NCUA's New MBL Rule: Commercial Loans versus MBLs

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Since the MBL rule came out in February, NAFCU members have asked two questions in connection with this final rule: “What is the difference between a commercial loan and an MBL?” and “Why did NCUA do that?” We’ve been sorting this out for ourselves. NCUA has promised a lot of guidance, but here’s what we know so far…

Commercial Loans versus MBLs

New section 723.2 defines a “commercial loan” as:

“… any loan, line of credit, or letter of credit (including any unfunded commitments), and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for personal expenditure purposes.”

See, 81 Fed. Reg. 13529, 13554. It then excludes from this definition seven different kinds of loans: (1) Loans made by a corporate credit union; (2) Loans made by a federally insured credit union (FICU) to another FICU; (3) Loans made by an FICU to a CUSO; (4) Loans secured by a 1- to 4- family residential property; (5) Loans secured by a vehicle manufactured for household use; (6) Loans fully secured by shares in the credit union or deposits at another financial institution; and (7) Loans, which equal less than $50,000, when the aggregated outstanding balances of a borrower or an associated borrower are added to any unfunded commitments to them, less any portion secured by shares in the credit union.

The upswing is that there are two types of loans that have normally been considered MBLs, subject to the prescriptive MBL rules, that are not going to be “commercial loans” - loans secured by a 1- to 4- family residential property and loans secured by a vehicle manufactured for household use. It’s important to note that a “loan secured by a vehicle manufactured for household use” includes loans secured by a passenger vehicles, including minivans, SUVs, pick-up trucks, etc., but not vehicles that are part of a fleet or vehicles used to carry fare-paying passengers, possibly including part-time Uber or Lyft use. The preamble offers more details regarding this analysis.

The definition of a member business loan under the new rule is not substantively different from its current definition under section 723.1, though it is formulated differently:

“§ 723.8 Aggregate member business loan limit; exclusions and exceptions.

[…]

(b) Definition. For the purposes of this section, member business loan means any commercial loan as defined in 723.2 of this part, except that the following commercial loans are not member business loans and are not counted toward the aggregate limit on a federally insured credit union's member business loans:

(1) Any loan in which a federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full; and

(2) Any non-member commercial loan or non-member participation interest in a commercial loan made by another lender, provided the federally insured credit union acquired the non-member loans and participation interests in compliance with all relevant laws and regulations and it is not, in conjunction with one or more other credit unions, trading member business loans to circumvent the aggregate limit.

(c) Exceptions. Any loan secured by a lien on a 1- to 4-family residential property that is not a member's primary residence, and any loan secured by a vehicle manufactured for household use that will be used for a commercial, corporate, or other business investment property or venture, or agricultural purpose, is not a commercial loan but it is a member business loan (if the outstanding aggregate net member business loan balance is $50,000 or greater) and must be counted toward the aggregate limit on a federally insured credit union's member business loans.”

See, 81 Fed. Reg. 13558. The new definition for an MBL incorporates the new definition of  commercial loans. In subparagraph (c), it references certain loans that were removed from the commercial loan definition, and pulls them back into the definition of an MBL, including those loans secured by vehicles manufactured for household use and 1- to 4- family residential properties (if not the member’s primary residence). The only significant difference between the new and current MBL definitions is that the new definition specifically excludes non-member commercial loans or non-member participation interests in commercial loans made by other lenders, whereas the current definition includes them as member business loans, except with regard to the statutory cap, where special provisions apply. See, 12 C.F.R. §§ 723.1(e), 723.16(b).

Below is a venn diagram of the broad strokes for easy reference:

Why the difference?

In the preamble to the proposed rule, NCUA discussed why there was a need to distinguish between an MBL and a commercial loan:

“The current rule, however, does not distinguish between commercial loans and MBLs. MBLs are defined by the FCU Act and the current MBL rule, but commercial loans are not. As a result, the safety and soundness risk management requirements contained in the MBL rule have not always been consistently applied to commercial loans that are not MBLs.”

See, 80 Fed. Reg. 37898. As referenced by NCUA, the definition of “member business loan” is not only in NCUA’s rules and regulations; it was established by Congress and is stated in the Federal Credit Union (FCU) Act. See, 12 U.S.C. § 1757a(c)(1). While the scope of what is considered a “member business loan” is set out in the FCU Act, as is the statutory cap on MBLs, the FCU Act does not contain safety and soundness standards for business-purpose loans made by federally insured credit unions - NCUA must establish those. NCUA has drawn the distinction between commercial loans and MBLs so that the risk-based commercial lending policies required by the new final rule could be applied to loans that present a commercial risk from a safety and soundness perspective as determined by NCUA, rather than all loans defined as MBLs by Congress and the FCU Act (which was written for the purposes of the statutory cap). See, 80 Fed. Reg. 37900.

Creating procedures to distinguish between these may be a challenge for credit unions. We are waiting with bated breath for the further guidance NCUA has promised, and will let you know once we hear more.

Comments

[Ben Bigger]

Good article, however, I'm still confused. I still think a credit union's commercial loan policies should be written to limit its commercial loan exposure. This could be done by establishing commercial loans to net worth (even though technically not required under the new regulation).

MBL loans are still limited by current regulation. My fear is credit unions making or buying commercial loans and not understanding concentration risks and not having policies in place to control these risks.

[Elizabeth M. Young LaBerge, NAFCU Regulatory Compliance Counsel]

New section 723.4(c) will require credit unions to establish internal limitations on commercial loans in relation to net worth. This includes limitations specific to secured, unsecured and guaranteed commercial loans, as well as in specific categories/types of commercial loans and to specific borrowers.

The rule requires credit unions who engage in commercial lending to establish the policies to control these risks, including concentration limits, unless their commercial loan activity and asset size is sufficiently small enough. It is true that the new rule does not require a specific concentration limit to be set, but it does require credit unions to establish policies setting their own limits, which must be reviewed and approved by the board. While NCUA is not setting those limitations for credit unions, they will be reviewing them within the examination context for safety and soundness.

See: https://www.gpo.gov/fdsys/pkg/FR-2016-03-14/pdf/2016-03955.pdf

[David Smith]

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