A credit union lender's guide to working with brokers

Why this guide exists

A commercial loan broker is paid to find a lender for a borrower. For a credit union with a business lending team, brokers are a source of requests from outside the branch footprint and outside the current membership. Taken carelessly they are also a source of loans that cannot close, because the borrower cannot join or the loan does not fit under a limit.

This guide is about process. It gives no opinion on whether your credit union should work with brokers. Your board’s commercial loan policy decides that.

Four checks before credit

1. Membership. Can the borrower join under your field of membership? Brokers often do not know your charter. Tell them in one sentence who can join and how, and ask them to confirm it before sending a package. A loan to a non-member is a different instrument under the rules, and a participation bought from another lender is different again.

2. Room under the cap. Under 12 CFR 723.8 the aggregate limit on net member business loan balances is the lesser of 1.75 times actual net worth or 1.75 times the minimum net worth the statute requires, unless your credit union is exempt. The net balance counts unfunded commitments. A construction loan uses room on the day you commit, before a dollar is advanced.

3. The limit to one borrower. Your policy must cap loans to one borrower or group of associated borrowers at no more than the greater of 15 percent of net worth or $100,000, plus 10 percent of net worth for amounts fully secured by readily marketable collateral. “Associated borrower” reaches further than the named borrower. It covers any person or entity “with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower.” Ask the broker at the start for every entity the sponsor owns that borrows from you or could.

4. Policy fit. Section 723.4 requires your policy to state the types of commercial loans permitted and your trade area. A request outside either is an exception before credit is even considered.

A broker who gets a clear answer on these four in the first call will send you better requests. Publishing them is better still.

Keeping underwriting independent

Section 723.7(c) reads: any third party a credit union uses “to meet the requirements of this part must be independent from the commercial loan transaction and may not have a participation interest in a loan or an interest in any collateral securing a loan that the third party is responsible for reviewing, or an expectation of receiving compensation of any sort that is contingent on the closing of the loan.” The rule lists exceptions, among them a third party that only services the loan and a service organization your credit union controls.

A broker paid at closing has exactly that expectation. The practical reading:

• The broker’s summary, spreadsheet and projections are the borrower’s submission. They are not your analysis.
• Financial analysis, the collateral valuation method and the risk rating are done by your staff or by an independent third party, not by the broker.
• Appraisals and environmental reports are ordered by you.
• The broker does not sit in the credit decision.

Section 723.7(b) also bars a commercial loan where additional income to the credit union or its senior managers is “tied to the profit or sale of any business or commercial endeavor that benefits from the proceeds of the loan.”

Fees: who pays, and in writing

Brokers are usually paid by the borrower at closing, sometimes by the lender, sometimes by both. Whatever the arrangement:

• Get the fee agreement. Ask for the signed agreement between the broker and the borrower. Know the amount and when it is earned.
• Show it on the closing statement. A fee paid from loan proceeds is a use of proceeds and belongs in your sources and uses.
• If you pay, say so. A fee from the credit union to the broker should be disclosed to the member in writing.
• Check state law. Some states license commercial loan brokers or require disclosures. The rules differ, and this guide does not survey them. Ask your counsel about your state and the borrower’s.

SBA loans have their own rules. If your credit union is an SBA lender, a broker is an agent under 13 CFR part 103. An agent must sign and provide a compensation agreement, and SBA may require a charge it finds unreasonable to be reduced or refunded. SOP 50 10 8.1 limits what an agent may charge the borrower: 3 percent of the loan amount on loans up to $50,000, and above that 2 percent of the first $1,000,000 plus 0.25 percent of the amount over $1,000,000, capped at $30,000. Contingency fees and flat fees are not allowed, and the fee is disclosed on Form 159. See the 7(a) package checklist.

Worked example (hypothetical). A broker brings a $1,400,000 SBA 7(a) request. Under the SOP formula the most the agent may charge the borrower is 2 percent of the first $1,000,000, which is $20,000, plus 0.25 percent of the remaining $400,000, which is $1,000. That is $21,000, under the $30,000 cap. A fee agreement that says “2 percent of the loan, due only if it closes” fails twice: 2 percent of $1,400,000 is $28,000, above the formula, and a fee owed only on closing is a contingency fee.

Fair lending

Regulation B defines a creditor as a person who “regularly participates in a credit decision.” For the sections that bar discrimination and discouragement, the term “also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made.” A broker is inside that second sentence. You are inside the first.

What follows for your process:

• A request that reaches you through a broker is a request to you. Your notice duties run from when you have what your process treats as a complete request, however it arrived.
• Do not let a broker’s choice of which clients to bring become your screen. Take requests on the same terms from every source.
• Never ask a broker for information about a borrower that you could not ask the borrower.

See what to do after a bank says no for the notice rules as a borrower sees them.

What a useful submission looks like

Tell brokers what you want on the first pass. A short list works:

• One page: borrower, owners, loan amount, purpose, collateral, sources and uses
• Confirmation that the borrower can join, and how
• Three years of business tax returns and the latest interim statement
• A debt schedule for the business and for each owner of 20 percent or more
• For real estate: rent roll or lease, trailing twelve months of income and expenses, purchase contract
• Every related entity that borrows from the credit union
• The broker’s fee agreement

The deal summary builder prints a one-page summary in this shape. What a lender-ready package looks like is the version of this list written for the other side of the table.

When the loan is too large

A request above your limit to one borrower, or above the room under your cap, is not a decline by default. Under 12 CFR 701.22 you can originate and sell participations, keeping at least 10 percent of the outstanding balance for the life of the loan if you are a federal credit union, and a participation sold without recourse comes off your net member business loan balance. Tell the broker early that a second credit decision is involved. See loan participations explained.

Say what you want, in public

Brokers read your Form 5300 before they call. It shows what you hold and what you made this year. It does not show what you want next. A credit union that publishes its loan types, size range, trade area and membership rules gets fewer requests it cannot use.

On this site a representative with a work email at the credit union’s own domain can claim the page for free and correct facts. What brokers see about your institution walks through the page. Nothing a credit union adds changes the public figures or the order of any list.

Questions to ask a broker

• Has the borrower confirmed it can join?
• Who pays your fee, how much, and when is it earned?
• Which other lenders have seen this request, and what did they say?
• What entities does the sponsor own that borrow from us?
• Is anything in the package your estimate and not the borrower’s document?

General information, not legal, tax or credit advice. A lender's own policy decides what it will do; ask it for the policy in writing.

SBA does not require you to use an agent or broker for a loan application. SBA has not reviewed or endorsed this site.