When it comes to member business lending (MBL), the rules can feel a bit like playing a game of Dungeons & Dragons (D&D). For those unfamiliar, D&D is an iconic role-playing game with two key components: the rulebooks, which dictate how the game is played, and the Dungeon Master (DM), who has the power to shape the game’s outcomes, sometimes overriding the rules entirely. Similarly, in the world of credit unions and MBL, there’s a rulebook that financial institutions must follow—but external factors like credit risk landscapes, credit policy changes, and regulatory updates often function like Dungeon Masters, altering the game on a whim.
To succeed in this unpredictable environment, credit unions must be prepared to adapt and strategize when the rules shift. This blog explores the “rulebooks” and “Dungeon Masters” that influence member business lending and offers actionable advice on how credit unions can stay ahead in the game.
Rule #1: The Ever-Changing Credit Risk Landscape
The credit risk landscape resembles the broader setting your D&D campaign might take place in. Sometimes conditions are constructive and rewarding, while at other times, they’re fraught with challenges. The Federal Reserve recently shared insights into how businesses perceive their own credit risk, breaking them down into three categories: low, medium, and high risk.
Interestingly, businesses with higher credit risk are often the most optimistic about revenue growth, even when their profitability struggles or cash flow remains uneven. For credit unions, this means navigating an environment where member businesses may overestimate their ability to pay back loans or absorb operating costs. These shifts in the credit risk landscape are often beyond your control, but your role is to differentiate between opportunities worth pursuing and those best avoided.
Strategy Tip:
To adapt to this evolving reality, implement robust credit-scoring models tailored to small businesses. These tools can help you quickly assess risk and streamline decision-making. For larger credits, it is critical that you leverage solutions like Baker Hill’s Financial Analysis to better understand the cashflow capabilities of the member business. Having that insight can make it so your journey is not walking through “credit doom”, but rather in a “castle of creditworthiness”. Additionally, monitoring external economic indicators and industry-specific trends can provide a clearer picture of when to tighten or loosen lending criteria as well as provide portfolio managers insights into your members repayment capacity.
Rule #2: Credit Policy Updates Are Your Rulebook
Over the years the D&D rulebook has changed the tempo of play. Likewise, the change in business environments requires updates to credit policies that can fundamentally change how the game is played. A change in your credit policy—for instance, a decision to adjust scoring thresholds or modify collateral requirements, the opening of a new market or product—can ripple through your MBL strategy. Additionally, internal mandates handed down by senior leadership, such as targeting specific markets or avoiding others, can shift your approach overnight.
While credit policies are typically designed to mitigate risk and align with institutional goals, they can sometimes feel restrictive, limiting your ability to respond creatively to market demand. That’s why it’s important for credit unions to approach policy updates with a blend of innovation and compliance.
Strategy Tip:
Maintain flexibility within your credit policies to allow exceptions under specific circumstances. Establish cross-departmental alignment to ensure that sales, underwriting, and compliance teams remain on the same page. Just like in D&D, teams have knights, wizards, etc., leveraging their specific talents, collaboration can help credit unions make effective, member-centric decisions without compromising on policy integrity.
Rule #3: Regulatory Changes Are the Ultimate Dungeon Master
If credit policies are your rulebook, then regulatory oversight is your Dungeon Master. Regulators have the power to enforce rules, introduce new compliance requirements, and even mandate market behavior, leaving your credit union scrambling to adjust. The regulatory environment for member business lending is especially dynamic, with changes impacting loan limits, reporting standards, and approval processes. And not to mention Federal Reserve policy, pricing, market demand etc., that can all change in a snap!
For example, consider how the regulatory focus on transparency in lending practices has increased the need for credit unions to demonstrate robust borrower assessments. These changes often arrive quickly, forcing credit unions to reallocate resources and modify processes to stay compliant.
Strategy Tip:
Make compliance a proactive effort, not just a reactive one. Employ technology that integrates regulatory updates into your workflows, such as automated compliance checks during the underwriting process. Ensure your team stays informed with regular training sessions and partner with organizations that offer up-to-date insights on shifting regulations.
Sometimes you just have to be flexible and go with the whims of the Dungeon Master. Not one of us a year ago could have anticipated the changes to the Consumer Financial Protection Bureau (CFPB), but now it is just a time to pivot and adapt!
Adapting to the Unpredictable Nature of MBL
While many factors in the member business lending arena are out of your control, adaptation is the name of the game. Take inspiration from D&D players who work together to overcome challenges placed by the Dungeon Master. Here’s how credit unions can approach MBL with a forward-thinking mindset:
- Empower Your Team. Just like players in D&D have different roles (warrior, healer, mage), your team members bring specific skills to MBL. Equip them with training and tools to alleviate the pain points of rapidly shifting landscapes.
- Leverage Technology. Automation is a key advantage that lets you respond quickly to credit risks, regulatory requirements, and updated credit policies. Use machine learning to analyze borrower behavior and cross-check against compliance standards.
- Build Resilience. Even when the rules change, your relationships with member businesses can remain a constant advantage. Strengthen these relationships by offering tailored lending options and consulting services that address their specific needs.
Winning the Game
Successfully navigating the rules that impact member business lending requires finding harmony between preparation and agility. While you can’t always predict when the Dungeon Master will throw a curveball, you can craft strategies that empower your credit union to respond effectively. By understanding shifts in the credit risk landscape, aligning internal credit policies with external trends, and anticipating regulatory changes, your credit union can remain an authoritative, trusted player in the game.
The world of MBL may be complex, but for credit unions willing to take on the challenge, the opportunities for growth and impact are immense. Don’t just play the game. Master it!
This blog is part of a series: Winning at Member Business Lending. Check out the other installments in this series:
Cooperative Strategies for Member Business Lending Success
Twister and the Challenge of Coordination
