Written by Brandy Bruyere, Regulatory Compliance Counsel
During its Thursday, June 18th meeting, the NCUA Board issued a proposal to amend the Member Business Loan (MBL) rule which aims to provide regulatory relief from some of the more prescriptive underwriting requirements in the rule. This marks the first time in twelve years that NCUA is considering comprehensive changes to this rule, and could have a significant impact on credit unions’ ability to make MBLs. Today I’ll just provide a high-level overview of the proposal, and NAFCU’s Regulatory Affairs team will blog on some of the finer details of this proposal in a series of blogs once the proposal is formally published in the Federal Register.
Just as a brief reminder, the MBL rule (Part 723) contains specific requirements and is not nearly as flexible as NCUA’s general lending rule (section 701.21) in terms of underwriting standards. Here are a few of the current MBL requirements:
- Collateral and security requirements including limits on the loan-to-value ratio, a general requirement that the business’ principals provide a personal guarantee, and limits on unsecured business loans
- Concentration limits on lending to any one member or group of associated members;
- Limits on construction and development lending including a concentration limit and minimum equity interests
NCUA does have a waiver process for the prescriptive regulatory underwriting requirements, although many of the provisions in the MBL rule are statutory, such as the aggregate cap, and are thus not part of the waiver process or this proposed rulemaking.
Rather than setting underwriting standards by regulation, NCUA’s proposal would allow a credit union’s board of directors to establish its MBL program’s standards with generalized safety and soundness requirements. Most notably, proposed section 723.4 sets forth NCUA’s expectations for an appropriate commercial loan policy. Here is a very high-level overview of some of the proposal’s key elements, keep in mind that the actual rule text is rather technical:
- Proposed section 723.4—Commercial loan policy—requires credit unions to adopt a “comprehensive written commercial loan policy” that will “ensure the [credit union’s] commercial lending activities are performed in a safe and sound manner…” See p. 88-90 of the draft proposal (Emphasis added). Here is a bird’s eye view of the proposed rule’s minimum requirements:
- Type of loans permitted;
- Trade area;
- Maximum amount of assets in relation to net worth allowed in secured, unsecured, and unguaranteed commercial loans and in any given category or type of commercial loan;
- Qualifications and experience requirements for commercial lending personnel;
- A loan approval process;
- Underwriting standards “commensurate with the size, scope, and complexity of the commercial lending activities and borrowing relationships contemplated”; and
- Risk management processes “commensurate with the size, scope and complexity of the [credit union’s] commercial lending activities and borrowing relationships.”
- Proposed section 723.5—Collateral and security—while the proposal would remove the current requirement to obtain the personal guarantee of the business’ principals, credit unions’ MBL programs would still need to “require collateral commensurate with the level of risk associated with the size and type of any commercial loan.” Unsecured loans and loans without the personal guarantee of the person with “controlling interest” in the business would require documentation of “mitigating factors” which offset “relevant risk.” See p. 91 of the draft proposal.
- Proposed section 723.6—Construction and development loans—this provision is quite detailed, but generally the proposal would require careful consideration of the construction project’s costs versus the projected value. For more information, see p. 92-95 of the draft proposal.
Again this blog is just a summary, there are many more technicalities to this proposal that we will delve into in the near future. NCUA also issued a table summarizing the proposed changes which may be another helpful starting point. NAFCU’s Regulatory Affairs team will also prepare a Regulatory Alert for our members in the coming weeks.
Must Have Spinach! At 8 months, Nolan has been eating veggies for a while. When we tried to get him to eat spinach for the first time, I was cautiously optimistic since he's a pretty agreeable baby. It went really well...until I ran out of spinach. Then I got this: