BY MARK RITTER
When I first entered the credit union business lending world, there was a clear line between a business loan and a consumer loan when it came to real estate.
Was a 1-4 family unit property the member’s primary residence?
Yes – That’s a consumer loan.
No – That’s a business loan.
However, this changed in May of 2018 when Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act. It included a provision for credit unions that exempted ANY loan secured by a 1-4 family unit property from the member business loan definition. These investment property loans aren’t business loans anymore, but they don’t fit nicely into a residential mortgage lending program either.
What are they now?
Credit unions now have a meaningful piece of regulatory relief they can use to expand their lending capability to the membership. At the time the law was changed, this simple fix freed up $7.8 billion in business loan cap space for credit unions without a low-income designation.
That’s good for both members and credit unions. Nearly 24% of net member business loan balances were tied up in these properties that looked like residential properties and were not classified as business loans by local banks. However, nearly 74% of all credit unions nationwide reported $0 in 1-4 family investment property loans to the NCUA on their March 2018 Call Report. This is just my opinion, but I feel confident is saying that 99% of all credit unions have a member that owns a rental property in some manner.
Residential rental property loans are a great mechanism to increase loans in a product that virtually all credit unions can understand. The new tax law and shifting demographics have made renting a home a viable option for members who may have purchased a home in the past. Even though the regulatory classification has changed, that doesn’t mean prudent risk practices have changed.
Here are a few key areas to consider when looking to serve the local residential investor community:
- Sales process for members
Real estate investors are much closer to the profile of a small business member in that these are long-term and recurring transaction members. Having an option for face-to-face interactions as opposed to online or phone applications is a must.
- Risk management practices
Real estate investors like credit—lots of credit. If you give them one loan they will want ten more. One of my former credit analysts referred to residential real estate investors as “credit gerbils.” Credit unions need to monitor the marketplaces and relationships to make sure the program does not grow too fast, proper oversight exists, and prudent lending practices remain in place.
A high percentage of residential investment loans today are in LLCs or some other non-natural person entity. Does your credit union have underwriting tools, loan documents, and a servicing platform for business entities? If the answer is no, many business lending CUSOs like MBFS provide simple ways for credit unions to enter this market with low upfront costs.
Don’t Miss the Opportunity
Your members own rental properties. The regulatory barriers have come down for credit unions to expand their lending with real estate secured loans that we can all understand. The market is strong and projected to remain very solid into the future. What’s stopping you?