Depending on who you talk to, the credit union business lendinglandscape could easily be a mix of record loan growth peppered witha drop in delinquent debt to an environment that is thriving betterthan what bank competitors are experiencing.

Credit unions may be entering a new phase of lending recovery asthey tweak traditional methods to grow loans and explore new areasto start and expand their business lending programs. One area thatmay see a revival is in the area of participation loans.

Michigan Business Connection underwrites and originatescommercial loans and manages more than $250 million in credit unionbusiness loans. The CUSO in Ann Arbor, Mich., was recently involvedin the financing of a multi-unit residential and retail propertyand a wellness center that it says proves how the state's creditunions continue to reduce the financing gap caused by reducedlending by banks and non-bank lenders.

In total, the two loans have 18 combined credit unionparticipants, with MBC providing the construction administrationand loan management, according to the CUSO.

“Risk sharing is critical to safety and soundness, and these twoprojects illustrate the important role that credit unions areplaying with economic development, affordable housing and qualityhealthcare,” Beardsley said.

For MBC, it's further proof that collaboration is an advantagethat credit unions have over other lenders.

“I don't think I've ever seen other financial institutions ableto sincerely put their competitive differences aside in order tocollaborate for the greater good like credit unions can,” Beardsleysaid. “CUSOs help make that happen by providing expertise, but moreimportantly, a framework for the efficient exchange of risk andreward.”

Indeed, there was a run-up in participation loans from the dayswhen that type of shared financing was easy to buy into, said LarryMiddleman, president/CEO of CU Business Group LLC, a Portland, Ore.-based business lendingand deposit service CUSO that serves 420 credit unions in 44states. At their peak, they numbered nearly $7 billion making up25% of all business loans, he added. But when the recession hit in2008 and 2009, participation loans started down the same rocky roadas business loans.

“A lot of bad loans have gone through participations. Now, we'reseeing more interest in buying participation loans,” Middlemannoted. “The loan-to-share ratio is far lower than they've beenhistorically. Today, the average loan is $430,000 compared to$305,000 in 2007.”

These days, credit unions want to do a bit of everything fromexpanding strong commercial lending programs to include depositservices to building a niche with smaller business loans, Middleman said. As a whole, stronger expertiseis coming into the industry more and even if credit unions areopting to partner with CUSOs, they are still leveraging thatin-house expertise to help manage their business lendingprograms.

While there may be a positive shift in business lending forcredit unions, Biz2Credit CEO Rohit Arora is not convinced. The NewYork firm connects small businesses with lenders for financing.

“Despite the surge of loan approvals by credit unions from late2011 and early 2012, they are rejecting more than half of thefunding requests from small business owners,” Arora said. “They arelagging behind as traditional banks are becoming more aggressive inthe small business lending space.”

One of the culprits may be credit unions either not makingbetter use of their technology or having systems that are too slowto process loans, Arora offered.

According to its most recent Biz2Credit Small Business Lending Index, which is a monthlyanalysis of 1,000 loan applications, credit union approval of smallbusiness loans slid for the ninth consecutive month to 45.9% inFebruary, down from 46.9% in January. Arora said approvals havedropped more than 20% in a year's time.

Meanwhile, Biz2Credit found that banks with less than $10billion in assets are making more loans through entities such asthe SBA's Small Loan Advantage program, which require littlecollateral and offer loans from $50,000 to $350,000 – a rangeconsidered a sweet spot for some credit unions. Ironically, thatsame niche is gaining attention among large banks such as Bank ofAmerica and TD Bank.

“Small business lending is a profitable business.  I'msurprised it has taken so long for some players to get back intothe game,” Arora said.

Still, when comparing bank chargeoffs and delinquencies to thoseat credit unions, Middleman said the latter group still has theedge.

“Banks took early hits in 2009 and 2008 mainly through a lot ofspeculative and construction loans, especially from a lot ofcommunity banks,” Middleman said. “That's a big reason why creditunions didn't have a huge spike.”

Looking back to 2004, 60-day loandelinquencies hammered financial institutions, peaking in 2011 atmore than $600 million brought on by a sluggish economy and lendingpractices, Middleman said. Participation loan and member businessloan chargeoffs at credit unions were $25 million in 2006 comparedto $375 million in 2011. The good news is that in 2012, creditunions experienced a decline in both delinquencies and chargeoffs,he noted.

“We're now entering a third cycle of recovery where we protectwhat we got and do more with fewer resources,” Middleman said.