Okay? William MacMaster: Okay. Kathryn Baxter: So, here’s what one credit union
said, and this is a little bit of a long question, so I’ll read it slow. They said how do you identify the true purpose of a loan other than what the borrower has presented? If the borrower provides the purpose of increasing inventory and borrows $20,000 with A credit, good DTI, etc., if
it uses this for different purposes, how do we get more information? In other words, they want to be sure what they’re lending. William MacMaster: Well, purpose is simply follow the money. Okay? When they come to you and you look at your collateral, that will give you an
indication what the true purpose of that loan is, or whatever they use to support the loan is going to tell you what the true purpose of that loan is. So in some instances where you’ll see the borrower come in and say they want to borrow the money for X, however they’re actually using the
money for Y, and the true purpose of that loan would be what they’re using the loan funds for. Kathryn Baxter: Okay. Now, do you recall the question I asked earlier where the member had two loans, $25,000, and they were talking about the aggregate $50,000. This is a
continuation of that. So here’s what the credit union said. They said so if the second loan was for a personal vehicle, would it still be considered in the aggregate number? William MacMaster: If it’s for a personal vehicle no, because that would not be part
of the business loan relationship. The business purpose of the loan – now, let’s say that second vehicle was a business purpose vehicle it would be. But if it’s personal that’s separate from the sole proprietorship or whatever that business entity is. Kathryn Baxter:
Okay. Wonderful. Now, Melissa, are you still there? Melissa Marquez: I’m still here. Kathryn Baxter: Okay. You had quite a few questions, too. So here’s what one credit union asks. They said do you use consumer loan docs for these loans? Melissa Marquez: Yes,
we do. Kathryn Baxter: Okay, that was quick. So let’s ask you another question. So another credit union wanted to know what is your loan concentration? What’s your penetration on these, your micros?
Melissa Marquez: You mean our loan concentration – for our overall loan portfolio, or within the micro loan like what is the – what’s the concentration within it? Kathryn Baxter: Yes, the
second part. Melissa Marquez: Oh, the second one. So, I think of our $335,000 portfolio about $160,000 are in business lines of credit and the rest are in term loans. Kathryn Baxter: Okay. Fantastic. All right, now, let’s jump to
– everyone stay on the line. Let’s get a question for Dan. You there, Dan? Daniel Kelley: I am. Kathryn Baxter: All righty. Here’s what one credit union said. They said how do you figure the equipment’s estimated life? Daniel Kelley: Well, a lot of times
that’s kind of a hit or miss, as well. Generally if we question how long the life of it is we do require an appraisal on the equipment, and we kind of have the appraiser assign an estimated value, or estimated useful life to that. Kathryn Baxter: Okay. So now here’s another
question. The credit union wants to know – they’re saying, rather, that they’re wondering if obtaining annual financial information on well-paying micros, and if so are these being financially analyzed and underwritten again, I guess, if they’re having any type of problems. Daniel Kelley:
Yes, what we do is we require annual financials on all of our business loans, except if it’s real estate under $25,000 and equipment under $15,000 we waive that requirement. But we do get annual financial on all the other ones, and we risk rate each loan annually. Kathryn Baxter: Okay. All right.
We’re going to jump back to Bill MacMaster. William MacMaster: Okay. Kathryn Baxter: You ready? William MacMaster: Yes, ma’am. Kathryn Baxter: Okay. Let’s see. You have a couple of long questions here. Let me give you one that’s not so long. Well, actually, this
question was answered by Melissa. They wanted to know about the use of consumer contracts to underwrite the microloans. And here’s another question about that $50,000 example. So, here’s what the credit union says. Does
the $50,000 limit refer to the amount requested, cash given or the total of payments of the loan? Do you see it? William MacMaster: Yes, it would be the amount funded is the way it would be reported.
So, for example, you may give a line of credit, but you may not have funded the full line. So that amount of money that’s been funded is what’s applied, if I understand the question right. Kathryn Baxter: I think you got it. William MacMaster: If I may add –
Kathryn Baxter: Sure. William MacMaster: – there’s something important about using consumer loan documents in business lending. Okay? You have to be careful to specify a couple of terms in that loan document. And you can write them in to a standard consumer loan doc. For example, you
have to put in if you have requirements for financial statements annually. You have to state that in that loan document. You also have to state and identify the collateral requirements. And that could be handwritten in a memo section and initialed by
the borrower. Kathryn Baxter: Okay. Here’s another question for you, Bill. So the credit union says the way they understand it for an MBL over $50,000- this is a $50,000 loan – the loan officer must have two years’ lending experience in member business lending. However, they’re asking
are you saying that for MBLs under $50,000 you can use loan officers with internal training? Is that correct? William MacMaster: That is absolutely correct. And with the regulations moving forward that’s not going to exist any longer. Anyhow, what’s important is what kind of training
that the individual that is underwriting the loan has. You can have a person that has dealt with single-family residential loans, for example. They have a little bit more understanding of how the cash flows are related to the loan. Therefore, that individual may
be trained into understanding how to do basic cash flow analysis, and then that would make them qualified to do the loans and monitor the loans. Kathryn Baxter: Okay. So we’re going to jump over to Melissa. Melissa Marquez: Okay. Kathryn Baxter: All right,
Melissa? Melissa Marquez: Yes. Kathryn Baxter: We have had a couple of credit unions that have requested your email address. We will provide it, but do you mind saying it really slowly so that they can write it
down? Melissa Marquez: Yes, my email address is – I’m going to spell it out – it’s [email protected] coop. so my email is my name, melissa, at
genesee. coop, the name of the credit union. Kathryn Baxter: Okay. You have another couple of questions here. So, here’s what one credit union asks. They want to know how is it
that the credit union using consumer loan documents to document a business loan, especially for businesses that are not DBAs, how is that? Melissa Marquez: Well, we – that’s
what we do. We use our consumer loan docs. We don’t have an explicit you must give us your business annual reports or annual statements or tax. We
don’t require – we don’t – so it’s not embedded into that document. But we have – I mean, because we’re relationship lending, we just ask them for it. And no one in the – all the years that we’ve had it, no business
has said, “Oh, we’re not going to give them to you. ” And so from that perspective we just – members will ask them to meet with us and could they bring their financial statements and their tax records, and they just always do. This other part for the collateral purpose side
of it, it can get a little cumbersome if you have a lot of collateral that you’re trying to include, like a very specific piece of equipment. The document isn’t always that handy, and we do end up having to sometimes write it in to get all of that – any of the collateral that we’re using for the loan to
the document. Kathryn Baxter: Okay, Tom wants to add something. Tom Penna: I want to expand on that, Melissa, as well. Each state might be a little different, so the best way to understand what’s the proper document is always to run it by your attorney. Melissa Marquez: Exactly. Tom Penna: They will tell you what
the proper documentation is for your state and what best documents to use to ensure all the collateral is properly secured. Kathryn Baxter: It makes sense. So, Melissa, here’s another question for you. This credit union is interested in finding out what percentage you’re
reserving for these loans. Melissa Marquez: You mean in terms of for our allowance we don’t have a specific reserve for these loans. Now, I can say that in the early years of the program we had gotten some special
reserves through a grant that we placed within our allowance for loan loss, and I’m talking like $30,000, and then that was used when we had losses. We basically used that up.
But we don’t have any special reserves, depending on – it’s combined into our overall loan reserves. Kathryn Baxter: All righty. So now we’re going to jump back to Dan. Dan, you still there? Daniel
Kelley: Yes, I am. Kathryn Baxter: Okay. So bear with me. This is a long question, too. So here’s what the credit union is asking. Microloans are tough to make and in most cases require handholding, they said. So how are you able to break even on this venture,
considering the amount of time and resources required to make these loans? They basically are saying what are your tricks that you’re using to do this? Or your strategy. Let’s not say you have tricks. Let’s say you have strategy. Daniel Kelley: Well, I guess there are several things. Yes, if we were just doing a couple of small loans, I agree
that it is time intensive. But a couple of things is a lot of times the businesses that we see up here, once you do that first small loan, usually they come back for something else, and you get the repeat business. And also we’ve been pretty successful if someone comes in for a business loan and we notice they have a car financed elsewhere, or a mortgage,
then we can pull in their personal loans, as well. And our hope is that they grow and go into our member business loan package. But at any rate, with our credit union we happen to be flush with cash right now, so when we’re looking at our investment options, and because we were able to do all of our business lending with
the existing staff that we had, there really was minimal cost to add this program. So we’ve found it’s been quite profitable that way. Kathryn Baxter: Okay. So, Melissa, why don’t you address that question, too? The credit union basically wants to know what is your secret? What strategies are you using because
this adventure they said they think requires a lot of handholding? What do you say? Melissa Marquez: I do agree there is that element of handholding, or we’re a credit union so there is a lot of high touch with our members. But in the case of our microloan program the way we’ve – one of
the things we’ve really done is explored our partnerships with the local microenterprise technical assistance providers. So if we see a member who is really not ready to borrow, we are going to refer them over to one of those local resources, technical assistance providers, and that’s been
really important to us. We have good working relationships, so when – we’ll contact them directly and say this is what we think we need. This is what we’re looking for. And when that member is ready, they don’t come back to us. So we don’t – we do handholding, but it’s really in
the – on the borrowing side or not on the business development side. Kathryn Baxter: Okay. So, now, I’m going to direct this question to both you and Dan. So, Melissa, you can answer it first. I asked the question earlier, and I think the credit union submitted an additional
one, because they wanted to be specific with this. So they said what percentage of your loan pool, your entire pool, are microenterprise loans? Melissa Marquez: It’s pretty small, because our entire loan portfolio is $11
million. So, and we only have $335,000. So you can see it’s a very tiny part of our overall lending. But it’s been important to us to offer it and to develop the relationships with the members. Kathryn Baxter: What about you, Dan? Daniel
Kelley: Yes, the microloan is a small portion. It’s about a little bit less than 1 percent of our total portfolio. But our total member business loans is a little bit over 10 percent of our portfolio. Kathryn Baxter: Okay. So now, Dan, this question is specific to you, but, Melissa, you can
certainly chime in, as well. The credit union wants to know if at the annual review your debt service coverage ratio is less than 1.25, what action do you take? Daniel Kelley: If it was like for renewal of a line of credit we may decide not to renew it, but generally, unless we have a loan covenant in the document that says it has
to be that, what we might do is we might just downgrade their loan. We have a risk rating system from 1 to 10, and like a 4 will put you on the watch list, and we might have to set up special reserves for you. But the fact that you went below the ratio would not mean that we’d call the loan or anything. Kathryn Baxter: Okay. What about you,
Melissa? Melissa Marquez: I would say we would want to have a conversation with the borrower to just kind of go okay, what’s going on? Let’s look a little more closely about what’s happening with the business to kind of figure out what’s happening. And so it’s much more
on a personal level of trying to figure out where they’re at in how the business is operating. And typically what we’ve found is they know what’s wrong, and they’re trying to fix it themselves. And so the more they are aware of that and saying
what they’re doing about it, that’s the more comfortable we get with just continuing our business relationship. But if a business is saying to us we’re going to be closing, we’re going to close the line of credit, because it was specifically given for the business, so it won’t be open for
advances if the business is going to close. Kathryn Baxter: Okay. All righty. Let’s jump back to Dan. Actually, this question might be for Bill, so, Bill, listen carefully. This is that $50,000 question that’s not going away. You probably should’ve used another number. Here’s what the credit union asked. They said, did I
hear correctly that you get a third party equipment appraisal for the commercial loans for $50,000? Was that you or was that Dan that answered? Daniel Kelley: That was me. This is Dan. Kathryn Baxter: Okay, Dan. Daniel Kelley: We may require it, yes. What we do is if it’s something that we can get a Blue Book value on or something, we wouldn’t. But if it’s a
unique piece of property and we have no way of evaluating it using best commercial practices we would require an appraisal, yes. Kathryn Baxter: So now here’s a follow-up question to that. This other credit union wants to know where can they get an equipment appraisal. Daniel Kelley: Well, I don’t – I can’t speak for where they are, but
in Maine we actually have a couple of people that are appraisers that they charge $125 per piece of equipment to do an appraisal. Kathryn Baxter: Okay. Let’s see. So for those that are still on the call, if you have any more questions that you want to ask now is the time. I have
another long question. Let’s see if I can give you pieces of it. This is still you, Dan, and Melissa, certainly chime in on your side. Here’s what the credit union says. Do you have any issues with your microloans becoming MBLs because you have a
consumer who is also a business owner who has a home equity line of credit on a rental property? Does that make sense? Daniel Kelley: Yes, I don’t know what really – I mean, I guess, let me back up a second on that one. We do all of our,
whether it’s a microloan or an MBL, we do it all on MBL docs, we don’t use consumer loan docs for any of our microloan programs. But, yes, we have no problem if people – our aggregate’s $1.4 million, so if people have multiple consumer and business loans we do aggregate them together just for whether
we meet our internal cap. But we have no problems with what type of loans they are. Kathryn Baxter: Okay. Melissa Marquez: And this is Melissa. I would just add that we monitor to make sure that the total borrowing is not going to go above the cap. Kathryn Baxter: Okay. So now – I’m sorry, Tom, did you have something you want
to add? Tom Penna: Well, I think Bill said it a little earlier, too, just remember, the personal loans will always be separate from the calculation for an MBL. I mean, personal like if it’s your personal home, your personal auto, a home equity on a one- to four-family residence that is your residence, as
well, is excluded. When you get into MBLs there are exclusions that will not be included in calculating that MBL, and a lot of that will be covered in the E&I presentation, as well. But just remember to keep the personal loans separate from the business loans, you should be okay.
William MacMaster: Well, there’s an important point, and Melissa hit the nail on the head. You still have a cap to one borrower regardless if it’s a personal or a business loan. The cap to one borrower is the aggregate of all loans. And the way it’s
reported is separate, okay, thisis very important. But, the regulatory cap to one borrower is to all the loans. Kathryn Baxter: Okay, so, Bill, you have a question with regard to the regulation. So, the credit union says that you mentioned that the regulations
were changing. Is the requirement of two years’ commercial lending experience to be eligible to be make business loans in excess of $50,000? If so, is there a time frame on this? William MacMaster: Okay, and I’m going to answer this in a very specific but not
direct way. Okay, the Federal Register has the final draft of Regulation 723, and it’s available out there right now for you to review. And, the second part of my answer, is E&I is working on a webinar, and they will be covering
this in detail. So, I would rather defer to that presentation at this time. Kathryn Baxter: Makes sense. So now I’m going to – this is probably going to be our last question. I’m going to bounce this to both Dan and Melissa. So here’s some clarity on that question that we
had earlier. So the credit union says – they’re giving an example here – they say $15,000 for an alignment machine, but the member also has a home equity line of credit of $40,000 on a rental property. The $15,000 loan would now be an MBL per definition. How do you manage that? That was the question. That’s what
they want to know. So anyone can answer that question. Daniel Kelley: Well, I think – I guess as far as managing it, I assume they mean for reporting it on their Call Report? Kathryn Baxter: Yes. Daniel Kelley: And what we do is we have some – it’s done automatically for us by how we code loans when
they’re put in the system, and it’ll give us a detail report, and it actually fills out our Call Report information for us. Kathryn Baxter: Tom? Tom Penna: It’s the full amount of that second loan gets reported as the MBL, not just the portion that goes over $50,000. William MacMaster: But the question said $15,000. Kathryn Baxter:
Yes, there was $15,000 and then $40,000. Tom Penna: Yes, it’s the full amount of the loan. Kathryn Baxter: Yes. William MacMaster: Okay. Kathryn Baxter: Okay. All right. Did you have anything you wanted to add, Melissa? Melissa Marquez: No, not really. Kathryn Baxter: Okay. All right. Well, I guess what
we’re going to do at this particular point, whatever questions we didn’t get to we certainly will make sure they get addressed. When we load the webinar to our on-demand site the Q&A will be visible for everyone that submitted a question. I have
one last question for both Dan and Melissa, so one credit union says they would like to know how many staff members are employed by each of your credit unions. Melissa Marquez: Well, this is Melissa. We have seven full-time
employees and three part-time employees. In terms of our business lending, I definitely am involved in almost all of our business lending, as is our loan officer. We make our decisions together. Kathryn Baxter: Okay. Daniel
Kelley: And we have 37 employees in total, 34 full time. We have one business loan officer. We have a person that has a split job duty, and part of it is she does credit analysis work, and then I manage the program. Kathryn Baxter: Okay, fantastic. Sounds good. So
what we’re going to do, we’re going to end out our webinar here. Thanks everyone for joining us. We thank our speakers. We thank Tom for being our host today. We thank Bill MacMasters, Dan Kelley and Melissa Marquez for being our speakers today. We also thank Franz Ayento, who is our
behind-the-scenes IT guy, and ON24, who is our webinar host. I’m Kathryn Baxter. For Tom Penna and the rest of the NCUA team, we’d like to tell you all to have a wonderful
afternoon and a great week.

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