NCUA Proposes New Member Business Lending Rule

The National Credit Union Administration voted 3-0 on Thursday to propose a new member business lending (MBL) rule. The proposal offers federally insured credit unions greater flexibility and reduces regulatory burden for credit unions participating in member business lending. The NCUA released this explanatory document to help

“The proposed rule will get the NCUA out of the waiver business, and will, within the limits of statutory restrictions imposed by the Congress, give credit unions greater latitude in determining who to lend to and under what conditions,” said NCUA Board Member Rick Metsger. “Credit unions will no longer have to ask for permission before they make commercial loans.” 

This proposed rule will empower boards of directors to set overall policies including:

  • The institution’s appetite for risk;
  • The types of loans it will grant;
  • Its trade area;
  • Its underwriting standards;
  • Its collateral requirements; and
  • Its risk rating system. 

Metsger indicated in his statement that management will be responsible for implementing these policies and developing processes and procedures to carry them out, and now have the latitude to determine what constitutes appropriate MBL experience when hiring staff.

Specifically, the proposed rule eliminates detailed collateral criteria and portfolio limits. The general aggregate statutory limit on MBLs in the current rule is the lesser of 1.75 times the credit union’s net worth or 12.25% of the credit union’s total assets. The proposal notes that the MBL limit should not be expressed as an absolute percentage, but rather as 1.75 times the applicable net worth requirement for a credit union to be considered well-capitalized.

This means that a credit union could have an MBL cap greater than 12.25 percent of its assets if it has enough capital on hand. This is because the statutory MBL cap is actually the lower of 1.75 times its actual net worth or 1.75 times its risk-based net worth (RBNW) requirement, and 1.75 times its RBNW could be more than 12.25 percent. 

The proposal focuses on broad, well-defined principles that clarify regulatory expectations for federally insured credit unions engaged in commercial lending activities. Among the host of prescriptive limits, definitions, and waivers removed or modified by this rule are:

  • The requirement for a personal guarantee;
  • The 80 percent limit on Loan-to-Value ratios;
  • The limit on unsecured MBLs;
  • The requirement that staff have 2 years of direct experience;
  • Detailed limits on construction and development loans;
  • The restrictive definition of “associated borrower”; and
  • The 15 percent of net worth limit on loans to one borrower, which will now increase to 25 percent if the additional 10 percent is supported by readily marketable collateral.

Additionally, the rule creates a new definition of “commercial loan,” which is similar but not identical to the definition of “member business loan.”  In general, the term “commercial loan” encompasses a broader range of loans, but in a couple of areas it is narrower. The new definition was created for two reasons: First, because there are controls and policies that should be applied to the broader range of commercial loans, and not just to member business loans, and second because Congress was very prescriptive in defining member business loans.

One issue important to NW credit unions is how the NCUA treats state-specific rules going forward. The NCUA offered three suggestions:

  • Eliminate current state rules but allow states to submit new rules for approval;
  • Grandfather state rules as they exist, but prohibit any new rules from being submitted for approval; and
  • Grandfather state rules, and allow states to submit new rules for approval.

“The NCUA’s current prescriptive approach to member-business lending is a big constraint on credit unions’ ability to serve their members’ needs and the needs of their community,” said John Trull, AVP of regulatory affairs for the NWCUA. “State-specific MBL rules helped Northwest credit unions weather the 2008 Wall Street banking crisis and proved how they excel in sound lending and risk management practices. State specific rules provided the NCUA a road map for improvement.”

Trull stated that the Association, with the help of our members and partners, will strongly advocate for a final MBL rule that preserves current state rules and respects the dual charter. The NCUA will accept public comments on the proposal for 60 days following publication in the Federal Register.

Questions about this story? Contact James Pearson: 206.340.4790, jpearson@nwcua.org.

 

Posted in Advocacy News, NCUA.