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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU 2.0 Podcast Episode 383 MBFS's Mark Ritter on Member Business Lending Now
Mark Ritter, CEO of Member Business Financial Services, a Pennsylvania based CUSO, estimates that about 800 US credit unions do member business lending, meaning that perhaps 3700 don’t.
Many, many more could. That is spelled out in HR 1151, the law that lets credit unions serve more than one employer group. Passage of that law is detailed in CU 2.0 Podcast Episode 51 with Marc Schaefer, then the CEO of Truliant CU.
If credit unions can make small business loans, why don’t they - that’s a question Ritter asks and answers in this show.
But it also is very clear that he believes credit unions - and their members and communities - would be better served if more credit unions jumped into member business lending. The need on the part of small businesses is acute, many are turning to non traditional lenders who may charge as much as 40% APR. Credit unions can play an important role in helping their communities' small businesses, says Ritter.
Understand, too, that a CUSO like MBFS - and there are several competitors in the space - may source the loan, it will underwrite it, MBFS will say if it thinks the loan is a definite “yes,” a definite “no,” or - most likely - a maybe. And if it’s a maybe MBFS will relate the pros and cons of issuing the loan.
The credit union provides the loan capital. MBFS does the heavy lifting.
In the show Ritter offers his unfiltered outlook for commercial real estate loans and also predicts a bump in delinquency rates - and yet he is bullish about member business lending in general.
Ritter, by the way, has his own podcast. Tune in for deep dives in member business trending.
Listen up.
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SPEAKER_00:Hi, and welcome to the CU2.0 podcast with big new ideas about credit unions and conversations about innovative technology with credit union and fintech leaders. This podcast is brought to you by Quillo, the real-time loan syndication network for credit unions, and by your host, long-time credit union and financial technology journalist Robert McGarvey. And now the CU 2.0 podcast with Robert McGarvey.
SPEAKER_01:Mark Ritter, CEO of Member Business Financial Services of Pennsylvania Base Custo, estimates that about 800 U.S. credit unions do member business lending. Meaning that perhaps 3,700 don't. Many, many more could. That's called out in HR 1151, the law that lets credit units term more than one employer group. Tacked into that law is language pertaining to member business lending. The passage of the law, by the way, is detailed in TU2.0 Podcast Episode 51 with Mark Schaeffer. And it's TEO2ISTU. Now back to member business lending. If credit unions can make small business loans, why don't they? The question reader asks and answers in this show. It's also very clear that if we use credits and their members and communities would be better stirred if more credits jumped into member business lending. The need on the part of small businesses is acute. Many are turning to non-traditional lenders who may charge as much as 40% APR. Critians can play an important role in helping the community's small businesses, et cetera, now help their communities too. Understand also that accused are like MBFS, and it has several competitors in the space. If it's a maybe, MBFS will relate the pros and cons of issuing a loan. The credit union provides the loan capital, it makes the final decision on the loan, it sets its parameters of what it will lend to and what it will not lend to, and then MBFS does the heavy lifting on each individual loan. In the show, Twitter offers its unfiltered outlook for commercial real estate loans and also predicts a bump in delinquency rates. Yet he's bullish about member business lending in general. Twitter, by the way, has his own podcast. There's a link to that podcast in the show notes. Tune into it for deep dives into member business lender. Listen up. Oh, I enjoyed, by the way, your show that you did with Todd Harborough. I've done shows in the past about 1151, so I knew about that. I didn't know the uh member business banking link to 1151.
SPEAKER_02:Yeah.
SPEAKER_01:Yeah, that was all revelatory to me.
SPEAKER_02:You know, and I have told people that was the best and worst thing ever for their industry because before 1151, there was probably 15 or 20 credit unions nationwide that did business lending. And it just was one of these things that didn't hit the radar for people. But once they put the cap in place, all of a sudden it spurred people getting into business lending.
SPEAKER_01:Right. In a way, it was a green light. They said, oh wow, we can actually do this.
SPEAKER_02:Yes, before it was basically left unsaid. Uh the in here in Pennsylvania, almost all the business loans that were done were Amish loans with the Amish credit union. And that was it. Uh and it was just one of these things. Well, you could do it, but we really don't regulate it. And you know, it's out there. And it and that's you're right. That gave it the green light to say, oh, you can do this up to uh this much. And then it became the wave of QSOs being formed. There was a whole wave of QSOs kind of formed in the same era. And then people said, Oh, not only am I can I do business loans, here's a way to do business loans that's a little bit easier for me. Because when when I started, I started in credit unions in 2001. And I like to say, you know, it was basically the wild West Lewis and Clark for getting business loans done. You you just had to figure it out. There was nothing.
SPEAKER_01:Now how many competitors do you have, fusel competitors in the member in the business loan space?
SPEAKER_02:Uh I would say for people like me, I I think there's probably about 15 or so of us. Um, and that number is stretching it. Uh, probably in people that are my size, we we probably have about six to eight. And there's several very small people around the country that maybe just work with a handful of credit unions in their neighborhood, uh, not that big, but there's probably about six to eight of us. And it's really uh a business that you have to have scale to make it worthwhile. It is because you're starting the the investment on the front end is brutal in today's world with software costs and people costs, and and you have to have a base of clients. Uh, otherwise you'll you're just losing money for years. Uh and you know, going back, I've looked at an article from about 15 years ago of uh the when all the QSOs started working together, and there's only half of us that's still in business. Uh so there's even really been a consolidation of this time, and some people have gotten into it and say, no, we we can't make money doing this, or we can't even break even. So that's why I think you've seen the market mature a little bit to uh a couple people who who have the scale to stay in it.
SPEAKER_01:Well, there's also more non-traditional lenders coming into the small business lending space with very high interest rates, but they're willing to make um riskier net loans, I suppose.
SPEAKER_02:Oh, typically they average in the high 30s and for close to 40 percent. And it got to the point where they couldn't price for risk because once interest rates skyrocketed and these rates started going up in small businesses. I mean, the people who had took those loans weren't the greatest credit quality to begin with. And you know, you had these people, you know, anybody who could uh you know, steam glass with their breath could get a loan. And then it just spiraled. And uh you've seen even a lot of them go out of business because of liquidity, the interest rates increasing, and just that top softening of the small business space.
SPEAKER_01:So it is and also those guys did not have the uh organized crime muscle that the past generations could collect on the loans, or at least the thread of the muscle would would create collection. Whereas these guys um didn't have much of anything really in that regard.
SPEAKER_02:When you're you know you're you're getting a fintech loan online, it's not like like you said, you know, the local, even the local bank or the local lender who's knocking on your store saying, give me my damn money, you know, what's going on? You you really didn't have you don't have a uh affinity or scare that somebody's gonna be coming after you.
SPEAKER_01:Yeah, when I was a kid, every factory in New Jersey, probably in Pennsylvania too, had a uh loan shark.
SPEAKER_02:Absolutely.
SPEAKER_01:Yeah, this was this was the so-called five for six man. He'd give you five, and on payday you'd give him six, which was a hell of a good interest rate. It's uh uh but that they there were those guys were omnipresent in factories. Uh often it was one of the workers or a foreman or something. Not necessarily a guy working full-time on that.
SPEAKER_02:But my father was a union electrician for years in the coal region of Pennsylvania and has told me the stories of uh you know, once in a while when he had to go and uh you know pay his pay the bills back when we were younger, he would walk in and uh just stacks of cash and guns everywhere.
SPEAKER_01:Well, back back in those days, there were very few places for your father to go and get loans. I know that because I'm older than you, but my father had very few options for getting loans. So even if if the car engine blew up, it was it wasn't a clear-cut way. You have went to like beneficial finance or household finance, both of which were legitimate businesses, but they charged pretty high interest rates.
SPEAKER_02:Particularly where I grew up in the ethnic communities, where these were closed communities where people worked and stayed within their network and they did business within their network for in their community and ethnicities for better or for worse.
SPEAKER_01:Now, how many credit unions at this point have what you would call a serious commitment to doing member business lending?
SPEAKER_02:So I have I I have actually due this data. And I consider somebody who's into business lending, if they do one loan every other month. I I've kind of set a low bar. I've set that bar at six loans a year. That's a pretty, you're right, that's a pretty low bar. And that is about 800 credit unions in the entire nation that fit into that. And if you actually throttle it up, you you're you're to you know a pretty good volume. You're talking into maybe a hundred, hundred and a quarter, depending on how you define that. And that number of six loans, I've act it that has not moved at all in the past 10 years. You're seeing volumes of business loans really increase. It keeps going up, up, up at a nice steady pace. But it's very concentrated among those top 150 credit unions. You're not seeing the depth that I think it should. And it really just that that's disappointing to me. I I really think the you know, that we need a deeper bench in credit union business lending because it'll help the smaller and mid-sized credit unions survive. And I think also those small and mid-sized credit unions, I hey, listen, I have a lot of friends at really large credit unions, but those small and mid-sized credit unions have a much better touch neighborhood-wise in their communities. So I think it's a win-win, but people continue just to stir the pot at it.
SPEAKER_01:Why would a$500 million asset credit, which, if it's reasonably well run, would have the liquidity to make some business loans. Why would it say no? We're not interested in that business.
SPEAKER_02:Yeah, I I I think what the biggest issue becomes fear. I haven't done that.
SPEAKER_01:Well, that is that is the worst four-letter word in credit union speech. It's uh we go to the boardroom and you say, What's the dirtiest word? Four letters, fear.
SPEAKER_02:It's uh I I haven't done that. I don't do that. I I once had a credit union CEO look at me and say, I have another 10 years of my career. All I want is for nothing to happen. I just we want to keep it with that. They would they would rather, I call it management by avoidance, rather do nothing and have nothing happen in that area than okay, you do 10 years of loans and you have one go bad and everybody makes a big deal about it.
SPEAKER_01:It's that well, that's another thing credit unions do that drives me nuts. You know, in in in the fintech world world, you know, the motto is fail fast. But built into that is there are going to be some failures. There are gonna be. And the credit union they try they want a zero delinquency rate, a dear a zero foreclosure rate. These are not realistic goals.
SPEAKER_02:Small business lending is I cannot think of another area where people are so proud not to do well. People will, oh no, no, no, we we we don't do small business lending. No, no, no. Well, well, guess what? Your members do. You would never say that about auto loans. Oh no, we're not good at auto loans, we're not good at mortgages. But for some reason, people give themselves a pass and sometimes look at it with a badge of honor to avoid this segment of their community and their members who need the financing, who need their help, who are looking around and have hopes and dreams and and create jobs. And and we just give it a pass at times. It now now there are, like I said, there are some people that do it great. I have some people that do it great. But if you look at the call report numbers, you're looking at over 3,000 credit unions with zero business loans on their books. That's a crime.
SPEAKER_01:And I've talked to CEOs of decent-sized credit unions in rural America. I've asked them, would you a member of yours is is a farmer, a member wants a loan to buy a tractor. Tractor's going to be six figures. Uh, would you make the loan? No. And because we we don't we don't do farm loans. I said, well, that's kind of like a car loan. It's just not a car, it's a tractor. It's not still still wouldn't do it. And the mind is just closed on that.
SPEAKER_02:I just did a uh uh podcast episode with Phil Love, who runs a QSO in the Midwest, and they are very heavy into ag ag loans uh because of their location and credit union base. And we and I talked a lot with him about it, and it you know, we're we're talking about such a crucial industry in America. A you know, and we're we're not talking about an elitist institution. This is the industry that feeds America, that feeds your members.
SPEAKER_01:That's and every everybody's complaining about the death of the family farm, the death of the small farmer. And I view that as tragic myself. But these are the very people who often need to borrow a little money to buy that new tractor. Yeah, the the mega company that owns half the land in Kansas, they they have financing ways. They know how to raise money.
SPEAKER_02:Yeah, and and it's it's a shame because this is, you know, we talk about community-based financial cooperatives. And that this is your the communities that you're in, but we sometimes segment them off and say, oh, we we can't do that. Uh, you know, we have this community charter, we're here for open everybody, but we we lop off certain segments and of people who you'll give them car loans, you'll give their family car loans, you'll give the people who work on the farm financing. You're in you're in bed with these the farmers in your community, whether you like it or not.
SPEAKER_01:So if you want if you want that that guy to pay off his car loan, it would help if you keep his business growing.
SPEAKER_02:Yeah, absolutely. It's it's mind-blowing on why we can't get people to look at, you know, drive around to your neighbors, drive around to your towns, particularly for these people that have a community charter or are within a pretty tight segment. You know, and yeah, there's going to be some things that you can't do everything to everybody at all times, but this is pretty commonplace of the businesses in your community that need funding uh and helping them out and helping them grow. It it's time to be able to do that.
SPEAKER_01:I think it's equipment, equipment. It's basically a car line. You can repossess a tractor.
SPEAKER_02:Yes. Uh it's it's hold value.
SPEAKER_01:And it's predictable value if it's a name brand. If it's a John Deere tractor, I don't know who the big tractor makers are, but if it's the name brand, it will it will hold predictable value. So it's it's not a crazy loan. Now tell me how your business is structured. The credit union member of the Q Zone puts up money for the loan, they fund the loan. What do you do?
SPEAKER_02:So we we don't we are not a direct lender. So when you get a loan, you nobody's getting a loan through MBFS. So we we are the life cycle is that we have a team of lenders out there that work with the credit unions in a region, and they either get referrals from credit union members or they're kind of pounding the streets, knocking on doors, looking for prospects. Or we do have a base of credit unions that do that function themselves. And, you know, once you have all the interviews and gathering financials, and this is what we're due. So we'll take that loan and underwrite the loan and give them a package that says, this is clearly a yes, you know, this is clearly a no. But most of the time we say, okay, it's somewhere in between. If you're going to do the loan, here's things to consider, here's conditions to get done. So once they help, once they make the decision on the loan, then we really are that back office uh that helps people close the loan. We help out with the appraisals, we have a loan doc system, and then we have a servicing platform too, because a large chunk of our portfolio is participated up out among credit unions of them working together. So, you know, I kind of like to think of us as that whole back office operations. You know, we we are that front-end member-facing situation for a chunk of our loans. We think of us as kind of that back office chunk, you know, doing the X's and O's to support the whole commercial lending process. And we get paid, you know, similar to an attorney office. It's okay, we did this service, it costs this much money. And uh most of the time that's passed through to the members on their on their balance sheet. And uh, but but really also what we'll do, you know, and this isn't the money making piece, but just really kind of being there for the credit unions on, you know, I'm having this situation, how do I help it? We help them get started with good policies and help creating credit culture. You know, it when the NCUA is there, there we're we're having this working with them side by side. Um, but you know, our revenue sources are those, you know, fee for service things like the underwriting, loan origination, documentation, servicing. You know, our servicing portfolio right now is just a little over$3 billion, which is right in line with just about any QSO out there in the country.
SPEAKER_01:So, I mean, to go back to where I started, the credit union basically needs to have some money that it's willing to lend. Yes, that's essentially all they need to do.
SPEAKER_02:Correct. You know, and back in the old days of the CUSO world, you used to be able to point at the, you know, NCUA would come in and say, I have questions, and you point at the CUSO and say, go ask them. Now you you you you don't have to be an expert in commercial lending, but you have to understand what's going on the books. We have to be able to understand the risk and how it fits into your risk profile. You don't have to know how where to place every number in spreading software. That's our job.
SPEAKER_01:But each credit union has the opportunity to set its own underwriting standards. Correct. I do not want to do marijuana business, marijuana business loans, for instance. Others others will say we really send all the marijuana loans our way. That's fine, it's up to each credit union. And is and I assume that's the way all your credit union members, that's how they work.
SPEAKER_02:Exactly. You know, people always ask me, well, do credit unions do this? And usually within our block of credit unions, somebody's doing something just about everything everywhere. You know, it's not a fit for everybody, but that's the nice thing with Accuso is you know, we can move uh businesses around to somewhere where it fits.
SPEAKER_01:And you bring some of the business to the credit union, too, then uh from what you from what you said.
SPEAKER_02:Correct. You know, the commercial lenders are a real pain in the ass. Uh, you know, they they make a lot of money, they're they're they're all they're tough to manage, and you know, you when you throw them into a credit union, sometimes it really throws off the d the dynamics. So that's why.
SPEAKER_01:Well, I I I I I talked to and I'm sure you, I'm sure you could actually, I'm sure you remember the exact situations a couple times in recent years, not super recent, uh a few years back, credit unions have bought often a small bank, and you ask, why do you want the bank? And it's uh oh, it's the commercial lending department. You check with them like a year later and you say, How's it going? It's not going too well in most cases.
SPEAKER_02:No.
SPEAKER_01:Uh and so those relationships didn't translate from ABC Community Bank to the credit union immediately, which is what the credit union people thought, even though the people transferred. But maybe the relationship was actually not with the lender, but with the president of the community bank. Maybe that's the guy you played golf with on Saturday. That's kind of what they were missing.
SPEAKER_02:I I always tell people always ask me about hiring lenders. And I'll say the worst hire you can make is the 30-year, you know, the 30-year veteran who says, all my people are with me, and I've never made a bad loan, and I have a loyal base of people, because I can tell you that guy hasn't originated a new customer in probably 15 years. And the other piece is just because he has a particular type of customer doesn't mean you want to do that. You know, it it you want you want uh what I call the young and hungry, people who are out there working the streets, working with businesses, you know, you you form those relationships in the community and and you keep hustling. Yeah.
SPEAKER_01:Who needs to loan? It's the 35-year-old small business person.
SPEAKER_02:Yes. It's not it's not a good thing.
SPEAKER_01:I mean, it's a generational thing.
SPEAKER_02:Exactly.
SPEAKER_01:Nothing wrong with that. Now, I listened to one of your recent podcasts, and you said that you had concerns about delinquency rates rising, not to a critical point, but actually, I if I remember what you said, you said essentially delinquency had been at zero for several years. So a one and a half percent delinquency rate looks like an explosion, which mathematically it is. So are you still thinking that way?
SPEAKER_02:Yes. And and and I remember in in twenty every presentation I did in 21 and 22, I told people your delinquency is zero. You're not as smart as you think. It's just that liquidity is swimming everywhere. People have been given tons of money. Rates, you're doing these commercial loan rates at 3%. Well, at 3%, just about any idiot can make a loan work. Once rates rose, the the the we found out who the weak people are to historically normal rates. You know, everybody's talking about oh, rates are high. Doing rates at six and a half, seven percent is just called life, and that's pretty normal. So you we we've seen this continual bump in delinquency. You know, we how many loans did we do in 21 and 22 to these huge office buildings? And in they were all done on five-year rates. So five years from now is gonna be 26 and 27. So look out. Look out. It's you know, I always say the bigger your market area, the bigger the loans, the bigger problems you're gonna have. In smaller market areas, smaller size loans that are more low steadier. I don't, it's it's we're really not seeing a bump in the road. These big loans in big cities, it's a mess. And next year and the year after, it's gonna be worse. And a lot of people, these originators did these loans and sold them all throughout the community as the best loans. And at the time, everybody said these are the lowest best quality loans out there, these office buildings. And now, you know, the Piper is going to have to come do where the valuation and occupancy just isn't holding up. So I think we have another couple years of this shaken out. Typically, when credit unions have had delinquency cycles, it's been very concentrated. What I'm seeing now is delinquency much deeper than we've ever seen in the credit union industry.
SPEAKER_01:Well, explain that.
SPEAKER_02:Back in the Great Recession, you know, we had the Miami condos, we had the California condos, we had church loans. And really, when you looked at it, might have had 10 or 12 credit unions involved in that.
SPEAKER_01:Well, you go back to the SNL crisis in the late 80s, that was essentially 10 SNLs or thereabouts. I'm not saying Ward didn't have a fingerprint on it, but there were Lincoln savings, for instance. There was just a handful that did the majority of those loans.
SPEAKER_02:And you're seeing, but now in the credit union space, you see a lot of people who either they bought into loans, the the big originators sold billions of loans a year as participations, or they just did it them themselves. And there was a lot more credit unions out there doing these larger office buildings because it's easy work. It's much easier, you know, as a lender to do a six to ten million dollar loan and go play around to golf than bust your hump, you know, doing three to five hundred thousand dollar loans to small businesses. And that's what a lot of people did.
SPEAKER_01:But well, the the commercial, the the office building market. I live in Phoenix in the office building market here. And I'm just saying this from what I see walking around, it has to be horrendous.
SPEAKER_02:Yes.
SPEAKER_01:I I I can. Could show you two or three vacant, reasonably new buildings within a mile of where I live. And they're just sitting there falling apart, you know, broken windows, blah blah blah. I mean, I they're just waiting to be torn down, I imagine.
SPEAKER_02:I I almost think at some point, you know, uh there's a few buildings that can be converted into residential. You know, we have an inherent lack of housing in this country.
SPEAKER_01:That's a really expensive proposition.
SPEAKER_02:But it's very expensive. And many times, because of ingress and egress in the elevators, it's just not possible.
SPEAKER_01:Well, it's it's and there's a BMO, a beautiful BMO, Bank of Montreal building, Corner Academy Bank and Central Prime Real Estate. Uh, and that's been in the conversion process for at least a dozen years. I think it's gone bankrupt twice. Um it's uh so I think ownership changed and went bankrupt again, if my memory's right. It's uh construction seems to be stalled yet again. It's it'd be a beautiful apartment location, it really would be. But it's yeah, it's it's not just the elevators, it's also things like there tends to be like uh more limited water stacks. So, how do we get water to the to the corner apartments, which will probably cost more in the first place, and they kind of are gonna expect water? It's uh uh stuff like that. So it's it's not a I wish it were easy to do because it would be a magic wand, but it's not.
SPEAKER_02:It's not. And many people, you know, I I had one built one of our credit unions, they had a building, single tenant national public company, and they emptied out the building, and the the building literally got bulldozed over trying to build a uh retail and residential uh complex be because people are just trying to do anything they can to turn these just dogs that are going to be dogs for decades if they ever come back and uh and make them uh and make them possible. And I say this as somebody realize I'm sitting in my home office to a completely virtualized company. Uh you know, I I don't think these white-collar jobs are coming back to big city or just office park skyscrapers.
SPEAKER_01:How many employees do you have?
SPEAKER_02:60.
SPEAKER_01:60. And so they're all virtual. There's no no office that they can go to.
SPEAKER_02:We we have an office. Uh, if somebody set off a bomb in our office, there would be no casualties. Uh we we have somebody go in twice a week to check the mail and see if anything else is goofy is going on. Uh, I go there maybe once every two months. Uh, and and usually I'm in there for an hour, and that's about it.
SPEAKER_01:Now, do you have any any members of your QZO that are still actively doing commercial real estate loans?
SPEAKER_02:Commercial real estate, absolutely. Office is it office is like doing Miami condos in 2008. That's that business is dead.
SPEAKER_01:Or do them today. I think condos are pretty slow on the market right now.
SPEAKER_02:Yeah, and uh and and now also, but keep in mind I that one of the big factors is work from home. And what I find is in our small cities, in our third-tier cities, work from home isn't as big of a deal. You know, you you these towns where you can drive from one end to the other in 10, 15 minutes, uh, it's not an issue to call your people into work because they can drive into work, they can go home for lunch, it's it's not a big deal. So we're we're seeing small towns, small cities, mid-sized loans. They're still doing these loans and the performance is great. But if if you know my my wife used to work in Center City, Philadelphia in a big tower, and it took her an hour and a half, and people just said, I'm not doing it. So, so those are the areas where where traffic uh is an issue. You're in these big areas, it's the white-collar laptop class, you know, who says I'd rather be from home. Uh, you know, for me, it's more of a business decision on the work from home because I I can hire people in second-tier cities who are great and have a ton of experience, and I can pay them a nice salary where they don't have there's not a lot of competition for jobs and they love it.
SPEAKER_01:Now, a few minutes ago, you mentioned loan participation. Is that still a big part of your portfolio?
SPEAKER_02:Yes. Yeah, and we're seeing last year the commercial loan participations and participations in general couldn't get any lower. This year, people are calling us up saying, what do you have? What do you have? What do you have? And it comes down to two areas. The first is they can't make that all these other loan segments are just dying, drying, dying at the buying. Uh cars are okay, but they're not at the pace that they were, and they pay off so quickly, then there's no there's no source coming in to replace it. And even you know, the mortgage business is slow, you know, a lot of those consumer loan areas are slow. So people are looking at us just because the business lending area tends to be more consistent, but also the liquidity's back. You know, last year people just said, I'm squeezing every nickel I can. We're not doing commercial lending just because I'm trying to save every dollar for internal people, uh, for car loans and credit cards and the like. Liquidity is back, and they there's not many other sources. So, you know, our business is as good as it's been since 2022. And you know, I don't we're not we're not quite at that level, but uh it's pretty damn good.
SPEAKER_01:Well, the home mortgage market is very slow, and from what I'm reading, the automobile market isn't particularly robust. So there should be some money floating around available to land.
SPEAKER_02:Yeah, and the one nice thing about the business lending area is it you know it peaks and bat, it peaks a little bit, but generally it's very consistent. There's there's always businesses looking for capital for their businesses, there's real estate investors looking to for for deals. So when rates are going up, we stay particularly busy. When rates are going down, we're a little bit busier. And you know, most of these loans are written on five-year loans. So every year, about 20% of the market is coming up with opportunities.
SPEAKER_01:If there's liquidity, why are credit unions interested in participation rather than sole ownership?
SPEAKER_02:Because they they they're looking for demand, they're looking for opportunities because the property values are still fairly elevated. And what you're also seeing is a generation of credit unions that are finally having concentration risk and have to sell off because they're reaching their regulatory caps, they're reaching caps to one borrower, they're reaching just general diversification. So people are selling up quite a bit more when they they could finance this whole loan internally, but many times they can't or they shouldn't just because of risk management, because credit unions have been in this while now, portfolios are maturing, and you know, people always thought, oh, we have this 12 and a quarter limit. Yeah, I'll never get there. Well, they're getting there.
SPEAKER_01:Now tell me about the a cap on an amount of a loan to an individual borrower. What is that?
SPEAKER_02:Generally, for federal credit unions, it's 15% of net worth. So if you have a uh you know a billion-dollar credit union and they have 70 million net worth as the bare minimum, you're talking 15% of that. So, you know, they could do loans up to 12, 13 million dollars in range, which for most credit unions is is, you know, they could finance a city block for that in some of these markets. Right. Right. If you're you're in DC, New York, you know, that that's not an enormous property, but it's a lot of money. So really, you know, we don't see too many people who regularly want to fund up to that limit. They might go there for more. And when people hit that limit, it's normally a group of loans rather than an individual loan. Uh, because you know, that white knuckle number at 15% of net worth for an individual loan is a big, big loan for most credit unions.
SPEAKER_01:Right. And they are very risk-averse people. Yes. So better to spread this around, I suppose. And also the the mechanics of participation, there's a lot of automation there. It's a lot simpler and easier to put together a participation deal today than it was 15 years ago. 15 years ago, you had to get on the phone, call the CEO of XYZ credit union down the street, say, hey, you want a piece of this?
SPEAKER_02:It's uh and and I I mean, we at Members First, when I started out, we were literally doing these on a spreadsheet. And and like every loan was a manual process. And now, like you said, buying and selling is a little bit easier with transferring data back and forth. Calculations on servicing is a little bit easier. So, so technology has really helped out on that piece.
SPEAKER_01:Yeah, this is a generational thing, man. When I started, you did it on an HP calculator.
SPEAKER_02:Yes.
SPEAKER_01:The spreadsheet, XL Lotus, man. This is great. Woo! This is futuristic. So what what's your what's your plan for the business over the next 10 years?
SPEAKER_02:I would really like to see a flattening of our headcount. And I I think we can keep our costs down by focusing a lot more on automation. You know, it's business lending compared to mortgages and auto loans, it's not a standardized product. And business lending is always the last bastion and area to automate because it's not a simplistic linear process. So I really think we're going to focus on that piece. And the other piece that we're focusing on is going deeper into credit unions. Uh, we work with inclusive, uh, and who's the trade association for CDFIs.
SPEAKER_01:Kathy Mann has been a guest on this podcast two or three times.
SPEAKER_02:Okay.
SPEAKER_01:She's a great person.
SPEAKER_02:Yeah, we yes, they are. They have a great organization. And I think by working with a lot of those credit unions now, I think they're going to grow. You know, some of them will get gobbled up, but some of them will grow into be the mid-sized credit union for the next 10 years. So we're really looking at diversifying our base. Um, we even work with credit unions and uh Puerto Rico now on on helping them out with business loans. We have a couple uh natives of Puerto Rico who help us out and keep things going. Um, but but I but I also So you you can do business in Spanish. Exactly.
SPEAKER_01:Cool. That's very cool.
SPEAKER_02:And and and and and just to clarify, the person you're talking to can't do business in Spanish.
SPEAKER_01:Right, right, right. No, I'm talking about your company.
SPEAKER_02:But the company, yes. Yes, we can.
SPEAKER_01:Yeah, I I I've talked with smallest credit unions in Texas that were doing uh business loans in Spanish. It's um because the borrowers own the they even wanted the documents in Spanish. It's yeah, so and I understand that I'm I'm not gonna sign a real estate contract written in French. No way, no how. It's uh so I understand you your primary language is what you want to sign a business document in.
SPEAKER_02:Yeah, but I but but I think we'll continue. I I think there's just like there's a consolidation in the credit union space, there's no way all of the people who support businesses will be able to survive. So I really think we're gonna see a consolidation and shrinking down, or at least I hope so.
SPEAKER_01:Um are you looking to adopt more AI tools?
SPEAKER_02:Yes. Yeah, we're we're already we're very deep in the co-pilot as our walking entry point. Uh and and really it's you know, we're trying to figure out that way to implement an automation and keep our headcount down. Uh, with and I think my strategy is I I want to use AI to uh to keep the simple things moving and pay our expertise, people who are experts to be the artist working with the complex issues.
SPEAKER_01:Well, yeah, to eventually we're at in Ashland, Steve O'Donnell from one in Nevada. He's done some marvelous AI implementations at that credit unit. But it's it's routine back office stuff. It's not customer inner in-member interface, it's not anything glamorous. It's but this is less and both stuff that someone has to do, and AI does it really pretty well, he's finding.
SPEAKER_02:Yes, absolutely. And and and many times what we find is that the money and products are really put into the consumer side to start out, and then they tend to bleed over to the business lending because it's a few, it's the business lending, it's fewer volume, there's fewer opportunities, and it's less standardized.
SPEAKER_01:Well, MIT has been doing an ongoing survey of very big companies using AI, 90 plus percent of whom are reporting last dialogue to extreme disappointment with the results. But MIT also points out most of them are doing customer-facing stuff that's kind of glitzy and creative, rather than doing the kind of back office routine stuff that Steve O'Donnell's doing at one the bottom. AI is getting smart, but it's not necessarily going to write you a beautiful TV commercial at this moment in time.
SPEAKER_02:No, no, I I I look at AI for the next several years as an intern with a lot of energy who you have to review their work.
SPEAKER_01:True. But you have to redo most people's work, man. Yes. The people have to redo my work, so uh I I've always needed a good proofreader because I'm I'm a good writer, but a sloppy proofreader. Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial scene? Can't all be mega banks, can it? It's my hope it won't all be mega banks. It'll always be a place for credit unions. That's what we're discussing here. To figure out how you can help, get in touch with me. This is RJMegarvey at gmail.com. Robert McGarvey again. That's RJMegarvey at gmail.com. Get in touch, we'll figure out a way that you can help. We need your support, we want your support, we thank you for your support. The TU2.0 Podcast.