December 17, 2025 • 47 mins
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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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:00):
Welcome to the CU2.0 podcast.
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(00:27):
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And now the CU 2.0 podcast withRobert McGarvey.
SPEAKER_01 (00:34):
Mark Ritter, CEO of Member Business Financial
Services of Pennsylvania BaseCusto, estimates that about 800
U.S.
credit unions do member businesslending.
Meaning that perhaps 3,700don't.
Many, many more could.
That's called out in HR 1151,the law that lets credit units
(00:57):
term more than one employergroup.
Tacked into that law is languagepertaining to member business
lending.
The passage of the law, by theway, is detailed in TU2.0
Podcast Episode 51 with MarkSchaeffer.
And it's TEO2ISTU.
Now back to member businesslending.
If credit unions can make smallbusiness loans, why don't they?
(01:19):
The question reader asks andanswers in this show.
It's also very clear that if weuse credits and their members
and communities would be betterstirred if more credits jumped
into member business lending.
The need on the part of smallbusinesses is acute.
Many are turning tonon-traditional lenders who may
charge as much as 40% APR.
Critians can play an importantrole in helping the community's
(01:42):
small businesses, et cetera, nowhelp their communities too.
Understand also that accused arelike MBFS, and it has several
competitors in the space.
If it's a maybe, MBFS willrelate the pros and cons of
(02:05):
issuing a loan.
The credit union provides theloan capital, it makes the final
decision on the loan, it setsits parameters of what it will
lend to and what it will notlend to, and then MBFS does the
heavy lifting on each individualloan.
In the show, Twitter offers itsunfiltered outlook for
commercial real estate loans andalso predicts a bump in
(02:28):
delinquency rates.
Yet he's bullish about memberbusiness lending in general.
Twitter, by the way, has his ownpodcast.
There's a link to that podcastin the show notes.
Tune into it for deep dives intomember business lender.
Listen up.
Oh, I enjoyed, by the way, yourshow that you did with Todd
(02:49):
Harborough.
I've done shows in the pastabout 1151, so I knew about
that.
I didn't know the uh memberbusiness banking link to 1151.
SPEAKER_02 (02:59):
Yeah.
SPEAKER_01 (02:59):
Yeah, that was all revelatory to me.
SPEAKER_02 (03:02):
You know, and I have told people that was the best
and worst thing ever for theirindustry because before 1151,
there was probably 15 or 20credit unions nationwide that
did business lending.
And it just was one of thesethings that didn't hit the radar
(03:25):
for people.
But once they put the cap inplace, all of a sudden it
spurred people getting intobusiness lending.
SPEAKER_01 (03:34):
Right.
In a way, it was a green light.
They said, oh wow, we canactually do this.
SPEAKER_02 (03:39):
Yes, before it was basically left unsaid.
Uh the in here in Pennsylvania,almost all the business loans
that were done were Amish loanswith the Amish credit union.
And that was it.
Uh and it was just one of thesethings.
Well, you could do it, but wereally don't regulate it.
And you know, it's out there.
(04:01):
And it and that's you're right.
That gave it the green light tosay, oh, you can do this up to
uh this much.
And then it became the wave ofQSOs being formed.
There was a whole wave of QSOskind of formed in the same era.
And then people said, Oh, notonly am I can I do business
(04:23):
loans, here's a way to dobusiness loans that's a little
bit easier for me.
Because when when I started, Istarted in credit unions in
2001.
And I like to say, you know, itwas basically the wild West
Lewis and Clark for gettingbusiness loans done.
(04:45):
You you just had to figure itout.
There was nothing.
SPEAKER_01 (04:50):
Now how many competitors do you have, fusel
competitors in the member in thebusiness loan space?
SPEAKER_02 (04:58):
Uh I would say for people like me, I I think
there's probably about 15 or soof us.
Um, and that number isstretching it.
Uh, probably in people that aremy size, we we probably have
about six to eight.
(05:20):
And there's several very smallpeople around the country that
maybe just work with a handfulof 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 businessthat you have to have scale to
(05:40):
make it worthwhile.
It is because you're startingthe the investment on the front
end is brutal in today's worldwith software costs and people
costs, and and you have to havea base of clients.
Uh, otherwise you'll you're justlosing money for years.
Uh and you know, going back,I've looked at an article from
(06:01):
about 15 years ago of uh thewhen all the QSOs started
working together, and there'sonly half of us that's still in
business.
Uh so there's even really been aconsolidation of this time, and
some people have gotten into itand say, no, we we can't make
money doing this, or we can'teven break even.
(06:23):
So that's why I think you'veseen the market mature a little
bit to uh a couple people whowho have the scale to stay in
it.
SPEAKER_01 (06:34):
Well, there's also more non-traditional lenders
coming into the small businesslending space with very high
interest rates, but they'rewilling to make um riskier net
loans, I suppose.
SPEAKER_02 (06:50):
Oh, typically they average in the high 30s and for
close to 40 percent.
And it got to the point wherethey couldn't price for risk
because once interest ratesskyrocketed and these rates
started going up in smallbusinesses.
I mean, the people who had tookthose loans weren't the greatest
(07:12):
credit quality to begin with.
And you know, you had thesepeople, you know, anybody who
could uh you know, steam glasswith their breath could get a
loan.
And then it just spiraled.
And uh you've seen even a lot ofthem go out of business because
of liquidity, the interest ratesincreasing, and just that top
(07:34):
softening of the small businessspace.
SPEAKER_01 (07:36):
So it is and also those guys did not have the uh
organized crime muscle that thepast generations could collect
on the loans, or at least thethread of the muscle would would
create collection.
Whereas these guys um didn'thave much of anything really in
that regard.
SPEAKER_02 (07:54):
When you're you know you're you're getting a fintech
loan online, it's not like likeyou said, you know, the local,
even the local bank or the locallender who's knocking on your
store saying, give me my damnmoney, you know, what's going
on?
You you really didn't have youdon't have a uh affinity or
scare that somebody's gonna becoming after you.
SPEAKER_01 (08:16):
Yeah, when I was a kid, every factory in New
Jersey, probably in Pennsylvaniatoo, had a uh loan shark.
SPEAKER_02 (08:25):
Absolutely.
SPEAKER_01 (08:26):
Yeah, this was this was the so-called five for six
man.
He'd give you five, and onpayday you'd give him six, which
was a hell of a good interestrate.
It's uh uh but that they therewere those guys were omnipresent
in factories.
Uh often it was one of theworkers or a foreman or
something.
Not necessarily a guy workingfull-time on that.
SPEAKER_02 (08:47):
But my father was a union electrician for years in
the coal region of Pennsylvaniaand has told me the stories of
uh you know, once in a whilewhen he had to go and uh you
know pay his pay the bills backwhen we were younger, he would
walk in and uh just stacks ofcash and guns everywhere.
SPEAKER_01 (09:10):
Well, back back in those days, there were very few
places for your father to go andget loans.
I know that because I'm olderthan you, but my father had very
few options for getting loans.
So even if if the car engineblew up, it was it wasn't a
clear-cut way.
You have went to like beneficialfinance or household finance,
(09:31):
both of which were legitimatebusinesses, but they charged
pretty high interest rates.
SPEAKER_02 (09:36):
Particularly where I grew up in the ethnic
communities, where these wereclosed communities where people
worked and stayed within theirnetwork and they did business
within their network for intheir community and ethnicities
for better or for worse.
SPEAKER_01 (09:55):
Now, how many credit unions at this point have what
you would call a seriouscommitment to doing member
business lending?
SPEAKER_02 (10:06):
So I have I I have actually due this data.
And I consider somebody who'sinto 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 ayear.
(10:29):
That's a pretty, you're right,that's a pretty low bar.
And that is about 800 creditunions in the entire nation that
fit into that.
And if you actually throttle itup, you you're you're to you
know a pretty good volume.
(10:51):
You're talking into maybe ahundred, hundred and a quarter,
depending on how you definethat.
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 ofbusiness loans really increase.
(11:17):
It keeps going up, up, up at anice steady pace.
But it's very concentrated amongthose top 150 credit unions.
You're not seeing the depth thatI think it should.
And it really just that that'sdisappointing to me.
I I really think the you know,that we need a deeper bench in
(11:40):
credit union business lendingbecause it'll help the smaller
and mid-sized credit unionssurvive.
And I think also those small andmid-sized credit unions, I hey,
listen, I have a lot of friendsat really large credit unions,
but those small and mid-sizedcredit unions have a much better
(12:01):
touch neighborhood-wise in theircommunities.
So I think it's a win-win, butpeople continue just to stir the
pot at it.
SPEAKER_01 (12:12):
Why would a$500 million asset credit, which, if
it's reasonably well run, wouldhave the liquidity to make some
business loans.
Why would it say no?
We're not interested in thatbusiness.
SPEAKER_02 (12:26):
Yeah, I I I think what the biggest issue becomes
fear.
I haven't done that.
SPEAKER_01 (12:33):
Well, that is that is the worst four-letter word in
credit union speech.
It's uh we go to the boardroomand you say, What's the dirtiest
word?
Four letters, fear.
SPEAKER_02 (12:42):
It's uh I I haven't done that.
I don't do that.
I I once had a credit union CEOlook at me and say, I have
another 10 years of my career.
All I want is for nothing tohappen.
I just we want to keep it withthat.
(13:04):
They would they would rather, Icall it management by avoidance,
rather do nothing and havenothing happen in that area than
okay, you do 10 years of loansand you have one go bad and
everybody makes a big deal aboutit.
SPEAKER_01 (13:22):
It's that well, that's another thing credit
unions do that drives me nuts.
You know, in in in the fintechworld world, you know, the motto
is fail fast.
But built into that is there aregoing to be some failures.
There are gonna be.
And the credit union they trythey want a zero delinquency
(13:43):
rate, a dear a zero foreclosurerate.
These are not realistic goals.
SPEAKER_02 (13:50):
Small business lending is I cannot think of
another area where people are soproud not to do well.
People will, oh no, no, no, wewe we don't do small business
lending.
No, no, no.
Well, well, guess what?
Your members do.
You would never say that aboutauto loans.
Oh no, we're not good at autoloans, we're not good at
(14:12):
mortgages.
But for some reason, people givethemselves a pass and sometimes
look at it with a badge of honorto avoid this segment of their
community and their members whoneed the financing, who need
their help, who are lookingaround and have hopes and dreams
(14:33):
and and create jobs.
And and we just give it a passat times.
It now now there are, like Isaid, there are some people that
do it great.
I have some people that do itgreat.
But if you look at the callreport numbers, you're looking
at over 3,000 credit unions withzero business loans on their
(14:53):
books.
That's a crime.
SPEAKER_01 (14:56):
And I've talked to CEOs of decent-sized credit
unions in rural America.
I've asked them, would you amember of yours is is a farmer,
a member wants a loan to buy atractor.
Tractor's going to be sixfigures.
Uh, would you make the loan?
No.
And because we we don't we don'tdo farm loans.
(15:17):
I said, well, that's kind oflike a car loan.
It's just not a car, it's atractor.
It's not still still wouldn't doit.
And the mind is just closed onthat.
SPEAKER_02 (15:29):
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 theirlocation and credit union base.
And we and I talked a lot withhim about it, and it you know,
(15:52):
we're we're talking about such acrucial industry in America.
A you know, and we're we're nottalking about an elitist
institution.
This is the industry that feedsAmerica, that feeds your
members.
SPEAKER_01 (16:06):
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 tragicmyself.
But these are the very peoplewho often need to borrow a
little money to buy that newtractor.
Yeah, the the mega company thatowns half the land in Kansas,
they they have financing ways.
(16:28):
They know how to raise money.
SPEAKER_02 (16:31):
Yeah, and and it's it's a shame because this is,
you know, we talk aboutcommunity-based financial
cooperatives.
And that this is your thecommunities that you're in, but
we sometimes segment them offand say, oh, we we can't do
that.
Uh, you know, we have thiscommunity charter, we're here
(16:52):
for open everybody, but we welop off certain segments and of
people who you'll give them carloans, you'll give their family
car loans, you'll give thepeople who work on the farm
financing.
You're in you're in bed withthese the farmers in your
community, whether you like itor not.
SPEAKER_01 (17:13):
So if you want if you want that that guy to pay
off his car loan, it would helpif you keep his business
growing.
SPEAKER_02 (17:23):
Yeah, absolutely.
It's it's mind-blowing on why wecan't get people to look at, you
know, drive around to yourneighbors, drive around to your
towns, particularly for thesepeople that have a community
charter or are within a prettytight segment.
(17:43):
You know, and yeah, there'sgoing to be some things that you
can't do everything to everybodyat all times, but this is pretty
commonplace of the businesses inyour community that need funding
uh and helping them out andhelping them grow.
It it's time to be able to dothat.
SPEAKER_01 (18:01):
I think it's equipment, equipment.
It's basically a car line.
You can repossess a tractor.
SPEAKER_02 (18:07):
Yes.
Uh it's it's hold value.
SPEAKER_01 (18:09):
And it's predictable value if it's a name brand.
If it's a John Deere tractor, Idon't know who the big tractor
makers are, but if it's the namebrand, it will it will hold
predictable value.
So it's it's not a crazy loan.
Now tell me how your business isstructured.
The credit union member of the QZone puts up money for the loan,
(18:32):
they fund the loan.
What do you do?
SPEAKER_02 (18:35):
So we we don't we are not a direct lender.
So when you get a loan, younobody's getting a loan through
MBFS.
So we we are the life cycle isthat we have a team of lenders
out there that work with thecredit unions in a region, and
they either get referrals fromcredit union members or they're
(18:59):
kind of pounding the streets,knocking on doors, looking for
prospects.
Or we do have a base of creditunions that do that function
themselves.
And, you know, once you have allthe interviews and gathering
financials, and this is whatwe're due.
So we'll take that loan andunderwrite the loan and give
(19:21):
them a package that says, thisis 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 theymake the decision on the loan,
then we really are that backoffice uh that helps people
(19:46):
close the loan.
We help out with the appraisals,we have a loan doc system, and
then we have a servicingplatform too, because a large
chunk of our portfolio isparticipated up out among credit
unions of them working together.
So, you know, I kind of like tothink of us as that whole back
(20:07):
office operations.
You know, we we are thatfront-end member-facing
situation for a chunk of ourloans.
We think of us as kind of thatback office chunk, you know,
doing the X's and O's to supportthe 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.
(20:29):
And uh most of the time that'spassed through to the members on
their on their balance sheet.
And uh, but but really also whatwe'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?
(20:50):
We help them get started withgood policies and help creating
credit culture.
You know, it when the NCUA isthere, there we're we're having
this working with them side byside.
Um, but you know, our revenuesources are those, you know, fee
for service things like theunderwriting, loan origination,
(21:11):
documentation, servicing.
You know, our servicingportfolio right now is just a
little over$3 billion, which isright in line with just about
any QSO out there in thecountry.
SPEAKER_01 (21:26):
So, I mean, to go back to where I started, the
credit union basically needs tohave some money that it's
willing to lend.
Yes, that's essentially all theyneed to do.
SPEAKER_02 (21:37):
Correct.
You know, and back in the olddays of the CUSO world, you used
to be able to point at the, youknow, NCUA would come in and
say, I have questions, and youpoint at the CUSO and say, go
ask them.
Now you you you you don't haveto be an expert in commercial
lending, but you have tounderstand what's going on the
(21:58):
books.
We have to be able to understandthe risk and how it fits into
your risk profile.
You don't have to know how whereto place every number in
spreading software.
That's our job.
SPEAKER_01 (22:12):
But each credit union has the opportunity to set
its own underwriting standards.
Correct.
I do not want to do marijuanabusiness, marijuana business
loans, for instance.
Others others will say we reallysend all the marijuana loans our
way.
That's fine, it's up to eachcredit union.
And is and I assume that's theway all your credit union
(22:33):
members, that's how they work.
SPEAKER_02 (22:36):
Exactly.
You know, people always ask me,well, do credit unions do this?
And usually within our block ofcredit unions, somebody's doing
something just about everythingeverywhere.
You know, it's not a fit foreverybody, but that's the nice
thing with Accuso is you know,we can move uh businesses around
to somewhere where it fits.
SPEAKER_01 (22:58):
And you bring some of the business to the credit
union, too, then uh from whatyou from what you said.
SPEAKER_02 (23:05):
Correct.
You know, the commercial lendersare a real pain in the ass.
Uh, you know, they they make alot of money, they're they're
they're all they're tough tomanage, and you know, you when
you throw them into a creditunion, sometimes it really
throws off the d the dynamics.
So that's why.
SPEAKER_01 (23:22):
Well, I I I I I talked to and I'm sure you, I'm
sure you could actually, I'msure you remember the exact
situations a couple times inrecent years, not super recent,
uh a few years back, creditunions have bought often a small
bank, and you ask, why do youwant the bank?
And it's uh oh, it's thecommercial lending department.
(23:44):
You check with them like a yearlater and you say, How's it
going?
It's not going too well in mostcases.
SPEAKER_02 (23:48):
No.
SPEAKER_01 (23:49):
Uh and so those relationships didn't translate
from ABC Community Bank to thecredit union immediately, which
is what the credit union peoplethought, even though the people
transferred.
But maybe the relationship wasactually not with the lender,
but with the president of thecommunity bank.
Maybe that's the guy you playedgolf with on Saturday.
(24:11):
That's kind of what they weremissing.
SPEAKER_02 (24:14):
I I always tell people always ask me about
hiring lenders.
And I'll say the worst hire youcan make is the 30-year, you
know, the 30-year veteran whosays, all my people are with me,
and I've never made a bad loan,and I have a loyal base of
(24:37):
people, because I can tell youthat guy hasn't originated a new
customer in probably 15 years.
And the other piece is justbecause he has a particular type
of customer doesn't mean youwant to do that.
You know, it it you want youwant uh what I call the young
(24:58):
and hungry, people who are outthere working the streets,
working with businesses, youknow, you you form those
relationships in the communityand and you keep hustling.
Yeah.
SPEAKER_01 (25:08):
Who needs to loan?
It's the 35-year-old smallbusiness person.
SPEAKER_02 (25:12):
Yes.
It's not it's not a good thing.
SPEAKER_01 (25:20):
I mean, it's a generational thing.
SPEAKER_02 (25:22):
Exactly.
SPEAKER_01 (25:24):
Nothing wrong with that.
Now, I listened to one of yourrecent podcasts, and you said
that you had concerns aboutdelinquency rates rising, not to
a critical point, but actually,I if I remember what you said,
you said essentially delinquencyhad been at zero for several
years.
So a one and a half percentdelinquency rate looks like an
(25:45):
explosion, which mathematicallyit is.
So are you still thinking thatway?
SPEAKER_02 (25:52):
Yes.
And and and I remember in intwenty every presentation I did
in 21 and 22, I told people yourdelinquency is zero.
You're not as smart as youthink.
It's just that liquidity isswimming everywhere.
People have been given tons ofmoney.
(26:15):
Rates, you're doing thesecommercial loan rates at 3%.
Well, at 3%, just about anyidiot can make a loan work.
Once rates rose, the the the wefound out who the weak people
are to historically normalrates.
You know, everybody's talkingabout oh, rates are high.
(26:37):
Doing rates at six and a half,seven percent is just called
life, and that's pretty normal.
So you we we've seen thiscontinual bump in delinquency.
You know, we how many loans didwe do in 21 and 22 to these huge
office buildings?
(26:59):
And in they were all done onfive-year rates.
So five years from now is gonnabe 26 and 27.
So look out.
Look out.
It's you know, I always say thebigger your market area, the
bigger the loans, the biggerproblems you're gonna have.
(27:19):
In smaller market areas, smallersize loans that are more low
steadier.
I don't, it's it's we're reallynot seeing a bump in the road.
These big loans in big cities,it's a mess.
And next year and the yearafter, it's gonna be worse.
(27:41):
And a lot of people, theseoriginators did these loans and
sold them all throughout thecommunity as the best loans.
And at the time, everybody saidthese are the lowest best
quality loans out there, theseoffice buildings.
And now, you know, the Piper isgoing to have to come do where
the valuation and occupancy justisn't holding up.
(28:05):
So I think we have anothercouple years of this shaken out.
Typically, when credit unionshave had delinquency cycles,
it's been very concentrated.
What I'm seeing now isdelinquency much deeper than
we've ever seen in the creditunion industry.
SPEAKER_01 (28:24):
Well, explain that.
SPEAKER_02 (28:26):
Back in the Great Recession, you know, we had the
Miami condos, we had theCalifornia condos, we had church
loans.
And really, when you looked atit, might have had 10 or 12
credit unions involved in that.
SPEAKER_01 (28:43):
Well, you go back to the SNL crisis in the late 80s,
that was essentially 10 SNLs orthereabouts.
I'm not saying Ward didn't havea fingerprint on it, but there
were Lincoln savings, forinstance.
There was just a handful thatdid the majority of those loans.
SPEAKER_02 (29:02):
And you're seeing, but now in the credit union
space, you see a lot of peoplewho either they bought into
loans, the the big originatorssold billions of loans a year as
participations, or they just didit them themselves.
And there was a lot more creditunions out there doing these
(29:24):
larger office buildings becauseit's easy work.
It's much easier, you know, as alender to do a six to ten
million dollar loan and go playaround to golf than bust your
hump, you know, doing three tofive hundred thousand dollar
loans to small businesses.
And that's what a lot of peopledid.
SPEAKER_01 (29:45):
But well, the the commercial, the the office
building market.
I live in Phoenix in the officebuilding market here.
And I'm just saying this fromwhat I see walking around, it
has to be horrendous.
SPEAKER_02 (29:58):
Yes.
SPEAKER_01 (29:59):
I I I can.
Could show you two or threevacant, reasonably new buildings
within a mile of where I live.
And they're just sitting therefalling apart, you know, broken
windows, blah blah blah.
I mean, I they're just waitingto be torn down, I imagine.
SPEAKER_02 (30:17):
I I almost think at some point, you know, uh there's
a few buildings that can beconverted into residential.
You know, we have an inherentlack of housing in this country.
SPEAKER_01 (30:28):
That's a really expensive proposition.
SPEAKER_02 (30:31):
But it's very expensive.
And many times, because ofingress and egress in the
elevators, it's just notpossible.
SPEAKER_01 (30:38):
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 theconversion process for at least
a dozen years.
I think it's gone bankrupttwice.
Um it's uh so I think ownershipchanged and went bankrupt again,
(30:59):
if my memory's right.
It's uh construction seems to bestalled yet again.
It's it'd be a beautifulapartment location, it really
would be.
But it's yeah, it's it's notjust the elevators, it's also
things like there tends to belike uh more limited water
stacks.
So, how do we get water to theto the corner apartments, which
(31:21):
will probably cost more in thefirst 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 itwere easy to do because it would
be a magic wand, but it's not.
SPEAKER_02 (31:35):
It's not.
And many people, you know, I Ihad one built one of our credit
unions, they had a building,single tenant national public
company, and they emptied outthe building, and the the
building literally got bulldozedover trying to build a uh retail
and residential uh complex bebecause people are just trying
(32:00):
to do anything they can to turnthese just dogs that are going
to be dogs for decades if theyever come back and uh and make
them uh and make them possible.
And I say this as somebodyrealize I'm sitting in my home
office to a completelyvirtualized company.
(32:21):
Uh you know, I I don't thinkthese white-collar jobs are
coming back to big city or justoffice park skyscrapers.
SPEAKER_01 (32:31):
How many employees do you have?
SPEAKER_02 (32:33):
60.
SPEAKER_01 (32:35):
60.
And so they're all virtual.
There's no no office that theycan go to.
SPEAKER_02 (32:41):
We we have an office.
Uh, if somebody set off a bombin our office, there would be no
casualties.
Uh we we have somebody go intwice a week to check the mail
and see if anything else isgoofy is going on.
Uh, I go there maybe once everytwo months.
Uh, and and usually I'm in therefor an hour, and that's about
(33:02):
it.
SPEAKER_01 (33:02):
Now, do you have any any members of your QZO that are
still actively doing commercialreal estate loans?
SPEAKER_02 (33:11):
Commercial real estate, absolutely.
Office is it office is likedoing Miami condos in 2008.
That's that business is dead.
SPEAKER_01 (33:24):
Or do them today.
I think condos are pretty slowon the market right now.
SPEAKER_02 (33:30):
Yeah, and uh and and now also, but keep in mind I
that one of the big factors iswork from home.
And what I find is in our smallcities, in our third-tier
cities, work from home isn't asbig of a deal.
You know, you you these townswhere you can drive from one end
(33:52):
to the other in 10, 15 minutes,uh, it's not an issue to call
your people into work becausethey can drive into work, they
can go home for lunch, it's it'snot a big deal.
So we're we're seeing smalltowns, small cities, mid-sized
loans.
They're still doing these loansand the performance is great.
(34:13):
But if if you know my my wifeused to work in Center City,
Philadelphia in a big tower, andit took her an hour and a half,
and people just said, I'm notdoing it.
So, so those are the areas wherewhere traffic uh is an issue.
You're in these big areas, it'sthe white-collar laptop class,
(34:34):
you know, who says I'd rather befrom home.
Uh, you know, for me, it's moreof a business decision on the
work from home because I I canhire people in second-tier
cities who are great and have aton of experience, and I can pay
them a nice salary where theydon't have there's not a lot of
(34:54):
competition for jobs and theylove it.
SPEAKER_01 (34:58):
Now, a few minutes ago, you mentioned loan
participation.
Is that still a big part of yourportfolio?
SPEAKER_02 (35:07):
Yes.
Yeah, and we're seeing last yearthe commercial loan
participations andparticipations in general
couldn't get any lower.
This year, people are calling usup 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 makethat all these other loan
(35:29):
segments are just dying, drying,dying at the buying.
Uh cars are okay, but they'renot 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 mortgagebusiness is slow, you know, a
(35:50):
lot of those consumer loan areasare slow.
So people are looking at us justbecause the business lending
area tends to be moreconsistent, but also the
liquidity's back.
You know, last year people justsaid, I'm squeezing every nickel
I can.
We're not doing commerciallending just because I'm trying
(36:11):
to save every dollar forinternal people, uh, for car
loans and credit cards and thelike.
Liquidity is back, and theythere's not many other sources.
So, you know, our business is asgood as it's been since 2022.
And you know, I don't we're notwe're not quite at that level,
but uh it's pretty damn good.
SPEAKER_01 (36:33):
Well, the home mortgage market is very slow,
and from what I'm reading, theautomobile market isn't
particularly robust.
So there should be some moneyfloating around available to
land.
SPEAKER_02 (36:50):
Yeah, and the one nice thing about the business
lending area is it you know itpeaks and bat, it peaks a little
bit, but generally it's veryconsistent.
There's there's alwaysbusinesses looking for capital
for their businesses, there'sreal estate investors looking to
for for deals.
(37:11):
So when rates are going up, westay particularly busy.
When rates are going down, we'rea little bit busier.
And you know, most of theseloans are written on five-year
loans.
So every year, about 20% of themarket is coming up with
opportunities.
SPEAKER_01 (37:33):
If there's liquidity, why are credit unions
interested in participationrather than sole ownership?
SPEAKER_02 (37:40):
Because they they they're looking for demand,
they're looking foropportunities because the
property values are still fairlyelevated.
And what you're also seeing is ageneration of credit unions that
are finally having concentrationrisk and have to sell off
(38:01):
because they're reaching theirregulatory caps, they're
reaching caps to one borrower,they're reaching just general
diversification.
So people are selling up quite abit more when they they could
finance this whole loaninternally, but many times they
can't or they shouldn't justbecause of risk management,
(38:23):
because credit unions have beenin this while now, portfolios
are maturing, and you know,people always thought, oh, we
have this 12 and a quarterlimit.
Yeah, I'll never get there.
Well, they're getting there.
SPEAKER_01 (38:36):
Now tell me about the a cap on an amount of a loan
to an individual borrower.
What is that?
SPEAKER_02 (38:44):
Generally, for federal credit unions, it's 15%
of net worth.
So if you have a uh you know abillion-dollar credit union and
they have 70 million net worthas the bare minimum, you're
talking 15% of that.
So, you know, they could doloans up to 12, 13 million
(39:07):
dollars in range, which for mostcredit unions is is, you know,
they could finance a city blockfor that in some of these
markets.
Right.
Right.
If you're you're in DC, NewYork, you know, that that's not
an enormous property, but it's alot of money.
So really, you know, we don'tsee too many people who
(39:28):
regularly want to fund up tothat 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 whiteknuckle number at 15% of net
worth for an individual loan isa big, big loan for most credit
unions.
SPEAKER_01 (39:49):
Right.
And they are very risk-aversepeople.
Yes.
So better to spread this around,I suppose.
And also the the mechanics ofparticipation, there's a lot of
automation there.
It's a lot simpler and easier toput together a participation
deal today than it was 15 yearsago.
15 years ago, you had to get onthe phone, call the CEO of XYZ
(40:13):
credit union down the street,say, hey, you want a piece of
this?
SPEAKER_02 (40:16):
It's uh and and I I mean, we at Members First, when
I started out, we were literallydoing these on a spreadsheet.
And and like every loan was amanual process.
And now, like you said, buyingand selling is a little bit
easier with transferring databack and forth.
Calculations on servicing is alittle bit easier.
(40:38):
So, so technology has reallyhelped out on that piece.
SPEAKER_01 (40:41):
Yeah, this is a generational thing, man.
When I started, you did it on anHP calculator.
SPEAKER_02 (40:46):
Yes.
SPEAKER_01 (40:48):
The spreadsheet, XL Lotus, man.
This is great.
Woo! This is futuristic.
So what what's your what's yourplan for the business over the
next 10 years?
SPEAKER_02 (41:01):
I would really like to see a flattening of our
headcount.
And I I think we can keep ourcosts down by focusing a lot
more on automation.
You know, it's business lendingcompared to mortgages and auto
loans, it's not a standardizedproduct.
(41:23):
And business lending is alwaysthe last bastion and area to
automate because it's not asimplistic linear process.
So I really think we're going tofocus on that piece.
And the other piece that we'refocusing on is going deeper into
(41:43):
credit unions.
Uh, we work with inclusive, uh,and who's the trade association
for CDFIs.
SPEAKER_01 (41:51):
Kathy Mann has been a guest on this podcast two or
three times.
SPEAKER_02 (41:55):
Okay.
SPEAKER_01 (41:57):
She's a great person.
SPEAKER_02 (41:58):
Yeah, we yes, they are.
They have a great organization.
And I think by working with alot of those credit unions now,
I think they're going to grow.
You know, some of them will getgobbled up, but some of them
will grow into be the mid-sizedcredit union for the next 10
years.
So we're really looking atdiversifying our base.
(42:21):
Um, we even work with creditunions and uh Puerto Rico now on
on helping them out withbusiness loans.
We have a couple uh natives ofPuerto Rico who help us out and
keep things going.
Um, but but I but I also So youyou can do business in Spanish.
Exactly.
SPEAKER_01 (42:39):
Cool.
That's very cool.
SPEAKER_02 (42:42):
And and and and and just to clarify, the person
you're talking to can't dobusiness in Spanish.
SPEAKER_01 (42:47):
Right, right, right.
No, I'm talking about yourcompany.
SPEAKER_02 (42:49):
But the company, yes.
Yes, we can.
SPEAKER_01 (42:52):
Yeah, I I I've talked with smallest credit
unions in Texas that were doinguh business loans in Spanish.
It's um because the borrowersown the they even wanted the
documents in Spanish.
It's yeah, so and I understandthat I'm I'm not gonna sign a
(43:13):
real estate contract written inFrench.
No way, no how.
It's uh so I understand you yourprimary language is what you
want to sign a business documentin.
SPEAKER_02 (43:23):
Yeah, but I but but I think we'll continue.
I I think there's just likethere's a consolidation in the
credit union space, there's noway all of the people who
support businesses will be ableto survive.
So I really think we're gonnasee a consolidation and
shrinking down, or at least Ihope so.
SPEAKER_01 (43:45):
Um are you looking to adopt more AI tools?
SPEAKER_02 (43:50):
Yes.
Yeah, we're we're already we'revery 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 automationand keep our headcount down.
Uh, with and I think my strategyis I I want to use AI to uh to
(44:16):
keep the simple things movingand pay our expertise, people
who are experts to be the artistworking with the complex issues.
SPEAKER_01 (44:27):
Well, yeah, to eventually we're at in Ashland,
Steve O'Donnell from one inNevada.
He's done some marvelous AIimplementations at that credit
unit.
But it's it's routine backoffice stuff.
It's not customer innerin-member interface, it's not
anything glamorous.
It's but this is less and bothstuff that someone has to do,
(44:50):
and AI does it really prettywell, he's finding.
SPEAKER_02 (44:53):
Yes, absolutely.
And and and many times what wefind is that the money and
products are really put into theconsumer side to start out, and
then they tend to bleed over tothe business lending because
it's a few, it's the businesslending, it's fewer volume,
there's fewer opportunities, andit's less standardized.
SPEAKER_01 (45:17):
Well, MIT has been doing an ongoing survey of very
big companies using AI, 90 pluspercent of whom are reporting
last dialogue to extremedisappointment with the results.
But MIT also points out most ofthem are doing customer-facing
stuff that's kind of glitzy andcreative, rather than doing the
(45:40):
kind of back office routinestuff that Steve O'Donnell's
doing at one the bottom.
AI is getting smart, but it'snot necessarily going to write
you a beautiful TV commercial atthis moment in time.
SPEAKER_02 (45:53):
No, no, I I I look at AI for the next several years
as an intern with a lot ofenergy who you have to review
their work.
SPEAKER_01 (46:06):
True.
But you have to redo mostpeople'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'ma good writer, but a sloppy
proofreader.
Before we go, think hard abouthow you can help support this
(46:27):
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere 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 bemega banks.
(46:47):
It'll always be a place forcredit unions.
That's what we're discussinghere.
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 away that you can help.
We need your support, we wantyour support, we thank you for
(47:07):
your support.
The TU2.0 Podcast.
Welcome to the CU2.0 podcast.
SPEAKER_00 (00:05):
Hi, and welcome to the CU2.0 podcast with big new
ideas about credit unions andconversations about innovative
technology with credit union andfintech leaders.
This podcast is brought to youby Quillo, the real-time loan
syndication network for creditunions, and by your host,
long-time credit union andfinancial technology journalist
(00:27):
Robert McGarvey.
And now the CU 2.0 podcast withRobert McGarvey.
SPEAKER_01 (00:34):
Mark Ritter, CEO of Member Business Financial
Services of Pennsylvania BaseCusto, estimates that about 800
U.S.
credit unions do member businesslending.
Meaning that perhaps 3,700don't.
Many, many more could.
That's called out in HR 1151,the law that lets credit units
(00:57):
term more than one employergroup.
Tacked into that law is languagepertaining to member business
lending.
The passage of the law, by theway, is detailed in TU2.0
Podcast Episode 51 with MarkSchaeffer.
And it's TEO2ISTU.
Now back to member businesslending.
If credit unions can make smallbusiness loans, why don't they?
(01:19):
The question reader asks andanswers in this show.
It's also very clear that if weuse credits and their members
and communities would be betterstirred if more credits jumped
into member business lending.
The need on the part of smallbusinesses is acute.
Many are turning tonon-traditional lenders who may
charge as much as 40% APR.
Critians can play an importantrole in helping the community's
(01:42):
small businesses, et cetera, nowhelp their communities too.
Understand also that accused arelike MBFS, and it has several
competitors in the space.
If it's a maybe, MBFS willrelate the pros and cons of
(02:05):
issuing a loan.
The credit union provides theloan capital, it makes the final
decision on the loan, it setsits parameters of what it will
lend to and what it will notlend to, and then MBFS does the
heavy lifting on each individualloan.
In the show, Twitter offers itsunfiltered outlook for
commercial real estate loans andalso predicts a bump in
(02:28):
delinquency rates.
Yet he's bullish about memberbusiness lending in general.
Twitter, by the way, has his ownpodcast.
There's a link to that podcastin the show notes.
Tune into it for deep dives intomember business lender.
Listen up.
Oh, I enjoyed, by the way, yourshow that you did with Todd
(02:49):
Harborough.
I've done shows in the pastabout 1151, so I knew about
that.
I didn't know the uh memberbusiness banking link to 1151.
SPEAKER_02 (02:59):
Yeah.
SPEAKER_01 (02:59):
Yeah, that was all revelatory to me.
SPEAKER_02 (03:02):
You know, and I have told people that was the best
and worst thing ever for theirindustry because before 1151,
there was probably 15 or 20credit unions nationwide that
did business lending.
And it just was one of thesethings that didn't hit the radar
(03:25):
for people.
But once they put the cap inplace, all of a sudden it
spurred people getting intobusiness lending.
SPEAKER_01 (03:34):
Right.
In a way, it was a green light.
They said, oh wow, we canactually do this.
SPEAKER_02 (03:39):
Yes, before it was basically left unsaid.
Uh the in here in Pennsylvania,almost all the business loans
that were done were Amish loanswith the Amish credit union.
And that was it.
Uh and it was just one of thesethings.
Well, you could do it, but wereally don't regulate it.
And you know, it's out there.
(04:01):
And it and that's you're right.
That gave it the green light tosay, oh, you can do this up to
uh this much.
And then it became the wave ofQSOs being formed.
There was a whole wave of QSOskind of formed in the same era.
And then people said, Oh, notonly am I can I do business
(04:23):
loans, here's a way to dobusiness loans that's a little
bit easier for me.
Because when when I started, Istarted in credit unions in
2001.
And I like to say, you know, itwas basically the wild West
Lewis and Clark for gettingbusiness loans done.
(04:45):
You you just had to figure itout.
There was nothing.
SPEAKER_01 (04:50):
Now how many competitors do you have, fusel
competitors in the member in thebusiness loan space?
SPEAKER_02 (04:58):
Uh I would say for people like me, I I think
there's probably about 15 or soof us.
Um, and that number isstretching it.
Uh, probably in people that aremy size, we we probably have
about six to eight.
(05:20):
And there's several very smallpeople around the country that
maybe just work with a handfulof 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 businessthat you have to have scale to
(05:40):
make it worthwhile.
It is because you're startingthe the investment on the front
end is brutal in today's worldwith software costs and people
costs, and and you have to havea base of clients.
Uh, otherwise you'll you're justlosing money for years.
Uh and you know, going back,I've looked at an article from
(06:01):
about 15 years ago of uh thewhen all the QSOs started
working together, and there'sonly half of us that's still in
business.
Uh so there's even really been aconsolidation of this time, and
some people have gotten into itand say, no, we we can't make
money doing this, or we can'teven break even.
(06:23):
So that's why I think you'veseen the market mature a little
bit to uh a couple people whowho have the scale to stay in
it.
SPEAKER_01 (06:34):
Well, there's also more non-traditional lenders
coming into the small businesslending space with very high
interest rates, but they'rewilling to make um riskier net
loans, I suppose.
SPEAKER_02 (06:50):
Oh, typically they average in the high 30s and for
close to 40 percent.
And it got to the point wherethey couldn't price for risk
because once interest ratesskyrocketed and these rates
started going up in smallbusinesses.
I mean, the people who had tookthose loans weren't the greatest
(07:12):
credit quality to begin with.
And you know, you had thesepeople, you know, anybody who
could uh you know, steam glasswith their breath could get a
loan.
And then it just spiraled.
And uh you've seen even a lot ofthem go out of business because
of liquidity, the interest ratesincreasing, and just that top
(07:34):
softening of the small businessspace.
SPEAKER_01 (07:36):
So it is and also those guys did not have the uh
organized crime muscle that thepast generations could collect
on the loans, or at least thethread of the muscle would would
create collection.
Whereas these guys um didn'thave much of anything really in
that regard.
SPEAKER_02 (07:54):
When you're you know you're you're getting a fintech
loan online, it's not like likeyou said, you know, the local,
even the local bank or the locallender who's knocking on your
store saying, give me my damnmoney, you know, what's going
on?
You you really didn't have youdon't have a uh affinity or
scare that somebody's gonna becoming after you.
SPEAKER_01 (08:16):
Yeah, when I was a kid, every factory in New
Jersey, probably in Pennsylvaniatoo, had a uh loan shark.
SPEAKER_02 (08:25):
Absolutely.
SPEAKER_01 (08:26):
Yeah, this was this was the so-called five for six
man.
He'd give you five, and onpayday you'd give him six, which
was a hell of a good interestrate.
It's uh uh but that they therewere those guys were omnipresent
in factories.
Uh often it was one of theworkers or a foreman or
something.
Not necessarily a guy workingfull-time on that.
SPEAKER_02 (08:47):
But my father was a union electrician for years in
the coal region of Pennsylvaniaand has told me the stories of
uh you know, once in a whilewhen he had to go and uh you
know pay his pay the bills backwhen we were younger, he would
walk in and uh just stacks ofcash and guns everywhere.
SPEAKER_01 (09:10):
Well, back back in those days, there were very few
places for your father to go andget loans.
I know that because I'm olderthan you, but my father had very
few options for getting loans.
So even if if the car engineblew up, it was it wasn't a
clear-cut way.
You have went to like beneficialfinance or household finance,
(09:31):
both of which were legitimatebusinesses, but they charged
pretty high interest rates.
SPEAKER_02 (09:36):
Particularly where I grew up in the ethnic
communities, where these wereclosed communities where people
worked and stayed within theirnetwork and they did business
within their network for intheir community and ethnicities
for better or for worse.
SPEAKER_01 (09:55):
Now, how many credit unions at this point have what
you would call a seriouscommitment to doing member
business lending?
SPEAKER_02 (10:06):
So I have I I have actually due this data.
And I consider somebody who'sinto 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 ayear.
(10:29):
That's a pretty, you're right,that's a pretty low bar.
And that is about 800 creditunions in the entire nation that
fit into that.
And if you actually throttle itup, you you're you're to you
know a pretty good volume.
(10:51):
You're talking into maybe ahundred, hundred and a quarter,
depending on how you definethat.
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 ofbusiness loans really increase.
(11:17):
It keeps going up, up, up at anice steady pace.
But it's very concentrated amongthose top 150 credit unions.
You're not seeing the depth thatI think it should.
And it really just that that'sdisappointing to me.
I I really think the you know,that we need a deeper bench in
(11:40):
credit union business lendingbecause it'll help the smaller
and mid-sized credit unionssurvive.
And I think also those small andmid-sized credit unions, I hey,
listen, I have a lot of friendsat really large credit unions,
but those small and mid-sizedcredit unions have a much better
(12:01):
touch neighborhood-wise in theircommunities.
So I think it's a win-win, butpeople continue just to stir the
pot at it.
SPEAKER_01 (12:12):
Why would a$500 million asset credit, which, if
it's reasonably well run, wouldhave the liquidity to make some
business loans.
Why would it say no?
We're not interested in thatbusiness.
SPEAKER_02 (12:26):
Yeah, I I I think what the biggest issue becomes
fear.
I haven't done that.
SPEAKER_01 (12:33):
Well, that is that is the worst four-letter word in
credit union speech.
It's uh we go to the boardroomand you say, What's the dirtiest
word?
Four letters, fear.
SPEAKER_02 (12:42):
It's uh I I haven't done that.
I don't do that.
I I once had a credit union CEOlook at me and say, I have
another 10 years of my career.
All I want is for nothing tohappen.
I just we want to keep it withthat.
(13:04):
They would they would rather, Icall it management by avoidance,
rather do nothing and havenothing happen in that area than
okay, you do 10 years of loansand you have one go bad and
everybody makes a big deal aboutit.
SPEAKER_01 (13:22):
It's that well, that's another thing credit
unions do that drives me nuts.
You know, in in in the fintechworld world, you know, the motto
is fail fast.
But built into that is there aregoing to be some failures.
There are gonna be.
And the credit union they trythey want a zero delinquency
(13:43):
rate, a dear a zero foreclosurerate.
These are not realistic goals.
SPEAKER_02 (13:50):
Small business lending is I cannot think of
another area where people are soproud not to do well.
People will, oh no, no, no, wewe we don't do small business
lending.
No, no, no.
Well, well, guess what?
Your members do.
You would never say that aboutauto loans.
Oh no, we're not good at autoloans, we're not good at
(14:12):
mortgages.
But for some reason, people givethemselves a pass and sometimes
look at it with a badge of honorto avoid this segment of their
community and their members whoneed the financing, who need
their help, who are lookingaround and have hopes and dreams
(14:33):
and and create jobs.
And and we just give it a passat times.
It now now there are, like Isaid, there are some people that
do it great.
I have some people that do itgreat.
But if you look at the callreport numbers, you're looking
at over 3,000 credit unions withzero business loans on their
(14:53):
books.
That's a crime.
SPEAKER_01 (14:56):
And I've talked to CEOs of decent-sized credit
unions in rural America.
I've asked them, would you amember of yours is is a farmer,
a member wants a loan to buy atractor.
Tractor's going to be sixfigures.
Uh, would you make the loan?
No.
And because we we don't we don'tdo farm loans.
(15:17):
I said, well, that's kind oflike a car loan.
It's just not a car, it's atractor.
It's not still still wouldn't doit.
And the mind is just closed onthat.
SPEAKER_02 (15:29):
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 theirlocation and credit union base.
And we and I talked a lot withhim about it, and it you know,
(15:52):
we're we're talking about such acrucial industry in America.
A you know, and we're we're nottalking about an elitist
institution.
This is the industry that feedsAmerica, that feeds your
members.
SPEAKER_01 (16:06):
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 tragicmyself.
But these are the very peoplewho often need to borrow a
little money to buy that newtractor.
Yeah, the the mega company thatowns half the land in Kansas,
they they have financing ways.
(16:28):
They know how to raise money.
SPEAKER_02 (16:31):
Yeah, and and it's it's a shame because this is,
you know, we talk aboutcommunity-based financial
cooperatives.
And that this is your thecommunities that you're in, but
we sometimes segment them offand say, oh, we we can't do
that.
Uh, you know, we have thiscommunity charter, we're here
(16:52):
for open everybody, but we welop off certain segments and of
people who you'll give them carloans, you'll give their family
car loans, you'll give thepeople who work on the farm
financing.
You're in you're in bed withthese the farmers in your
community, whether you like itor not.
SPEAKER_01 (17:13):
So if you want if you want that that guy to pay
off his car loan, it would helpif you keep his business
growing.
SPEAKER_02 (17:23):
Yeah, absolutely.
It's it's mind-blowing on why wecan't get people to look at, you
know, drive around to yourneighbors, drive around to your
towns, particularly for thesepeople that have a community
charter or are within a prettytight segment.
(17:43):
You know, and yeah, there'sgoing to be some things that you
can't do everything to everybodyat all times, but this is pretty
commonplace of the businesses inyour community that need funding
uh and helping them out andhelping them grow.
It it's time to be able to dothat.
SPEAKER_01 (18:01):
I think it's equipment, equipment.
It's basically a car line.
You can repossess a tractor.
SPEAKER_02 (18:07):
Yes.
Uh it's it's hold value.
SPEAKER_01 (18:09):
And it's predictable value if it's a name brand.
If it's a John Deere tractor, Idon't know who the big tractor
makers are, but if it's the namebrand, it will it will hold
predictable value.
So it's it's not a crazy loan.
Now tell me how your business isstructured.
The credit union member of the QZone puts up money for the loan,
(18:32):
they fund the loan.
What do you do?
SPEAKER_02 (18:35):
So we we don't we are not a direct lender.
So when you get a loan, younobody's getting a loan through
MBFS.
So we we are the life cycle isthat we have a team of lenders
out there that work with thecredit unions in a region, and
they either get referrals fromcredit union members or they're
(18:59):
kind of pounding the streets,knocking on doors, looking for
prospects.
Or we do have a base of creditunions that do that function
themselves.
And, you know, once you have allthe interviews and gathering
financials, and this is whatwe're due.
So we'll take that loan andunderwrite the loan and give
(19:21):
them a package that says, thisis 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 theymake the decision on the loan,
then we really are that backoffice uh that helps people
(19:46):
close the loan.
We help out with the appraisals,we have a loan doc system, and
then we have a servicingplatform too, because a large
chunk of our portfolio isparticipated up out among credit
unions of them working together.
So, you know, I kind of like tothink of us as that whole back
(20:07):
office operations.
You know, we we are thatfront-end member-facing
situation for a chunk of ourloans.
We think of us as kind of thatback office chunk, you know,
doing the X's and O's to supportthe 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.
(20:29):
And uh most of the time that'spassed through to the members on
their on their balance sheet.
And uh, but but really also whatwe'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?
(20:50):
We help them get started withgood policies and help creating
credit culture.
You know, it when the NCUA isthere, there we're we're having
this working with them side byside.
Um, but you know, our revenuesources are those, you know, fee
for service things like theunderwriting, loan origination,
(21:11):
documentation, servicing.
You know, our servicingportfolio right now is just a
little over$3 billion, which isright in line with just about
any QSO out there in thecountry.
SPEAKER_01 (21:26):
So, I mean, to go back to where I started, the
credit union basically needs tohave some money that it's
willing to lend.
Yes, that's essentially all theyneed to do.
SPEAKER_02 (21:37):
Correct.
You know, and back in the olddays of the CUSO world, you used
to be able to point at the, youknow, NCUA would come in and
say, I have questions, and youpoint at the CUSO and say, go
ask them.
Now you you you you don't haveto be an expert in commercial
lending, but you have tounderstand what's going on the
(21:58):
books.
We have to be able to understandthe risk and how it fits into
your risk profile.
You don't have to know how whereto place every number in
spreading software.
That's our job.
SPEAKER_01 (22:12):
But each credit union has the opportunity to set
its own underwriting standards.
Correct.
I do not want to do marijuanabusiness, marijuana business
loans, for instance.
Others others will say we reallysend all the marijuana loans our
way.
That's fine, it's up to eachcredit union.
And is and I assume that's theway all your credit union
(22:33):
members, that's how they work.
SPEAKER_02 (22:36):
Exactly.
You know, people always ask me,well, do credit unions do this?
And usually within our block ofcredit unions, somebody's doing
something just about everythingeverywhere.
You know, it's not a fit foreverybody, but that's the nice
thing with Accuso is you know,we can move uh businesses around
to somewhere where it fits.
SPEAKER_01 (22:58):
And you bring some of the business to the credit
union, too, then uh from whatyou from what you said.
SPEAKER_02 (23:05):
Correct.
You know, the commercial lendersare a real pain in the ass.
Uh, you know, they they make alot of money, they're they're
they're all they're tough tomanage, and you know, you when
you throw them into a creditunion, sometimes it really
throws off the d the dynamics.
So that's why.
SPEAKER_01 (23:22):
Well, I I I I I talked to and I'm sure you, I'm
sure you could actually, I'msure you remember the exact
situations a couple times inrecent years, not super recent,
uh a few years back, creditunions have bought often a small
bank, and you ask, why do youwant the bank?
And it's uh oh, it's thecommercial lending department.
(23:44):
You check with them like a yearlater and you say, How's it
going?
It's not going too well in mostcases.
SPEAKER_02 (23:48):
No.
SPEAKER_01 (23:49):
Uh and so those relationships didn't translate
from ABC Community Bank to thecredit union immediately, which
is what the credit union peoplethought, even though the people
transferred.
But maybe the relationship wasactually not with the lender,
but with the president of thecommunity bank.
Maybe that's the guy you playedgolf with on Saturday.
(24:11):
That's kind of what they weremissing.
SPEAKER_02 (24:14):
I I always tell people always ask me about
hiring lenders.
And I'll say the worst hire youcan make is the 30-year, you
know, the 30-year veteran whosays, all my people are with me,
and I've never made a bad loan,and I have a loyal base of
(24:37):
people, because I can tell youthat guy hasn't originated a new
customer in probably 15 years.
And the other piece is justbecause he has a particular type
of customer doesn't mean youwant to do that.
You know, it it you want youwant uh what I call the young
(24:58):
and hungry, people who are outthere working the streets,
working with businesses, youknow, you you form those
relationships in the communityand and you keep hustling.
Yeah.
SPEAKER_01 (25:08):
Who needs to loan?
It's the 35-year-old smallbusiness person.
SPEAKER_02 (25:12):
Yes.
It's not it's not a good thing.
SPEAKER_01 (25:20):
I mean, it's a generational thing.
SPEAKER_02 (25:22):
Exactly.
SPEAKER_01 (25:24):
Nothing wrong with that.
Now, I listened to one of yourrecent podcasts, and you said
that you had concerns aboutdelinquency rates rising, not to
a critical point, but actually,I if I remember what you said,
you said essentially delinquencyhad been at zero for several
years.
So a one and a half percentdelinquency rate looks like an
(25:45):
explosion, which mathematicallyit is.
So are you still thinking thatway?
SPEAKER_02 (25:52):
Yes.
And and and I remember in intwenty every presentation I did
in 21 and 22, I told people yourdelinquency is zero.
You're not as smart as youthink.
It's just that liquidity isswimming everywhere.
People have been given tons ofmoney.
(26:15):
Rates, you're doing thesecommercial loan rates at 3%.
Well, at 3%, just about anyidiot can make a loan work.
Once rates rose, the the the wefound out who the weak people
are to historically normalrates.
You know, everybody's talkingabout oh, rates are high.
(26:37):
Doing rates at six and a half,seven percent is just called
life, and that's pretty normal.
So you we we've seen thiscontinual bump in delinquency.
You know, we how many loans didwe do in 21 and 22 to these huge
office buildings?
(26:59):
And in they were all done onfive-year rates.
So five years from now is gonnabe 26 and 27.
So look out.
Look out.
It's you know, I always say thebigger your market area, the
bigger the loans, the biggerproblems you're gonna have.
(27:19):
In smaller market areas, smallersize loans that are more low
steadier.
I don't, it's it's we're reallynot seeing a bump in the road.
These big loans in big cities,it's a mess.
And next year and the yearafter, it's gonna be worse.
(27:41):
And a lot of people, theseoriginators did these loans and
sold them all throughout thecommunity as the best loans.
And at the time, everybody saidthese are the lowest best
quality loans out there, theseoffice buildings.
And now, you know, the Piper isgoing to have to come do where
the valuation and occupancy justisn't holding up.
(28:05):
So I think we have anothercouple years of this shaken out.
Typically, when credit unionshave had delinquency cycles,
it's been very concentrated.
What I'm seeing now isdelinquency much deeper than
we've ever seen in the creditunion industry.
SPEAKER_01 (28:24):
Well, explain that.
SPEAKER_02 (28:26):
Back in the Great Recession, you know, we had the
Miami condos, we had theCalifornia condos, we had church
loans.
And really, when you looked atit, might have had 10 or 12
credit unions involved in that.
SPEAKER_01 (28:43):
Well, you go back to the SNL crisis in the late 80s,
that was essentially 10 SNLs orthereabouts.
I'm not saying Ward didn't havea fingerprint on it, but there
were Lincoln savings, forinstance.
There was just a handful thatdid the majority of those loans.
SPEAKER_02 (29:02):
And you're seeing, but now in the credit union
space, you see a lot of peoplewho either they bought into
loans, the the big originatorssold billions of loans a year as
participations, or they just didit them themselves.
And there was a lot more creditunions out there doing these
(29:24):
larger office buildings becauseit's easy work.
It's much easier, you know, as alender to do a six to ten
million dollar loan and go playaround to golf than bust your
hump, you know, doing three tofive hundred thousand dollar
loans to small businesses.
And that's what a lot of peopledid.
SPEAKER_01 (29:45):
But well, the the commercial, the the office
building market.
I live in Phoenix in the officebuilding market here.
And I'm just saying this fromwhat I see walking around, it
has to be horrendous.
SPEAKER_02 (29:58):
Yes.
SPEAKER_01 (29:59):
I I I can.
Could show you two or threevacant, reasonably new buildings
within a mile of where I live.
And they're just sitting therefalling apart, you know, broken
windows, blah blah blah.
I mean, I they're just waitingto be torn down, I imagine.
SPEAKER_02 (30:17):
I I almost think at some point, you know, uh there's
a few buildings that can beconverted into residential.
You know, we have an inherentlack of housing in this country.
SPEAKER_01 (30:28):
That's a really expensive proposition.
SPEAKER_02 (30:31):
But it's very expensive.
And many times, because ofingress and egress in the
elevators, it's just notpossible.
SPEAKER_01 (30:38):
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 theconversion process for at least
a dozen years.
I think it's gone bankrupttwice.
Um it's uh so I think ownershipchanged and went bankrupt again,
(30:59):
if my memory's right.
It's uh construction seems to bestalled yet again.
It's it'd be a beautifulapartment location, it really
would be.
But it's yeah, it's it's notjust the elevators, it's also
things like there tends to belike uh more limited water
stacks.
So, how do we get water to theto the corner apartments, which
(31:21):
will probably cost more in thefirst 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 itwere easy to do because it would
be a magic wand, but it's not.
SPEAKER_02 (31:35):
It's not.
And many people, you know, I Ihad one built one of our credit
unions, they had a building,single tenant national public
company, and they emptied outthe building, and the the
building literally got bulldozedover trying to build a uh retail
and residential uh complex bebecause people are just trying
(32:00):
to do anything they can to turnthese just dogs that are going
to be dogs for decades if theyever come back and uh and make
them uh and make them possible.
And I say this as somebodyrealize I'm sitting in my home
office to a completelyvirtualized company.
(32:21):
Uh you know, I I don't thinkthese white-collar jobs are
coming back to big city or justoffice park skyscrapers.
SPEAKER_01 (32:31):
How many employees do you have?
SPEAKER_02 (32:33):
60.
SPEAKER_01 (32:35):
60.
And so they're all virtual.
There's no no office that theycan go to.
SPEAKER_02 (32:41):
We we have an office.
Uh, if somebody set off a bombin our office, there would be no
casualties.
Uh we we have somebody go intwice a week to check the mail
and see if anything else isgoofy is going on.
Uh, I go there maybe once everytwo months.
Uh, and and usually I'm in therefor an hour, and that's about
(33:02):
it.
SPEAKER_01 (33:02):
Now, do you have any any members of your QZO that are
still actively doing commercialreal estate loans?
SPEAKER_02 (33:11):
Commercial real estate, absolutely.
Office is it office is likedoing Miami condos in 2008.
That's that business is dead.
SPEAKER_01 (33:24):
Or do them today.
I think condos are pretty slowon the market right now.
SPEAKER_02 (33:30):
Yeah, and uh and and now also, but keep in mind I
that one of the big factors iswork from home.
And what I find is in our smallcities, in our third-tier
cities, work from home isn't asbig of a deal.
You know, you you these townswhere you can drive from one end
(33:52):
to the other in 10, 15 minutes,uh, it's not an issue to call
your people into work becausethey can drive into work, they
can go home for lunch, it's it'snot a big deal.
So we're we're seeing smalltowns, small cities, mid-sized
loans.
They're still doing these loansand the performance is great.
(34:13):
But if if you know my my wifeused to work in Center City,
Philadelphia in a big tower, andit took her an hour and a half,
and people just said, I'm notdoing it.
So, so those are the areas wherewhere traffic uh is an issue.
You're in these big areas, it'sthe white-collar laptop class,
(34:34):
you know, who says I'd rather befrom home.
Uh, you know, for me, it's moreof a business decision on the
work from home because I I canhire people in second-tier
cities who are great and have aton of experience, and I can pay
them a nice salary where theydon't have there's not a lot of
(34:54):
competition for jobs and theylove it.
SPEAKER_01 (34:58):
Now, a few minutes ago, you mentioned loan
participation.
Is that still a big part of yourportfolio?
SPEAKER_02 (35:07):
Yes.
Yeah, and we're seeing last yearthe commercial loan
participations andparticipations in general
couldn't get any lower.
This year, people are calling usup 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 makethat all these other loan
(35:29):
segments are just dying, drying,dying at the buying.
Uh cars are okay, but they'renot 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 mortgagebusiness is slow, you know, a
(35:50):
lot of those consumer loan areasare slow.
So people are looking at us justbecause the business lending
area tends to be moreconsistent, but also the
liquidity's back.
You know, last year people justsaid, I'm squeezing every nickel
I can.
We're not doing commerciallending just because I'm trying
(36:11):
to save every dollar forinternal people, uh, for car
loans and credit cards and thelike.
Liquidity is back, and theythere's not many other sources.
So, you know, our business is asgood as it's been since 2022.
And you know, I don't we're notwe're not quite at that level,
but uh it's pretty damn good.
SPEAKER_01 (36:33):
Well, the home mortgage market is very slow,
and from what I'm reading, theautomobile market isn't
particularly robust.
So there should be some moneyfloating around available to
land.
SPEAKER_02 (36:50):
Yeah, and the one nice thing about the business
lending area is it you know itpeaks and bat, it peaks a little
bit, but generally it's veryconsistent.
There's there's alwaysbusinesses looking for capital
for their businesses, there'sreal estate investors looking to
for for deals.
(37:11):
So when rates are going up, westay particularly busy.
When rates are going down, we'rea little bit busier.
And you know, most of theseloans are written on five-year
loans.
So every year, about 20% of themarket is coming up with
opportunities.
SPEAKER_01 (37:33):
If there's liquidity, why are credit unions
interested in participationrather than sole ownership?
SPEAKER_02 (37:40):
Because they they they're looking for demand,
they're looking foropportunities because the
property values are still fairlyelevated.
And what you're also seeing is ageneration of credit unions that
are finally having concentrationrisk and have to sell off
(38:01):
because they're reaching theirregulatory caps, they're
reaching caps to one borrower,they're reaching just general
diversification.
So people are selling up quite abit more when they they could
finance this whole loaninternally, but many times they
can't or they shouldn't justbecause of risk management,
(38:23):
because credit unions have beenin this while now, portfolios
are maturing, and you know,people always thought, oh, we
have this 12 and a quarterlimit.
Yeah, I'll never get there.
Well, they're getting there.
SPEAKER_01 (38:36):
Now tell me about the a cap on an amount of a loan
to an individual borrower.
What is that?
SPEAKER_02 (38:44):
Generally, for federal credit unions, it's 15%
of net worth.
So if you have a uh you know abillion-dollar credit union and
they have 70 million net worthas the bare minimum, you're
talking 15% of that.
So, you know, they could doloans up to 12, 13 million
(39:07):
dollars in range, which for mostcredit unions is is, you know,
they could finance a city blockfor that in some of these
markets.
Right.
Right.
If you're you're in DC, NewYork, you know, that that's not
an enormous property, but it's alot of money.
So really, you know, we don'tsee too many people who
(39:28):
regularly want to fund up tothat 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 whiteknuckle number at 15% of net
worth for an individual loan isa big, big loan for most credit
unions.
SPEAKER_01 (39:49):
Right.
And they are very risk-aversepeople.
Yes.
So better to spread this around,I suppose.
And also the the mechanics ofparticipation, there's a lot of
automation there.
It's a lot simpler and easier toput together a participation
deal today than it was 15 yearsago.
15 years ago, you had to get onthe phone, call the CEO of XYZ
(40:13):
credit union down the street,say, hey, you want a piece of
this?
SPEAKER_02 (40:16):
It's uh and and I I mean, we at Members First, when
I started out, we were literallydoing these on a spreadsheet.
And and like every loan was amanual process.
And now, like you said, buyingand selling is a little bit
easier with transferring databack and forth.
Calculations on servicing is alittle bit easier.
(40:38):
So, so technology has reallyhelped out on that piece.
SPEAKER_01 (40:41):
Yeah, this is a generational thing, man.
When I started, you did it on anHP calculator.
SPEAKER_02 (40:46):
Yes.
SPEAKER_01 (40:48):
The spreadsheet, XL Lotus, man.
This is great.
Woo! This is futuristic.
So what what's your what's yourplan for the business over the
next 10 years?
SPEAKER_02 (41:01):
I would really like to see a flattening of our
headcount.
And I I think we can keep ourcosts down by focusing a lot
more on automation.
You know, it's business lendingcompared to mortgages and auto
loans, it's not a standardizedproduct.
(41:23):
And business lending is alwaysthe last bastion and area to
automate because it's not asimplistic linear process.
So I really think we're going tofocus on that piece.
And the other piece that we'refocusing on is going deeper into
(41:43):
credit unions.
Uh, we work with inclusive, uh,and who's the trade association
for CDFIs.
SPEAKER_01 (41:51):
Kathy Mann has been a guest on this podcast two or
three times.
SPEAKER_02 (41:55):
Okay.
SPEAKER_01 (41:57):
She's a great person.
SPEAKER_02 (41:58):
Yeah, we yes, they are.
They have a great organization.
And I think by working with alot of those credit unions now,
I think they're going to grow.
You know, some of them will getgobbled up, but some of them
will grow into be the mid-sizedcredit union for the next 10
years.
So we're really looking atdiversifying our base.
(42:21):
Um, we even work with creditunions and uh Puerto Rico now on
on helping them out withbusiness loans.
We have a couple uh natives ofPuerto Rico who help us out and
keep things going.
Um, but but I but I also So youyou can do business in Spanish.
Exactly.
SPEAKER_01 (42:39):
Cool.
That's very cool.
SPEAKER_02 (42:42):
And and and and and just to clarify, the person
you're talking to can't dobusiness in Spanish.
SPEAKER_01 (42:47):
Right, right, right.
No, I'm talking about yourcompany.
SPEAKER_02 (42:49):
But the company, yes.
Yes, we can.
SPEAKER_01 (42:52):
Yeah, I I I've talked with smallest credit
unions in Texas that were doinguh business loans in Spanish.
It's um because the borrowersown the they even wanted the
documents in Spanish.
It's yeah, so and I understandthat I'm I'm not gonna sign a
(43:13):
real estate contract written inFrench.
No way, no how.
It's uh so I understand you yourprimary language is what you
want to sign a business documentin.
SPEAKER_02 (43:23):
Yeah, but I but but I think we'll continue.
I I think there's just likethere's a consolidation in the
credit union space, there's noway all of the people who
support businesses will be ableto survive.
So I really think we're gonnasee a consolidation and
shrinking down, or at least Ihope so.
SPEAKER_01 (43:45):
Um are you looking to adopt more AI tools?
SPEAKER_02 (43:50):
Yes.
Yeah, we're we're already we'revery 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 automationand keep our headcount down.
Uh, with and I think my strategyis I I want to use AI to uh to
(44:16):
keep the simple things movingand pay our expertise, people
who are experts to be the artistworking with the complex issues.
SPEAKER_01 (44:27):
Well, yeah, to eventually we're at in Ashland,
Steve O'Donnell from one inNevada.
He's done some marvelous AIimplementations at that credit
unit.
But it's it's routine backoffice stuff.
It's not customer innerin-member interface, it's not
anything glamorous.
It's but this is less and bothstuff that someone has to do,
(44:50):
and AI does it really prettywell, he's finding.
SPEAKER_02 (44:53):
Yes, absolutely.
And and and many times what wefind is that the money and
products are really put into theconsumer side to start out, and
then they tend to bleed over tothe business lending because
it's a few, it's the businesslending, it's fewer volume,
there's fewer opportunities, andit's less standardized.
SPEAKER_01 (45:17):
Well, MIT has been doing an ongoing survey of very
big companies using AI, 90 pluspercent of whom are reporting
last dialogue to extremedisappointment with the results.
But MIT also points out most ofthem are doing customer-facing
stuff that's kind of glitzy andcreative, rather than doing the
(45:40):
kind of back office routinestuff that Steve O'Donnell's
doing at one the bottom.
AI is getting smart, but it'snot necessarily going to write
you a beautiful TV commercial atthis moment in time.
SPEAKER_02 (45:53):
No, no, I I I look at AI for the next several years
as an intern with a lot ofenergy who you have to review
their work.
SPEAKER_01 (46:06):
True.
But you have to redo mostpeople'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'ma good writer, but a sloppy
proofreader.
Before we go, think hard abouthow you can help support this
(46:27):
podcast so we can do moreinterviews with more thoughtful
leaders in the credit unionworld.
What we're trying to figure outhere 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 bemega banks.
(46:47):
It'll always be a place forcredit unions.
That's what we're discussinghere.
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 away that you can help.
We need your support, we wantyour support, we thank you for
(47:07):
your support.
The TU2.0 Podcast.
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