Remote Deposit Capture for Business – A Must-Offer

By Larry Middleman, President/CEO of CU Business Group, LLC

Adoption of remote deposit capture (RDC) has come a long way in the past few years. Over that time, the mobile banking revolution has fully taken hold, with smartphones becoming virtual extensions of consumers’ identities. As part of that revolution, mobile RDC (mRDC) became mainstream, and it is now a given that financial institutions offer the service to their members/customers.

Many financial institutions recognize the urgency of this task.  According to Celent’s 2017 report, State of Remote Deposit Capture: The Final Stretch, more than 2,600 U.S. financial institutions went live with mRDC in the last two years.

Isn’t it time for your credit union to offer this critical service as well?

Why Must You Offer RDC?

Saves Time and Money. JPMorgan Chase, in announcing the closing of 5% of its retail branches in 2015, claimed that it realizes a 95% cost savings on every check deposited remotely, versus one processed by a branch teller. Your credit union may not realize such dramatic savings, but it is indisputable that the costs in terms of time, payroll, and branch overhead are significantly reduced when check processing is pushed closer to the end-user.

Your member benefits as well. Time-strapped business owners cannot afford to leave their operations for even a moment to drive to the credit union branch. With RDC, check deposits take far less time and effort, and can be done at the member’s convenience, rather than during “banking hours”. Businesses are free to make deposits more quickly and frequently, improving check clearing times and cash flow.

RDC also benefits the environment by minimizing wasteful trips to the credit union branch, saving gas, and reducing harmful emissions.

Eliminates Geographic Barriers. When competing against much larger banking institutions with branches and ATMs on every corner, electronic services like RDC are ways to even the playing field. Thanks to today’s internet-based technologies, any credit union business member can enjoy the same convenient and speedy account access as with Bank of America. With RDC and other remote banking channels, geography and location are no longer the critical service differentiators they once were.

An Opportunity to Earn Additional Fee Income. Although free mobile check deposit has become common-place among consumers, the additional features that business clients require means that there are still opportunities to charge for services.

Yet high fees may be discouraging commercial clients from adopting feature-rich desktop RDC services. It is important for credit unions to keep the cost factor in mind, particularly as they target down-market into the huge and potentially lucrative SMB sector.

According to Bob Meara, as senior analyst with Celent and the report author, “A low cost and easy to sell mRDC solution appropriate for SMBs is the missing ingredient.”

By offering mRDC, credit unions build stronger, “stickier”, and ultimately more profitable relationships with their business members.

Provides Access to Reams of Member Data. One the most interesting developments in mobile RDC technology over the past few years is its built-in data collection capabilities. For credit unions, the opportunity to mine valuable member data is every bit as important as the payment or check deposit itself.

Transactional data contains a treasure trove of information on your member’s behavior, useful both in managing fraud risk as well as highlighting opportunities to provide better service and address your member’s specific business needs.

What Are the Key Considerations for Rolling Out RDC?

Mobile vs. Scanner: It used to be a simple equation. Mobile device check deposit technology was originally designed strictly for consumers or the simplest, low-transaction business use, as one-at-a-time check scanning is too time-consuming and unwieldy for purposes of depositing a heavy volume of checks.

However, mobile RDC solutions that meet the needs of commercial and small business members much more effectively have recently been introduced. New features allow businesses to submit multiple checks in a single batch, and can even support multiple users working remotely in the field.

Still, mobile RDC is not the right choice for every business. According to industry experts, traditional desktop scanners are still much more effective for high check volumes; say more than 5 or 10 checks at a time. High-volume scanners save business members significant time and a lot of aggravation over snapping one-at-a-time photos on a mobile device.

Risk Management: The risk of fraud is one key reason why many financial institutions have waited to roll out an RDC service offering. The threat is real, but recently reported trends have belied many common perceptions of risk.

According to RemoteDepositCapture.com’s 2016 State of the Industry report, banks and credit unions surveyed suffer a duplicate check loss rate of just 0.0104% on mobile check deposits. The study also stated that 76% of financial institutions surveyed reported no direct mobile RDC losses, and 92% believe that the benefits of mRDC outweigh the risks and costs of the program.

“RDC solutions, when paired with sound risk management policies, actually deliver more data and protections than traditional, paper-based check solutions,” says John Leekley, founder of RemoteDepositCapture.com.

With built-in tools such as geolocation and biometric scanners, smart phones are giving banks and credit unions the ability to identify unusual geographic and psychographic patterns, and prevent fraudulent transactions before they occur. For instance, your credit union’s fraud detection department may recognize a mobile device in California depositing a check from a New York-based bank to the account of a member based in Virginia. You now have the opportunity to contact your member to confirm that the transaction is legitimate. Old-school mail deposits provide no way to spot these types of suspicious transactions until it’s too late.

Access to Tech Support and Staff Training: Having technical support available is imperative to a successful RDC program. Your business members will undoubtedly have questions and problems will arise. It is important to consider up front whether the credit union or the vendor will provide first-line support. Even if the credit union is the first line of defense, it is a big learning curve for staff, so ensure that you have adequate vendor support and training from the get-go.

Such training should go beyond the member contact center and technical areas, however. Credit union branch and business development personnel are the keys to effectively pitching the benefits of RDC to current and prospective business members. Ask yourself these questions before rolling out your RDC service: Who will do the training? Which credit union department will maintain ownership of the service? How does RDC fit into your credit union’s strategic goals and marketing plan?

Gone are the days where RDC is a “nice to have” product. Member expectations have developed to the point where every financial institution must offer at least one, if not several versions of the platform to serve their various target markets. Don’t get left behind in the mobile RDC revolution!

A person notating inspection on a tablet in the foreground. Two people in safety gear visually inspecting and pointing to something out of the image in the background.

Guarding Against Common Appraisal Pitfalls

by Nick Reynolds, VP/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending.  While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope.  This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

Appraisals are an important piece of your business lending program for several reasons.  To begin with, they are required under current regulations. Appraisals must meet certain conditions and provide a value that is completely independent.  Beyond the compliance aspect, appraisals help to protect both you and your member, and are a core factor in assessing what is typically a major item of collateral.

There are a few things, however, that can create problems in an appraisal.  One of the most common is the determination of business value.  In its guidance, the National Credit Union Administration (NCUA) prohibits the use of a so-called “going concern” business value in appraisals.

In practice, appraisers often have a difficult time separating going concern value from the “pure” real estate value.  This is particularly true in single-use facilities, like bowling alleys, car washes, gas stations and convenience stores, hotels, water parks, golf courses, and movie theaters.  Many appraisers like to include going concern business value, as it makes their overall analysis easier.  On such single-use properties, you might want to consider including a specific clause in your engagement letter requiring the exclusion of going concern value.

Beyond going concern value, you can consider equipment and personal property values in your collateral pool, but should do so with thoughtful consideration.  NCUA guidance requires, at least, that those values are separated in the appraisal so you can make an accurate determination of their value as collateral.  In cases where the personal property is a significant portion of the value, you may want to lend on those separately, where you can use a shorter amortization to allow for the shorter life of the asset.  A general principle of lending is to match the life of the loan with the life of the asset, and this detail in the appraisal will make that possible.

The primary goal of the appraisal is to provide an “as is” value, and this is where your underwriting should be focused.  You may consider prospective values, projections, and market rates, but when it comes time to fund your deal, your collateral is worth only what the appraiser has valued it at today.  The amount of value you recognize for all of those future events is based on your knowledge of your borrower, and your confidence they can execute their plan.

There are a number of ways to determine value.  The three most common methods are the cost approach, the sales comparison approach, and the income approach.  Some lenders use a discounted cash flow approach, but this method makes a lot of forward-looking assumptions.  If your borrower has long-term leases with escalation clauses, the discounted cash flow approach may be justifiable.  However, be aware that this is the most common method of determining business value, and as we discussed, that is not an element you are allowed to recognize as collateral value.

A complete and well-supported opinion of value is a critical piece of your underwriting process. But do not rely on it solely at the expense of your own judgement and knowledge of market conditions. The appraisal contains many pieces of valuable information, but your knowledge of your local business and real estate markets is your biggest safeguard against overvaluing your collateral.

Deepening Business Relationships Through Payments

By Melissa Giddens, CTP, AAP NCP, SVP, Consulting Business Leader, WesPay Advisors

Most businesses have a need for financial services above and beyond a loan and basic deposit account. Whether the business’ need is online and mobile banking or extends to ACH or wire payment origination services, businesses of all sizes are placing greater importance on the ability to maximize payables and receivables, mitigate the risk of fraud, and leverage information to make cash flow decisions. Credit unions need to have the resources and skills required to help their business members thrive.

Offering payment solutions can help meet the needs of business members, but also generate non-interest income for a credit union. Businesses pay for value perceived, therefore charging a fair and competitive price for payment services can help a credit union serve its field of membership and cover the costs for providing the services. Meeting the needs of businesses from a payments perspective can contribute toward retaining existing relationships, winning new business and creating a ‘stickiness factor’ that lends itself toward long-term, satisfied business members. It’s a win-win situation for a credit union.

Below are a few tips to keep in mind when working with businesses:

  • Lead with a conversation. Make it your mission to learn as much as you can about a business prospect before discussing your product offering. Talk to them about their business and make the focus all about them. Ask them how their current account and service structure is working, what efficiencies would benefit them, if their clients are requesting new payment options, etc. Taking the time to understand what’s working and what needs to be improved upon with their current provider can provide invaluable insight into how your credit union could meet those needs before ever mentioning a single product.
  • Drill into their payments needs. Get the prospect talking. Ask a wealth of questions to understand how they are utilizing payments in their business. How are they managing payroll, vendor payments, employee reimbursements, etc.? Conversely, how are they being paid from their clients? And, keep drilling down. If they receive a healthy number of checks, how are they depositing those checks into their account? Are they going into a branch, using a courier, leveraging remote deposit, etc.? And, are they receiving the information they need to reconcile transactions, manage their cash flow, etc.? What type of reporting do they need? Are they concerned about fraud? The more you understand a business prospect’s payments needs, the better positioned you’ll be when delivering a tailored proposal and ultimately, servicing the relationship.
  • Become a trusted advisor. Relationships with businesses extend beyond the services a credit union provides. Continually look for ways to add value for your member. Share an article on fraud prevention that may be meaningful for them along with a personalized note, send industry updates that pertain to past conversations you’ve had with them, etc. Let them know you’re thinking of them and keeping them in mind as you come across new information or resources. Create an environment where they look to you as their financial resource.
  • Do your homework. Research your prospect to understand their line of business, key company leadership, new initiatives they’re tackling, recent awards they’ve won, etc. and comment on what you’ve learned during meetings. Congratulate them on a new product they’ve launched or an industry award they’ve earned. Demonstrate that you’re prepared and that you’ve done your research. Prospects can tell when a potential provider shows up unprepared, so don’t give them a reason to question whether or not your credit union is the right fit for them.
  • Master the little things. Follow up timely. Do what you say you’re going to do. Send thank you notes or emails. Write down important takeaways you hear during the discussion, such as birthdays, a dream vacation they’re about to take, etc., so you can send them an annual birthday card or ask them how their trip went during your next conversation. Servicing businesses starts with building a relationship with the people you’re interacting with, so going the extra mile to demonstrate you were listening goes a long way toward building trust.

Working with businesses is an exciting opportunity for a credit union, as a business’ needs are continually evolving. Businesses look for a true financial partner to guide them through the changing financial landscape and how new products coming to market, regulatory changes, economic considerations, etc. may impact their organizations. When it comes to payments, selling solutions to businesses provides another opportunity for credit unions to shine in servicing the needs of its communities.

Melissa Giddens is the SVP, Consulting Business Leader for WesPay Advisors, a consultancy helping organizations advance their development and deployment of electronic payments. Prior to joining WesPay Advisors, Melissa worked with businesses for over 21 years to help build optimal structures for managing payables and receivables, mitigating the risk of fraud and maximizing cash flow. In 2016, she won the Frank E. Zima Payments Advocacy Award and has won numerous sales awards throughout her career. Melissa earned her Master of Business Administration from Green Mountain College. She holds the Certified Treasury Professional (CTP), Accredited ACH Professional (AAP) and National Check Professional (NCP) designations. Contact Melissa at mgiddens@wespayadvisors.com or 415-373-1180.

Lending on Real Estate Collateral

By Nick Reynolds, VP/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending. While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope. This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

If you are a fan of the 1993 Steven Spielberg movie Jurassic Park, you may recall the memorable words of Dr. Ian Malcolm (as played by Jeff Goldblum): “Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should.”

So it goes with real estate lending. Huge swings in commercial and multi-family real estate valuations since the financial crisis have rightfully given lenders pause (Fig. 1). Historically, the NCUA has authorized credit unions to lend up to a maximum 80% advance rate on commercial real estate. Recent changes to NCUA’s regulations have removed this prescriptive limit, but it still begs the question of whether you should consider going to 80% loan-to-value (LTV), or even higher, on a particular request.

One question I often receive is: Why is an 80% LTV ratio considered the industry standard for determining adequate collateral coverage? One way to look at this is that 80% represents the breakeven ratio on a typical commercial property, if it goes to foreclosure. You can estimate approximately 10% of property value will be spent on costs associated with the foreclosure process, including legal expense, carrying costs, any needed property repairs, and professional management. Once you factor in the realtor’s commission and any discount the buyer negotiates because it is a foreclosure, total costs may easily reach 20% of property value.

There are a number of factors you should consider when you look at a real estate property. In order to be competitive with other lenders, you often will need to advance 80% to win a deal. Under many circumstances, this will be fine. But you need to consider a few important aspects before approving the loan.

One key factor is the reliability of the appraisal. A real estate appraisal should include several “comparables” or “comps”—nearby properties that are similar in use, condition, and size to the subject property. The more closely these comps resemble your collateral, the greater your confidence will be in its appraised value. One home among a thousand of similar homes, with close, recent comps, will provide you with a high degree of confidence. On the other hand, your level of confidence will be much lower on a property with no local comps or recent nearby sales. After all, an appraisal is simply an educated opinion of value. Some of those opinions are supported better than others. You should take into account the levels of confidence and potential variability in the value in your advance rate.

Similarly, some properties are inherently more marketable. For example, an apartment building, a tilt up concrete warehouse with office space, and many types of retail locations are of general interest and the pools of potential buyers are large. But certain special-use properties don’t offer that same level of general appeal. Such properties include bowling alleys, car washes, gas stations and convenience stores, hotels, water parks, golf courses, and movie theaters. If the property only serves a single best use, you should consider a lower advance rate, because the pool of potential buyers is quite limited. Combined with the fact that, in a foreclosure scenario, the likelihood is high that local market conditions may not support that type of business in that specific location, you are going into a sale at a disadvantage.

There are other factors that may adversely impact the salability of your collateral. Rural locations often have a more limited market, and a lower advance rate is often warranted. The quality of leases and tenants may also impact the value. If the borrower holds a long term lease to a single tenant, the performance of that tenant has an outsized influence on property cash flows, and you may wish to reduce your advance rate. Also, if the current leases are below the market rate the appraiser used, you would want to reduce the advance rate.

Lastly, make sure to consider local economic and business conditions. Some markets, including major metropolitan areas and popular tourist destinations, tend to see much greater volatility in real estate prices than other, more stable areas. If you lend in an area that sees such high fluctuations in property values, consider using a lower standard advance rate than 80%.

Remember that your personal familiarity with your borrower and the local market are major advantages and should factor strongly in your underwriting decisions.

 

Two people shaking hands

Five Keys to Growing Business Deposits – One Credit Union’s Story

By Larry Middleman, President/CEO

Credit unions are looking to build long-term, meaningful relationships with their business members. Leading business lending credit unions realize that a robust, comprehensive deposit program is often the best way to capture the full relationship of larger, more sophisticated operating businesses.

At CU Business Group’s 2016 National Business Services Conference in Reston, Virginia, Mike Blosser, vice president of business services with Interra Credit Union presented a workshop on “Reaching New Levels in Business Deposits”.

Mike Blosser, Interra Credit Union

Mike Blosser, Interra Credit Union

Interra Credit Union ($1 billion, Goshen, IN) has long focused on the agricultural sector.  With 16 branches and 67,000 members, the Credit Union was embarking on a new strategic vision to serve 100,000 members by 2019. In support of this vision, Interra’s senior management has identified growing business core deposits as a key to the cooperative’s long-term success.

Yet management recognized that the Credit Union faced several daunting challenges in achieving this objective. The first was deciding how to pivot focus from its traditional reliance on small business and consumer members, to larger companies that had a need for cash management and other higher-end capabilities.

The Credit Union also bumped up against the limited operational and reporting capabilities of its core system, and needed to bridge critical training gaps within the IT and eServices departments, as well as among front-line staff.

Bob Brenneman, Director of Lending at Park View Federal Credit Union ($168 million, Harrisonburg, VA) a CU Business Group conference attendee, sat in on Interra’s session. The topic was timely for his organization.

“We are figuring out where we want to be in a couple of years from now,” Brenneman said. “We need to do a lot of strategic planning, get some expertise, and hire a few more people to make that next step. We want to offer more services to capture the full business relationship because we have just been so focused on the lending side.”

As Interra’s management dove into their project, they discovered five keys to creating a successful business deposits program, including:

1. Implement the right technology

At the time, Interra was in the process of implementing Q2, an omni-channel digital banking solution. The Credit Union specifically chose Q2 because it was built on a business banking platform, a rarity in an industry that often takes a “consumer-first” approach. This gave Interra executives the confidence that Q2 would be able to meet the needs of its sophisticated commercial clients.

The Q2 platform also includes a built-in business online banking solution, eliminating the need to integrate with yet another vendor.

2. Ensure the right product mix

From remote deposit capture to sweep accounts, from positive pay to business online banking, Interra was intent on offering commercial clients a full suite of electronic services to address every current need and anticipate future growth.

Prior to 2014, the Credit Union’s business product mix was extremely limited, including just one checking account and a few services such as a debit card, a business credit card, and online banking services built on the consumer platform.

Fast forward to today, and Interra now offers four distinct analysis checking accounts to address the unique needs of a variety of businesses, a true business debit card, and two types of credit cards (with EMV). The Credit Union also upgraded to a robust business online banking platform, supports online account opening, and offers a full treasury management suite including ACH, remote (and mobile) deposit capture, online wire transfers, positive pay, and multiple user capabilities, all available across a range of devices.

3. Staff for success

In his talk, Blosser stressed the importance of ensuring the team is ready and energized to serve the complex commercial market. Since 2014, Interra has aggressively grown the business services department, which includes a business development manager, a treasury management officer, a business services specialist, two business lending specialists, and a credit analyst. The commercial lending team doubled in size from two to four loan officers.

The Credit Union incentivizes its lenders to keep them engaged and focused on growing the portfolio. However, rewards are based on ongoing portfolio performance and loan quality, instead of sales goals, ensuring that individual and Credit Union motives are fully aligned.

4. Invest in comprehensive training

In the past, the Credit Union’s eServices department handled all new electronic banking setups for business members, as it does for consumer members. Yet without a background in business services, eServices staff didn’t have a strong understanding of business member needs.

Recognizing that business development officers are in the best position to serve business members and capitalize on opportunities to grow relationships, management trained them to set up business members on online banking, remote deposit services, and other treasury management and electronic services. The results: growth in eServices adoption and improving member satisfaction.

Interra also offers training in business products to all employees, allowing the entire team to engage in positive and meaningful conversations with business members with less anxiety.

5. Create positive brand awareness

Once the systems and infrastructure are in place, an expanded product mix is deployed, and key sales and service personnel are trained, it’s time to get the word out. Interra focuses on staying involved in the community, building on the brand awareness developed through its consumer and agricultural business lines, and using easy methods of promotion including posting “Financed by Interra” signage at commercial construction project sites.

 

Interra’s results have been impressive. Today the credit union has 78,000 members.  Business checking and savings accounts have grown by $37 million, bringing total business deposits (including money market accounts and certificates) to a total of $250 million.

Remote deposit capture is now being used at 78 business locations, processing a total of $7 million per month. 130 businesses are using ACH for processing payroll, payment collections, or making vendor payments. Credit card swipes are up by over 500 transactions per month, and over 300 business members are now using the new business online banking platform. Perhaps most impressively, Interra has opened 1,100 new business account relationships since going live with the new strategy.

Park View’s Brenneman found inspiration from Interra’s roadmap, citing Interra’s focus on deep-dive portfolio analysis, and its decision to offer commercial clients a comprehensive business online banking product.

“At our Credit Union, we are at a point where we’ve been all working hard, and we need to make a step to increase our growth trajectory,” Brenneman says. “[This session] provided me with some strategies we can work on to offer a full-service program to our business members.”

Farm equipment cutting down wheat

Securing Your Collateral – Establishing and Perfecting Liens

By Nick Reynolds, VP, Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending.  While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied, and wider in scope.  This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

The Great Recession taught many business lenders the importance of securing collateral. Although credit union business loan delinquencies have dropped back to historically normal levels of around 1%, from a peak of over 4% at the height of the financial crisis, securing your collateral position is still a cornerstone of any successful business lending program.

Credit Union delinquencies and charge-offs as a percent of outstandings.

Credit union MBL delinquencies peaked at over 4% in 2010 and 2011.

The taking of collateral on any loan requires two steps.  The first is establishing the lien, which is done by a security instrument.  For real estate, that is a deed of trust or mortgage, for cash it is an assignment of deposit account, and for anything else it is a security agreement.

The second step is “perfecting” your lien. Once your right to the collateral is established, you need to let the world know it is yours, which is done by a process known as “perfection”.  In real estate, perfection is attained through the filing of the deed of trust.  With cash, perfection is achieved by holding the cash.  For titled vehicles, perfection is achieved by registering your lien with your state’s motor vehicle division or department of licensing.  For everything else, you must use a UCC filing to perfect your interest in the collateral.

UCC filings are subject to the same rules of priority, essentially, as deeds of trust.  The first to file on a class of assets has the first right to the collateral.  Each UCC filing is date and time stamped, and that determines your position in line.

Many items you may want to take as collateral do not have titles or deeds.  Most specialized equipment, such as construction equipment, agricultural equipment, manufacturing machinery, and restaurant equipment typically don’t have titles.  Other assets such as accounts receivable, inventory, intellectual property, taxi medallions, patents, trademarks, and copyrights are also perfected by UCC filings.

There are a few peculiarities of this system that make the process of perfection challenging.  One is how the collateral is described in the filing.  For example, if you have a company that rents equipment out to contractors, and also sells equipment to the public, when you look at a specific piece of equipment it may be hard to tell if it is inventory or equipment.  When you take inventory as collateral, you also need to take “proceeds” of your collateral, which would typically be cash or accounts receivable.  Fortunately many of these items are covered well by loan documentation systems.

However, to use a system effectively, there are a few key tips.  One is to use as general of a description as possible. For example, you should describe the collateral on an operating line of credit as “all business assets,” rather than “accounts, inventory, and equipment.”  This will automatically pick up assets such as sale proceeds and chattel paper that should be part and parcel of your collateral, but won’t be counted if you use the shorter, more specific description.  We also recommend that you use both a specific and a general description of your collateral, for example: “All equipment, including, but not limited to, a 2010 Caterpillar 6D Tractor, serial number CAT###.”  This will also cover you in case of a clerical error in the description.  If the specific equipment is actually a 2009 rather than 2010 Cat, or if the serial number is wrong, you still have perfected the lien under the “All Equipment” part of the description.

It is also worth mentioning a process called a “Purchase Money Security Interest” (PMSI).  This allows the security holder to be in first position on a specific piece of equipment, even if another lender has filed it under “all equipment” ahead of you.  Similarly, your collateral analysis will be impacted if you have an all equipment filing and another lender finances a specific piece of equipment under a PMSI.  In that case, you should remove the value of the equipment from your analysis of collateral value because you are in a second position on that particular asset.

The description of your collateral, the method of perfection, and the documentation of your rights all form the basis of the collateral analysis on a commercial loan.  It is generally a straightforward process, but as with much in commercial lending, the devil is in the details.

Customer Due Diligence

New FinCEN Rules Require Credit Unions to Identify all Beneficial Owners of Legal Entity Accounts

By Claire White, Deposit Services Officer

On July 11th 2016, new FinCEN rules clarifying and strengthening customer due diligence requirements went into effect. Credit unions will have until May 11, 2018 to comply with the rules.

The new rules contain explicit customer due diligence requirements and include a new requirement to verify the identity of beneficial owners of legal entity customers (i.e. business entity members) with certain exclusions and exceptions.

Under the new rules, credit unions will use Customer Identification Program (CIP) procedures, similar to those used for individuals, to identify the beneficial owners of a legal entity. The credit union may rely on copies of the identification documents used to identify the beneficial owner and may rely on information provided by the entity, as long as it has no knowledge of facts that would call into question the reliability of the information.

Legal entity customers are defined in the final rules as a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. Sole proprietorships and unincorporated associations are not included in the definition, even if those such businesses may file with the Secretary of State in order to, for example, register a trade name or establish a tax account.

The final rules also include a list of entities that are not included as legal entity customers under the rules. The exclusions begin on page 17 of the link included in this article.

The final rules define beneficial owners as each of the following:

  • Each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer; and
  • A single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g. a CEO, CFO, COO, Managing Member, General Partner, President, Vice President, or Treasurer) or any other individual who regularly performs similar functions.
  • If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25% or more of the equity interests of a legal entity customer, the beneficial owner(s) for the purpose of the final rules is the trustee.

CU Business Group recommends credit unions review their Bank Secrecy Act (BSA) procedures and other procedures related to the opening and monitoring of business accounts to ensure compliance with the new Customer Due Diligence (CDD) rules before May 11, 2018.

We have created the following list of action steps to help you get started:

  1. Review your current account opening, monitoring, and any related BSA procedures for business accounts.
  2. Update the procedures if necessary.
  3. Contact your form vendor regarding a Certification of Beneficial Owner(s) or use the form provided in Appendix A of the Customer Due Diligence Requirements at account opening or when significant changes occur.
  4. Determine which areas of operations will be affected by the changes and provide training to staff.
  5. Inform internal and external auditors of the changes.

You can view the final rules on Customer Due Diligence Requirements for Financial Institutions online.

If you have questions about FinCEN’s final rules on CDD for legal entity customers, contact CUBG’s deposit team at 866-484-2876, or TreasuryMgmt@cubg.org.

Cowboys riding into the sunset

Global Analysis – The Good, the Bad, and the Ugly

By Nick Reynolds, Vice President/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending.  While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope.  This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

Standard practice in commercial loan underwriting requires that both the borrower and all guarantors qualify for the credit.  In some cases the borrower may not qualify for the loan and you must rely on the strength of one guarantor to approve the loan.  The assumption that one strong individual can support a weak credit is the basis for a combined analysis of all related parties, better known as “global analysis”.

It is generally believed that this is a valid method of analyzing a loan request, but there are a few reasons to think twice. Foremost among these reasons is that the success rate of having a guarantor service a loan that has gone bad is generally quite low.  Asset recovery experts will tell you that once a project fails, the typical guarantor will either have no assets left to service the loan, or will file bankruptcy to protect what they have left.  Either way, your chance of collecting from a guarantor is minimal.  One option is to make your guarantor a co-borrower, but this can actually be worse from the lender’s perspective because the individual waives some protections as a guarantor that are available to them as a co-borrower.

Despite these challenges, in practice you will need to use global analysis at times.  One of the great benefits of being a credit union is that you know your member.  If you know the business and its ownership, have worked with them for some time, and have a good feel for their integrity, you can avoid most of the problems associated with trying to collect from a guarantor.

Consider a couple of scenarios. One is an investment property that is not quite meeting an adequate debt service coverage ratio, but the borrower has a solid plan to increase rents to market rates over the next year. In this case, with a solid guarantor you can make a case for approval.

On the flip side, you have a borrower that has approached you for financing a large new project with highly uncertain outcomes, such as a new hotel. In this case, your guarantor had better be very strong, with the highest level of integrity.  Most deals will fall somewhere between those two extremes, and your assessment of the guarantor strength should correlate closely to the riskiness of the request.

Timeframe is an important factor as well.  For example, if you are financing a loan to purchase an underperforming property, and the principal has a solid business plan and the available capacity to support the project, it may be an approvable deal.  Today.  But it would be wise to set expectations with the guarantor about what happens if the deal does not perform as expected.  What is the exit plan?  Will you expect additional pay downs from other sources?  What is the timing of those pay downs and will they be tied to a specific measure like debt service coverage ratio?

As a general rule, you should not be locked into an under-performing property forever.  Any decision to lend on a property that does not cover its own debt service should be based on a reasonable expectation that the borrower will raise the property to an acceptable level of performance within a reasonable time.  A strong guarantor is one that has both the capacity and the willingness to ensure the property performs as advertised.  It is this assumption on which the validity of the global analysis method is based.

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5 Steps to Help Your Business Services Program Take Flight

By Mike Smith, CUBG VP/Senior Business Services Officer

In today’s challenging economic climate, credit unions are actively seeking new ways to achieve growth and profitability. For many this means taking a fresh look at promoting their business services program, with an eye toward building long-term relationships versus generating individual loan transactions.

At CU Business Group’s 2016 National Business Services Conference in Reston, VA, CUBG led a session aimed at helping credit unions develop a comprehensive marketing plan to target businesses right in their communities. Patrick Farrington, vice president of business services at Hiway Federal Credit Union ($1.1 billion, St. Paul, MN) attended the class.

“Each of the credit unions here seem to have similar issues,” Farrington said. “Whether it’s how to develop business or how to market their business, regardless of size everyone seems to be in the same boat.”

Here are some key steps to help get your credit union’s business services marketing strategy airborne:

Step 1: Establish a high-octane cross-selling program

Your existing membership base is a treasure trove. Most do their business banking at another institution, which means you have a great opportunity to gain member wallet share by offering specific, customized product and service recommendations.

“One thing to remember is that banks are concerned with competition from credit unions because they don’t want to give up a share of the business,” Farrington says. “There’s a goldmine of business and we just need to go after it.”

Key elements of a successful cross-selling system include defining your market, developing the right product mix, and providing your team with the tools they need.

Step 2: Communicate regularly with your members

According to a recent survey of business clients at the top 100 banks in the U.S., between 25 and 40% of business customers leave their bank within the first year, at an average cost to the institution of $400. A rigorous, consistent onboarding system can mean the difference between becoming your members’ primary financial institution and losing them to the competition.

CUBG recommends a multiple-step onboarding process, starting within three days of new account opening, simply to check in and make sure your member’s account is set up correctly. At one week following signup, have a senior executive, such as the vice president of lending, contact the new member. After six weeks, have another senior-level individual, perhaps even your CEO make a call.

At ninety days, it’s time for a face-to-face visit to your member’s business. This is a great opportunity to bring along a representative from another department such as wealth management or commercial lending, to demonstrate your credit union’s ability to meet all of the member’s financial needs. Make sure to celebrate your member’s one-year anniversary with a simple, handwritten card or a small gift.

Step 3: Engage with your community

In the business services arena, involvement in the local community is critically important. But don’t take a shotgun approach. Get involved in organizations and programs that are meaningful to your prospects.

For instance, if your strategy is focused on offering commercial real estate loans and deposit services to larger, more established businesses, it makes little sense to connect with the local Small Business Development Center, which primarily serves startups. Getting involved with organizations like the Commercial Brokers Association may pay greater dividends.

Step 4: Connect through social media and your website

In today’s business climate, engaging in social media is critical to reaching your target audience. According to a 2013 Gallup poll, prospects who research their buying decisions through social media platforms like Facebook or Twitter show a 17.6% greater chance of making the purchase than those who don’t.

In developing a social media program, focus on efficiency, authenticity, and consistency. Fewer than 20% of your posts should sell your credit union’s products and services. Instead, gain your audience’s trust by posting informational and educational articles. For efficiency, use services such as Hootsuite to schedule posts in advance and across multiple social platforms.

Even with the incredible growth of social media over the past few years, your website still serves as your credit union’s primary marketing and informational hub. Transform the business services page to a place where members can link to outside resources and additional services, then sit back and watch as it becomes a go-to destination for businesses in your community.

Step 5: Unleash your branch sales team

Lastly, don’t forget that your credit union already has a built-in, yet often underutilized sales machine: your branches! But in order to start generating referrals from the branches, you must establish clear goals, provide ample training and product information, and hold your branch team and management accountable. Just 20 minutes a day of consistent focus can result in immediate, quantifiable growth in qualified referrals from your branch network.

Follow the above action steps, and your business services program will reach cruising altitude in record time!

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ACH Risk, Reporting, and Reviews: 3 Considerations for CUs Expanding Business Services

By Brad Johnson, Director of Solutions Consulting at Centrix Solutions, a Q2 Company

More and more credit unions (CUs) are exploring the idea of expanding their business services. Some are well on their way, with commercial bankers recruited and ready; other CUs are a little more cautious—having done little to adopt more complex business services. And caution is more than understandable. Credit unions’ historical focus on consumer offerings gives them unrivaled expertise in retail services, but it also makes the prospect of expanding into the complex realm of business services a bit unsettling.

At the very least, CUs find themselves facing a lot of questions when they start to seriously consider expanding their business services: Is their core equipped for commercial account processing? Will their online platform provide the entitlements control, reporting and other features necessary to serve larger businesses? What transaction channels should be supported—ACH origination, wire, RDC?

And, often, the  answer to one question simply generates more questions.

Take the subject of ACH origination services. A lot of CUs have limited ACH origination activity already, but if they intend to grow their business services, ACH origination volume will no doubt increase. To plan for this, the CU must take a hard look at their current processes and technology and find scalable ways to handle a bigger ACH lift, while simultaneously mitigating risk.

 Three of the biggest ACH considerations around expanded business services are:

 1. ACH monitoring and anomaly detection

New clients represent increased risk. As CUs expand services, they’ll see a sharp increase in the resource requirements necessary to underwrite and manage new commercial members—some of whom might be originating more activity on their own than the CU previously originated from all its members combined (assuming they did any at all).

It’s vital to be proactive, implementing technology before ACH activity begins to spike. CUs must find tools that can automatically monitor ACH activity to detect anomalies, manage exposure limits and provide general oversight of all origination activity.

Starting with a solid, proactive strategy around monitoring and general data management for ACH origination will prove well worth the investment as activity grows. On the other hand, a reactive strategy, and managing the process with a lot of manual intervention, substantially increases both your risk and the stress on your operations staff.

2. Accurate and regular reporting

CUs expanding their business offerings may face an exponential increase in workload, making it next to impossible to track and report ACH activity manually. CUs hoping to scale their business services should not depend on unwieldy Excel spreadsheets, but should instead invest in efficiency-boosting reporting tools.

Even if a credit union doesn’t have the originator volume to support a reporting platform at the start of their foray into business services, by investing in robust, intuitive technology early on—coupling ACH reporting with monitoring and data management functionality—they will ease growing pains and substantially reduce risk. A full-featured ACH reporting platform can save a lot of time and effort by quickly and easily generating reports for the CU’s board or for annual ACH audits.

3. Annual risk reviews: what you need to know

Regulations require a comprehensive risk assessment on each originator at least once per year. But, more than just a compliance box to check, these assessments—if done right—can greatly reduce risk by providing insight into originators’ business activities. CUs should keep in mind that the risk surrounding commercial accounts is made up of more than their ACH activity. A solid risk assessment process, powered by the right tools, will look beyond ACH activity to include the overall financial health of the originator. Assessments should be able to spot red flags in customers’ deposit accounts—like insufficient funds and overdraft activity—as well as their loan positions or past due history. A business that has no anomalous ACH activity may still present significant risk. Identifying the warning signs early can help manage that risk—and the relationship with that business—in ways that ultimately benefit both the CU and the business in the long run.

Expanded offerings doesn’t have to equal increased manpower

Increased services don’t necessarily equal an increase in payroll. With the right tools, credit unions can expand their business offerings, while reducing the ACH-related workload of their back-office employees. CUs on the fence about implementing more business services should remember—the right tools can make the prospect less frightening and the process more profitable.