NAFCU Compliance Blog

Calling All Commercial Lenders: NCUA's 3Q17 Call Report Instructions Are Now Available

Written by Pamela Yu, Special Counsel for Compliance and Research

Attention all credit union commercial lenders: NCUA has released its September 2017 Call Report Information, including the 3Q17 5300 Form and 5300 Form Instructions.  The new 5300 Form and Instructions, effective September 30, 2017, include revisions to reflect the amendments to NCUA's commercial lending and member business loan (MBL) rule that became fully effective on January 1, 2017. 

Hopefully, credit unions engaging in commercial lending activities are already implementing the new changes and are prepared to identify and start reporting on MBLs and commercial loans this fall.  However, if you are still orienting yourself to the new changes, the 3Q17 5300 Call Report Instructions provide additional guidance that may help to clarify what qualifies as a commercial loan under the new rule.

By way of brief background, a key aspect of the new principles-based rule is its expanded scope to apply to commercial loans as newly defined by the rule.  In the past, Part 723 did not distinguish between commercial loans and MBLs—which are expressly defined in the FCU Act. As a result, the safety and soundness risk management requirements contained in the former MBL rule were not consistently applied to commercial loans that did not qualify as MBLs. See, 80 Fed. Reg. 37898.  Thus, the amended rule has two separate and distinct objectives.  First, the rule establishes safety and soundness requirements for credit unions that engage in commercial lending to their members.  Second, the rule incorporates the statutory cap on the aggregate amount of MBLs that a federally-insured credit union may make.  In furtherance of these two objectives, the rule relies upon two separate definitions: "commercial loans" and "member business loans."  The MBL definition is narrowly limited to its statutory definition and for the specific purpose of applying the statutory MBL cap. See, 12 C.F.R. §723.8.

While the new commercial loan definition is fundamental to the scope and application of the risk management provisions of the revised rule, it is somewhat confusing to apply.  The 3Q17 Instructions to Schedule A – Specialized Lending (NCUA Form 5300 - Page 16) provides a helpful table to illustrate the distinction between MBLs and commercial loans for purposes of Part 723:

Type of Loan	MBL	Commercial Loan
Loan fully secured by a 1 to 4 family residential property (member’s primary residence)	No	No
Business loan fully secured by a 1- to 4-unit family residential property (not a member’s primary residence)	Yes, if the aggregate net member business loan balance is equal to or greater than $50,000	No
Business loan secured by a vehicle manufactured for household use	Yes, if the aggregate net member business loan balance is equal to or greater than $50,000	No
Business loan secured by a vehicle used in a fleet or to carry fare-paying passengers	Yes, if the aggregate net member business loan balance is equal to or greater than $50,000	Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000
Business loan with aggregate net member business loan balance less than $50,000	No	No
Business loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions	No	No
Business 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	No	Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000
Non-member business loan or non-member participation interest in a commercial loan made by another lender	No	Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000

Still confused?  The 3Q17 Instructions also provide some examples to illustrate the commercial loan definition:

"A member has $35,000 in commercial purpose loans and the credit union grants this member an additional $40,000 in a commercial purpose line of credit, the credit union should report both loans as commercial loans as of the date of the second loan is granted regardless of whether the line is drawn on.

In this example, the same member subsequently paid down the $35,000 commercial purpose loan to $15,000 and has a $34,000 balance on the business line of credit, making the total outstanding balance $49,000.The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is still $55,000. The credit union is required to list both of these loans as commercial loans.

If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and the credit union reduces the line of credit to $34,000. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans.

If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and makes no change to the $40,000 business line of credit, but adds $6,000 to a secured share account at the credit union. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans."

Additionally, the 3Q17 Instructions give some examples of how MBLs should be reported:

"If a member has $35,000 in business purpose loans and the credit union grants this member an additional $40,000 in business purpose loans, the credit union should report the additional $40,000 as a Member Business Loan.

If, in the case above, the member subsequently pays down the $35,000 business purpose loan to $15,000 and the $40,000 business loan to $34,000, making the aggregate total business purpose loans $49,000, the credit union is not required to list any of these loans as Member Business Loans since the new aggregate loan total is $49,000 and is now below the $50,000 threshold in §723.8(c) of NCUA’s Rules and Regulations."

It is worth noting that the commercial loan and MBL reporting examples in the 3Q17 Instructions are generally consistent with previous agency guidance addressing a credit union's MBL reporting requirements once the aggregate of the total business purpose loans to a member are paid down below $50,000, as well as a 2016 NCUA legal opinion indicating that when a single closed-end MBL falls below the $50,000 threshold, the loan is no longer classified as an MBL for purposes of the MBL cap.  See, NCUA Legal Opinion Letter 16-0604.  The 3Q17 Instructions clarify that a similar analysis applies in the reporting of commercial loans that are paid down below the regulatory dollar threshold.

Prioritizing Your Efforts……. Superhero Style!

Written By Shereefat Balogun, Regulatory Compliance Counsel

 As compliance professionals, it's so hard being the good guy all of the time because there are so many things to focus on.   In the movies, the superhero has to choose between saving their partner, saving themselves, or completing the mission.  And of course, in the movies the superhero ends up somehow successfully doing all three.  Well, despite the common adage that "life isn't always like the movies", we can rise like the superhero by prioritizing our efforts and focus on the issues that our regulators are focusing on, specifically the CFPB and NCUA.

About three weeks ago, the CFPB issued its monthly report on consumer complaints.  Based on the report's findings, consumer debt collection continues to be a clear focus of the CFPB, as well as credit reporting. 

• Debt Collection- For a few years now, debt collection has been the source of most complaints submitted to the Bureau, and this report continues to highlight that. Debt collection was the most complained about product submitted in January 2017. Generally, consumers complain that collectors contacted them for debts that they do not owe; harass them by making multiple calls weekly or daily, or using false, deceptive, or misleading statements in connection with the debt collection; threatened to take illegal actions, such as arrests or seizure of the consumer's property; and impermissibly contacted or shared information with others, such as employers.  For more on the CFPB's efforts on debt collection practices, check out my previous blog on the topic here.

• Credit Reporting- The CFPB notes that the most common issues identified by consumers are problems with incorrect information on credit reports, which accounted for 76% of the complaints. Other issues identified include, the process for blocking and removing information resulting from identity theft.  The report states that consumers report notifying furnishers of information of identity theft with appropriate documentation, only to have accounts verified as accurate.  Notably, just two weeks ago, the Bureau issued its Supervisory Highlights which focuses on consumer reporting and concludes that the Bureau's work in the consumer reporting market is ongoing and remains a high priority.  Amongst its findings, the CFPB observes: 
  • Weaknesses in compliance management systems, such as weak oversight by management and the Board of Directors over furnishing practices; failure to update policies and procedures; weak training of employees who conduct furnishing and dispute handling operations; and weak monitoring and corrective action.
  • Absence of policies and procedures designed to: handle and investigate direct disputes from consumers; facilitate the creation and retention of documentation to substantiate final dispute decision; prevent duplicative or mixed reporting.
  • False representations by financial institutions in order to obtain a consumers' consumer report. For example, making false statements that a consumer had applied for a loan, and thus the institution had a permissible purpose to obtain the report.

These reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks. 

And let's not forget about our beloved…NCUA! The Supervisory Priorities for 2017 may be helpful in prioritizing our efforts.  Indeed, we referenced the 2017 priorities in a previous blog back in January.  Generally, the guidance informs credit unions of NCUA's primary areas of focus for 2017 as an effort to help prepare for this year's examination process.  As a reminder, this year's supervisory focus will be on:

• Cybersecurity- NCUA will continue to evaluate credit unions' cybersecurity risk management practices and encourages credit unions to use the Cybersecurity Assessment Tool (CAT) to bolster their security and risk management processes.  In case you may have missed it, NAFCU members can take advantage of a user-friendly workbook version of CAT here.
• Bank Secrecy Act Compliance- In 2017, NCUA field staff will focus on credit unions' relationship with money services businesses (MSBs) and other accounts that may pose a higher risk for money laundering.  NCUA expects credit unions to conduct appropriate due diligence, analysis, and monitoring when offering services to MSBs.  NCUA Letter to Credit Unions 14-CU-10 provides guidance on how credit unions can identify and mitigate risks associated with MSBs.
• Internal Controls and Fraud Prevention- NCUA field staff will continue to assess the adequacy of internal controls, as well as procedures and processes designed to prevent and control fraud.
• Interest Rate and Liquidity Risk- NCUA has started using a revised interest rate risk supervisory tool and new examination procedures to assess interest rate risk management practices.  For more information about the revised tool and new procedures, see NCUA Letter to Credit Unions 16-CU-08.  Also, examiners will focus on the relationship between interest rate risk and liquid risk.
• Commercial Lending- As you know, NCUA revised its Member Business Loans/Commercial Lending rule, which became effective January 1, 2017.  Field staff will evaluate a credit union's commercial loan policies and procedures and assess the risk management processes associated with managing a commercial loan portfolio.  NCUA warns that credit unions should be prepared to provide documentation to support management's ability to monitor and manage its commercial loan portfolio.  For more information, see NCUA Letter to Credit Unions 16-CU-11.
• Consumer Compliance- NCUA field staff will examine credit unions' compliance with the Military Lending Act (MLA), as well as the Servicemembers' Civil Relief Act (SCRA).  For more information on the MLA, see NCUA Letter to Credit Unions 16-CU-07.  NCUA Letter to Credit Unions 09-CU-12 provides guidance on complying with the SCRA. In particular, this enclosure provides a good overview of the SCRA requirements.

This month's Compliance Monitor, written by my colleague André Cotten, analyzes the NCUA's supervisory priorities for 2017 in more detail and highlights NCUA and NAFCU resources on each issue.  If you haven't checked it out already, please do!

"S..S..S.. on my chest 'cause I'm ready to save 'em."  Mantra of the year, Yes!!!  Be your credit union's superhero by focusing on the regulators' priorities to help save time, lives, and money.

As always, if you have any questions, please feel free to reach out to us.  We are here for you!

Love is . . . Supervisory Guidance: Collateral, new LTV ratios

Written by André B. Cotten, Regulatory Compliance Counsel

February is for lovers, and we are loving the new MBL guidance from NCUA. Previously, my colleague gave an overview of some of the changes to the rule beginning January 1, 2017. Today, I would like to take a closer look at collateral for commercial lending, and also the new suggested  LTV ratios for real estate.

Collateral is essential to commercial lending transactions. The credit union should ensure that the collateral is sufficient to offset inherent risks in the commercial lending transaction. According to the MBL guidance, “a credit union should make credit decisions based on the adequacy and reliability of a borrower’s source of repayment, the net earnings stream generated from a borrower’s business operations.” (See, section 723.5).

In general, commercial loans provide funding for members businesses to purchase an asset or to provide working capital that either fund the member’s inventory or accounts receivable during the business cycle. NCUA suggests that credit unions at least require member businesses to pledge the assets being financed as collateral.  NCUA also warns that additional collateral may be needed if a member’s assets are less marketable or possess a higher degree of risk. The credit union should closely consider a member business’ creditworthiness and the marketability of their inventory or accounts receivable.

As a result, NCUA advises that less marketable, less stable, and less valuable collateral should be monitored more closely than highly marketable, highly stable, and highly valuable collateral. Credit unions should establish policies and procedures to monitor less marketable collateral. These policies and procedures should include systems and process to respond to changes in asset values and the condition of the pledged collateral.

Simply put, the more marketable an asset, the more easily it can be converted to cash. The age and condition of the collateral, as well as possible alternative uses for the collateral, impact its marketability. For instance depreciating assets, such as newer equipment or vehicles, warrant a relatively higher LTV ratio. Alternatively, single-purpose real estate, like a car wash, has limited alternative uses, which warrants a lower LTV ratio.

Moreover, the amortization of a loan should reflect how long the credit union anticipates the collateral will be useful. This is determined by the type and expected use of the collateral being pledged. To mitigate this risk, the credit union should offset the potential volatility of an asset with the LTV. NCUA advises that credit unions use a reasonableness standard and align its policies with prudent lending practices to establish commercial LTV limits.

Real Estate Loan to Value Ratios

Section 723.2 defines the term, loan-to-value ratio, as the aggregate amount of all sums borrowed including outstanding balances plus any unfunded commitment or line of credit from all sources on an item of collateral divided by market value of the collateral used to secure the loan.

Prior to the implementation of the new MBL Rule, section 723.7(a)(1) read:

“The maximum loan-to-value ratio for all liens must not exceed 80% unless the value in excess of 80% is covered through private mortgage insurance or equivalent type of insurance, or insured, guaranteed, or subject to advance commitment to purchase by any agency of the federal government, an agency of a state or any of its political subdivisions, but in no case may the ratio exceed 95%”

(referring to loans for real estate). This version of the rule had a couple exceptions for construction loans or if the Regional Director granted a waiver. Otherwise, real estate loans had a loan-to-value cap.

The new MBL rule does away with the 80% cap for real estate and introduces loan to value ratio limits based on accepted industry and bank regulatory standards. NCUA also notes pursuant to section 723.4(f)(5) that credit unions should establish internal LTV ratio limits, which should be based on an internal risk management analysis and accepted financial institution industry standards.

The new LTV guidelines for real estate include:

• Loan Type (LTV Ratio Guidance)
• Raw Land (65%)        
• Land development or improved lots (75%)
• Construction-Commercial, non-owner occupied multifamily, and other nonresidential (80%)
• Improved property-commercial, non-owner occupied multifamily, and other nonresidential (85%)

NCUA does not require credit unions to strictly follow these guidelines. However, NCUA does view this guidance as a reasonable benchmark. The agency believes this guidance is in line with industry practice and is appropriately tailored to the risk associated with the various types of collateral.

NCUA also notes that when credit unions calculate the LTV ratio for an acquisition transaction, the credit union should establish the collateral value as the lesser of:

• Acquisition cost (purchase price) plus improvements; or
• Appraised value

This method ensures the risk is distributed between the credit union and the member business. NCUA wants to see the member with “skin in the game” or their own capital invested in the success of business.

NCUA warns that if a credit union seeks to approve any loans as an exception to the recommended loan to value policy highlighted above, then the credit union must implement prudent internal limits and set procedures to track and monitor these high risk loans.

As credit unions continue to adjust to the new MBL guidance, the NAFCU compliance team will continue to provide updates in future publications. As always, feel free to email us at [email protected] if you have any specific questions.

Upcoming Training and Webcasts. The Spring session of our Regulatory Compliance School is coming up April 10-14 in Arlington, VA. If you’re thinking about joining us, be sure to register with code SPRINGSAVINGS by Friday, 2/10 to save $200. If you want to challenge yourself to earn the bragging-rights title of NAFCU Certified Compliance Officer (NCCO), this is the place to do it. Already an NCCO? You’ll earn the full 24 CEUs needed to recertify, without having to retake the exams. 

Also, we have two webcasts this week that may be of interest:

Third-Party Vendor Cyber Risks, and Examiner Expectations

Live Webcast: Tuesday, February 7 | 2:00-3:30 p.m. ET

How to Implement a Comprehensive BSA Training Program

Live Webcast: Wednesday, February 8 | 2:00-3:30 p.m. ET

NCUA’s New MBL and Commercial Lending Rule Is Now Effective

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Friday!  On January 1, 2017, NCUA’s new MBL rule finally went into effect.  While the personal guarantee provision had an early implementation in May 2016, the bulk of the new rule was not implemented until the beginning of this year.  While NAFCU’s Compliance Team has continued to blog about this topic since NCUA proposed comprehensive changes to its MBL rule in June 2015, now that the entire final rule is effective, let’s do a quick recap of the new rule and then talk a little more about another one of the key areas of the new rule that members have been asking about: the small credit union exemption.

Quick Recap

In February 2016, the NCUA Board approved a final rule to amend Part 723, NCUA’s MBL rule.  The new rule fundamentally changes the manner in which NCUA approaches commercial lending, from both a regulatory and supervisory perspective.

NCUA adopted its first regulation governing MBLs in 1987 and has amended the rule several times over the years, including amendments to incorporate MBL provisions enacted in 1998 in the Credit Union Membership Access Act (CUMAA).  Among other things, CUMAA limited the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the FCU Act for a credit union to be well capitalized.  This statutory aggregate limit on MBLs was incorporated in Part 723 of NCUA’s regulations.  Part 723 also defined MBLs, established minimum safety and soundness standards for making MBLs, and implemented various statutory exceptions from the aggregate MBL limit.  Prior to the new final rule, NCUA had not significantly changed Part 723 since 2003.

Historically, Part 723 has treated commercial lending as synonymous with the statutory member business lending definition under the FCU Act. The new final rule, however, expands the scope of the rule to apply to commercial loans as newly defined under the regulation. The rule delineates loans subject to the statutory MBL cap and those subject to the safety and soundness policy and infrastructure requirements.

The new rule further diverges from prior iterations of the MBL rule by moving from a prescriptive regulatory framework to a broad, more flexible, principles-based regulatory approach.  This means that credit unions are no longer subject to strict underwriting requirements—including collateral and security requirements, equity requirements, and loan limits—expressly set out in the regulation.  Instead, the new rule sets out the broad elements that NCUA believes are necessary to ensuring that a credit union’s commercial lending policies and programs are safe and sound.  It is up to individual credit unions engaging in business lending to address these elements in their own commercial lending policies with risk-based limitations and requirements that are suitable to their own business lending activities.

Notably, because regulatory waivers are inconsistent with a principles-based regulatory approach, the new final rule eliminates the agency’s MBL waiver process.

Deep Dive: Small Credit Union Exemption

Section 723.1(b)(1) of the final rule includes an exemption for any credit union that is less than $250 million in assets and also meets both of the following requirements:

1. The credit union's aggregate amount of outstanding commercial loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus any outstanding commercial loan balances and unfunded commitments sold and serviced by the credit union total less than 15 percent of the credit union's net; and
2. In a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15 percent of the credit union's net worth.

Smaller credit unions meeting these conditions are exempt from the final rule’s requirements regarding board of director and management responsibilities and commercial lending policies in §723.3 and §723.4 of the final rule. 

In the preamble to the final rule, NCUA described the purpose of the exemption:

“. . . qualifying credit unions, especially smaller institutions which are only occasionally granting a loan(s) that meets the rule’s commercial loan definition, [are] alleviated from the burden of having to develop a full commercial loan policy and commercial lending organizational infrastructure.”

81 Fed. Reg. 13530, 13535 (Mar. 14, 2016).

The small credit union exemption provides significant regulatory relief for qualifying credit unions.  Section 723.3 of the new rule addresses the board duties and organizational requirements that a credit union must address in order to administer a safe and sound commercial loan program, including board oversight and approval of a credit union’s commercial loan policy, experience and expertise for personnel involved in member business lending, and necessary qualifications for senior executive officers and staff.  Section 723.4 of the new rule requires that credit unions involved in commercial lending must adopt and implement comprehensive written commercial lending policies and procedures for commercial lending that provide for ongoing control, measurement, and management of the credit union’s commercial lending activities.  Credit unions meeting the qualifying conditions for the exemption do not have to comply with these key provisions of the final rule.  

For smaller credit unions that are minimally involved in commercial lending activities, meeting these more rigorous board oversight, infrastructure, and policy requirements could be difficult and, without the exemption, some credit unions would be hindered from providing credit access to small businesses. The small credit union exemption in the final rule “avoid[s] the inclusion of credit unions that infrequently originate minimal amounts of loans that technically meet the regulatory commercial loan definition.” 81 Fed. Reg. at 13535.

NCUA has cautioned, however, that the exemption is not meant to be a means for credit unions to circumvent the regulatory requirements of §723.3 and §723.4 by strategically keeping its held-in-portfolio amount below 15 percent of net worth.  To avoid circumvention of the rule, the final rule makes it clear that the 15 percent exemption threshold is measured against all commercial loans originated by the credit union, including commercial loans on the balance sheet, commercial loans sold and serviced, and commercial loans sold and not serviced.

NCUA has also emphasized in its recently-issued commercial loan and MBL guidance that all credit unions must have a board-approved loan policy covering their lending activity in general (See, 12 C.F.R. 701.21(c)(2)), including those credit unions that qualify for the exemption. 

So, exempt credit unions, you’re not completely off the hook:  Exempt credit unions must still ensure their general loan policy covers the types of commercial loans the credit union makes, including satisfying all other applicable commercial lending requirements in Part 723.

As credit unions adjust to the new rule, we may continue to provide information on the rule, either on the NAFCU Compliance Blog or in other publications. Of course, as always, members are encouraged to reach out to the Compliance Team with any questions.

NCUA Incorporates Guidance on Member Business Lending into Examiner’s Guide – A Deep Dive into Guidance on Section 723.4

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On Tuesday, November 29, 2016, NCUA issued Letter to Credit Unions 16-CU-11 notifying credit unions that long-awaited guidance on the revised member business lending rule has been added to the NCUA Examiner’s Guide with just over a month before the effective date of the rule. The agency originally promised that guidance would be shared with credit unions in the preamble to the final rule published in the Federal Register on March 14, 2016. See 81 Fed. Reg. 13530, 13533 (Mar. 14, 2016).

Since the final rule was released, the NAFCU compliance team has received numerous questions regarding revised section 723.4, which mandates federally insured credit unions adopt and implement commercial lending policies and procedures that address topics such as the types of commercial loans offered by the credit union, trade area, qualifications of credit union employees involved in the origination process and commercial loan underwriting standards. The updated Examiner’s Guide finally provides some much-needed guidance for credit unions drafting commercial lending policies. Here is what the guidance has to say about some specific areas of concern.

Types of Commercial Loans and Trade Areas

The guidance notes that a “credit union should analyze its membership and ensure its commercial lending staff has the necessary expertise, gained through experience and training, to understand the needs of the membership and the types of loans offered.” For example, if a credit union predominantly serves fishermen in Gloucester, Massachusetts, the guidance seems to suggest that the credit union should have staff that have the requisite experience and training to understand the needs of commercial fishermen and the types of loans they may need for their businesses to thrive.

Similarly, a “credit union must be certain it is capable of serving its identified trade area.” This means understanding local demographics, economics and industries as well as being familiar with what influences those aspects of the trade area. Returning to our Gloucester example, the economy on the North Shore of Massachusetts is largely based on commercial fishing and tourism. The guidance seems to suggest that a credit union serving this area may want to have an understanding of what factors influence the local economy (e.g., overfishing or lack of tourism). Furthermore, such a credit union may want to make sure that it has the capacity to serve businesses that may have infrequent payment streams since both commercial fishing and tourism are largely seasonal and highly depend on the weather.

Qualifications and Experience Requirements for Lending Staff

When it comes to policies addressing the qualifications and experience of commercial lending staff, the guidance recommends that credit unions “consider relevant factors specific to the credit union and to the needs of its commercial borrowing members” such as “loan volume, projected loan growth, trade area, complexity of the borrowing relationships, types of loans permitted” and any other unique factors that could influence the commercial loan portfolio of the credit union. This seems to indicate that NCUA expects credit unions with higher loan volumes, higher projected loan growth or with greater complexity in borrowing relationships to have more experienced staff but that is not explicitly stated in the guidance or preamble.

In addition, the guidance notes that when determining staffing levels “a credit union should consider appropriate levels of management, relationship managers, and support staff as may be required to ensure member’s [sic] needs are responsibly serviced in a safe and sound manner.” Likewise, a “credit union should also consider an appropriate separation of duties to prevent potential conflicts of interest and other problems in loan underwriting, collection, and portfolio monitoring functions.” In other words, the guidance suggests that credit unions developing policies regarding staffing levels in commercial lending departments consider what staffing level is sufficient to ensure adequate separation of duties and how many additional resources, in the form of managers or support staff, are needed to maintain that staffing level.

Underwriting Standards

The Examiner’s Guide also states that a policy outlining credit union commercial underwriting standards “must address the required analysis and depth of the financial review performed to support a credit decision.” For example, a “credit union’s borrower analysis should focus on the borrower’s financial condition and ability to repay. The guidance indicates that this includes income and expense trends, debt service ability, balance sheet changes, and the impact of those changes on the borrower’s ability to service debt. NCUA also expects the guidance to discuss the required evaluation of related parties and the influence those parties have on a borrower’s ability to repay a loan.”

In addition, “the policy must establish due diligence requirements to evaluate the other sources of income or losses that affect the guarantors or principals to determine the global financial condition and the debt service ability of a borrower and any associated borrowers.” Moreover, a “credit union’s underwriting standards must address the quality of the financial information used to make a credit decision and ensure that the degree of verification reflected in the financial information is sufficient to support the financial analysis and the risk assessment of a credit decision. A credit union can determine the quality of a financial statement using the level of assurance provided by a preparer and the required professional standards supporting the preparer’s opinion.”

The guidance also addresses additional aspects of a credit union commercial underwriting policy including the use of tax returns or financial statements, the types of collateral allowed, LTV ratio limits, personal guarantees, and valuation methods.

But Wait! There’s More…

These are just some areas where credit unions have expressed concerns or sought additional clarification regarding the requirements of section 723.4. Other aspects of the commercial lending policy requirement are also discussed in the guidance. The Examiner’s Guide also addresses other aspects of the revised member business lending rule including commercial loan workouts and construction and development lending. As we continue to digest the guidance, we may provide periodic updates either on the NAFCU Compliance Blog or in other publications. As always, members are encouraged to reach out to the Compliance Team with any questions.

Have a great week!

Overheard at Regulatory Compliance Seminar: All I Want for Christmas is NCUA’s MBL Guidance

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

NAFCU’s Regulatory Compliance Seminar was held last month in New Orleans, Louisiana. Credit union volunteers, staff and compliance personnel from all over the country attended and it was a pleasure to meet so many of you in person.

One presentation I was especially looking forward to was by Vin Vieten, Senior Credit Specialist for NCUA who presented Principles Based Commercial Loan Risk Management. Following that presentation, NAFCU asked when NCUA expected to release the promised guidance regarding the new MBL rule and updates to the Call Report to accommodate the rule change. The guidance had been expected to be released in September. As of that moment, NCUA did not have an estimated release date for us. However, Mr. Vieten did say he expected it before January. Apparently, NCUA may be saving the guidance as a Christmas present. Mr. Vieten did also say that he didn’t expect that anyone will be shocked or surprised by the guidance, as it will focus on risk management. This echoes previous indications from NCUA that existing guidance on managing loan risk may significantly inform this new guidance.

Elements of Risk Management of Commercial Lending

Mr. Vieten’s presentation outlined 4 elements of commercial loan risk management: people, policies, process, and governance and control.

The “people” risk element includes the Board of Directors who are ultimately accountable for commercial lending by virtue of their approval of the policy and oversight of loans and staff. It also includes senior management, who must have a comprehensive understanding of commercial lending and be able to manage the risk appropriately, and lending staff who must underwrite, process and evaluate commercial loans.

The “policy” element refers to the commercial lending policy, which must address many aspects of the credit union’s commercial lending activities including:

• Types of commercial loans permitted;
• Trade area;
• Portfolio concentration limits;
• Qualification requirements for lending staff;
• Underwriting standards;
• Loan approval processes; and
• Other risk management processes, including periodic review, risk rating and monitoring.

The “process” element describes the risk management process. This includes performing and documenting an initial risk assessment on a commercial loan, monitoring and perhaps reevaluating that risk, and establishing a credit risk rating process.

The “governance and control” element addresses the responsibility of the board for overall supervision, and internal controls, such as the loan review area.

Below is a slide from the presentation containing a summary of the risk management process for commercial lending as a whole:

Newly Announced FFIEC Webinar on the Military Lending Act

On Wednesday, the FFIEC announced a webinar on the Military Lending Act being offered through the FFIEC’s Industry Outreach Program. The webinar will be held December 1, 2016 at 3:00 pm eastern. Credit unions can register for the webinar here.

The Tooth Fairy and the Fed; Calculating the MBL Threshold – New Legal Opinion Letter Released

The Tooth Fairy and the Fed

Written by Carrie Hunt, EVP of Government Affairs and General Counsel

When I went in to wake up my daughter yesterday she was gripping a one-dollar bill and smiling.  “Did the tooth fairy come last night?,”  I asked.   She nodded her head yes and looked at the bill in her hands.  “Mommy, why does all money say ‘Federal Reserve note’ on it?”  Her question caught me off guard and I paused and stumbled through an explanation.  My daughter is 7 and I really had not had enough coffee yet to figure out how to explain the Fed to a 7 year old. 

Her question made me think though about the importance of the Federal Reserve and about NAFCU’s annual meeting with the Board of Governors.   Each year traditionally the NAFCU Board of Directors meets with a member of the Board of Governors of the Federal Reserve and presents a report on credit unions.  This report is an amazing opportunity to tell the credit union story before monetary policymakers and make the case for the importance of credit unions in the economy.  Much of information of what NAFCU puts in that report comes from a survey of our members.  So, please take a moment to fill it out! 

https://www.nafcu.org/research/participate/

Luckily, the Hunt household expects a few more visits from the tooth fairy in the upcoming months and I can work on perfecting my talking points on currency and the central bank.   Or how in a few years the tooth fairy will only be using apple pay…

***

Calculating the MBL Threshold – New Legal Opinion Letter Released

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

On August 9^th, NCUA issued Legal Opinion Letter 16-0604 regarding the definition and reporting of member business loans (MBLs).

The question posed to NCUA was whether a member’s single closed-end MBL continues to be an MBL once it has been paid-down below the $50,000 threshold. See, 12 C.F.R. § 723.1(b)(3). NCUA affirmed that no, it does not. The letter referenced a prior legal opinion letter from 2002:

“In 2002, the Office of General Counsel considered whether a FICU could use the outstanding loan balance for an MBL, rather than the original amount, to determine if subsequent business purpose loans to the same member should be classified as MBLs. The resulting opinion concluded:

[A FICU] may add the outstanding balance of a member’s aggregate MBLs to the original loan amount of any new, subsequent loan to determine if, when added together, they exceed the rule’s $50,000 threshold for qualifying as an MBL. . . . If the combination of all of these loans does not exceed $50,000, the subsequent loan is not an MBL and is not subject to our MBL rule.”

Citing, NCUA Legal Opinion Letter 02-0384 (May 30, 2002). In addition, the letter quoted the Preamble to the 2003 MBL Final Rule:

“When the member pays down the amount of the total business purpose loans owed to the credit union so that the aggregate amount falls below the $50,000 threshold, the credit union is no longer required to report the [loan that caused the aggregate amount of business purpose loans to the member to exceed the $50,000 threshold] as an MBL.”

See, 68 Fed. Reg. 56537, 56545 (Oct. 1, 2003). The letter clarified that the same analysis that applies when aggregating multiple loans in the 2002 letter and the Preamble, also applies to a single loan. However, this analysis was specific to closed-end loans, as was indicated by the 2002 letter which stated, “We note, however, that a CU may not use outstanding balances in this context on lines of credit due to the member’s ability to draw on the line and easily alter the MBL’s outstanding balance.” Credit unions looking for additional guidance on calculating the MBL threshold can review the examples in the 2003 Preamble at 68 Fed. Reg. at 56545.

The Lowdown on Non-member Loan Participations and the MBL Cap; New Resource: NAFCU FFIEC Cybersecurity Assessment Tool Workbook

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Since NCUA’s Final Rule on MBLs was released, the Regulatory Compliance Team has gotten a few versions of the same question: Is it true that nonmember loan participations will no longer count towards a federal credit union’s MBL cap?

In the immortal words of Neil Patrick Harris’s Barney Stinson:

Yes, it’s true. Under the revised MBL Final Rule, the definition of a “member business loan” specifically does not include non-member participation interests in commercial loans made by other lenders.

Below is the text of the new rule:

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

This section incorporates the statutory limits on the aggregate amount of member business loans that may be held by a federally insured credit union and establishes the method for calculating a federally insured credit union's net member business loan balance for purposes of the statutory limits and NCUA form 5300 reporting.

(a) Statutory limits. The aggregate limit on a federally insured credit union's net member business loan balances is the lesser of 1.75 times the actual net worth of the credit union, or 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of the Federal Credit Union Act.

(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. …”

See, revised 12 C.F.R. § 723.8. (Emphasis added.) As you can see, non-member participation interests are generally not included in the definition of “member business loans” for the purposes of the cap. For more information on the new definition of member business loans in the revised MBL rules, check out this previous blog post on the topic. This change will be effective January 1, 2017.

NCUA reserved the option to re-include non-member participation interests in member business loans if it identified that credit unions were essentially trading MBL interests to circumvent the aggregate limit. It discussed this caveat in the Preamble to the Final Rule:

“To preserve the existing safeguard against evasion, the final rule retains in substance the current rule's stipulation that, for the exclusion to apply, a credit union must acquire the non-member loan or non-member participation interest in compliance with applicable laws and regulations and it must not be swapping or trading MBLs with other credit unions to circumvent the statutory aggregate limit. Attempts to circumvent the statutory aggregate limit will not be tolerated and will be treated as a violation of this final rule. A credit union that demonstrates a pattern or practice of evading the MBL cap, as with any other regulatory violation, will be subject to commensurate supervisory action.”

That perception could be an important consideration when purchasing and selling participations, but that caution is not new.

Still don’t believe us? Have a look at NCUA’s Summary of Key Changes to NCUA’s Final Member Business Loan Rule document, as screenshot of which is below:

If NAFCU member credit unions have other questions regarding the changes to the MBL rule, please let your NAFCU Regulatory Compliance Team know. We are here to help.

New Resource Now Available: NAFCU FFIEC Cybersecurity Assessment Tool Workbook

NAFCU's Regulatory Compliance Team has created a new, user-friendly version of the FFIEC’s Cybersecurity Assessment Tool. The NAFCU FFIEC Cybersecurity Assessment Tool Workbook is a members-only, editable, fillable, self-tallying Excel workbook that allows credit unions to self-test the cyber risk and readiness. Once all items are completed, the workbook  presents the credit union's Risk Profile and Cybersecurity Maturity results in a visual, sharable format. We’ve also put together some available-to-all resources for cybersecurity compliance, including insightful blog posts, articles and webcasts, to help credit unions stay on top of this cybersecurity issues.

Not a NAFCU member yet? Learn how NAFCU can help your credit union with compliance and more.

Overheard at Annual Conference: NCUA’s Expectations for Commercial Loans Made Without A Personal Guarantee

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

If you were able to attend NAFCU’s Annual Conference and Solutions Expo in Nashville two weeks ago, I hope you caught Friday morning’s presentation by NCUA’s Myra Toeppe, Regional Director for Region III. She spoke about the MBL final rule and its impact on examinations.

During that presentation, she gave attendees a peek into NCUA’s upcoming supervisory guidance regarding MBLs made without personal guarantees. As most of you know, the strict requirement for a personal guarantee was eliminated on May 13th as part of the new MBL final rule.  As we mentioned previously, NCUA has promised further guidance on implementing the new, risk-based commercial lending requirements. Guidance is generally expected in September. However, as the personal guarantee was implemented before the rest of the final rule, it appears guidance has already been issued internally at NCUA in Bulletin 4650B, Supervisory Expectations for Credit Unions When Loans Are Granted Without the Personal Guarantee of the Principal.

Expectations for Commercial Loans Without Personal Guarantees

Under the transitional provision in current section 723.7(f), credit unions can write MBLs without a personal guarantee where they determine and document that mitigating factors sufficiently offset the relevant risk posed by not obtaining the personal guarantee. On January 1, 2017, new section 723.5(b) will require this determination and documentation of the loan file for any commercial loan where a personal guarantee is not required.

NCUA expects federally insured credit unions that write MBLs (or certain commercial loans in 2017 and beyond) without a personal guarantee from the principal to have sufficient protections in three areas: risk management practices, underwriting and assessment of the borrower’s financial condition, and ongoing monitoring.

Risk Management Practices. NCUA expects that a federally insured credit union would only grant an MBL/commercial loan without requiring a full, unconditional personal guarantee from the principals when the borrower is in strong condition financially. This strength, and the credit union’s decision to forego the guarantee, should be supported by a comprehensive risk assessment.

Underwriting and Assessment of the Borrower’s Financial Condition. In order to establish the borrower’s financial strength, a federally insured credit union should have the processes and practices in place to accurately determine the borrower’s financial condition. The quality of the financial information used in the financial analysis should be commensurate with the level of risk and complexity of the borrower and the principals' operations.

A “financially strong borrower” should be able to demonstrate a preponderance of the following qualities:

• Superior debt service coverage;
• Positive income and profit trends;
• Strong balance sheet with a conservative debt-to-net worth ratio;
• Historical track record of meeting lending and trade obligations;
• Readily salable collateral supporting the loan;
• Low LTV ratio; and
• Documentation evidencing sufficient due diligence to verify the borrower’s creditworthiness.

Ongoing Monitoring. NCUA requires that federally insured credit unions be diligent in ongoing monitoring and detection of any changes in the risk associated with the borrower’s operations. The credit union should have risk monitoring practices in place for early detection of deteriorating creditworthiness. The credit union should not only be risk grading the loan at origination, but also throughout the life of the loan.

Examination Focus on MBLs/Commercial Loans

Ms. Toeppe also discussed that examinations will focus on portfolio controls and management. NCUA field staff will evaluate the credit union’s portfolio management processes for sufficiency. This will include assessing the reasonableness of the credit union’s internal limits, the adequacy of its internal tracking and monitoring, and compliance with the credit union’s internal policies and NCUA’s guidance.

For more details, we will have to wait until September for the promised guidance. In the meantime, credit unions looking for more help can look to NCUA’s Letter to Credit Unions 13-CU-02 and the attached Supervisory Letter 13-01. These letters were issued in February, 2013 regarding expectations for MBL waivers, and they served as the basis for NCUA’s guidance.  

Personal Guarantees and an SBA Reminder; Programming Note

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Welcome to the Brave New World of member business loans, where personal guarantees aren’t strictly required. Like so many fictional summer camp attendees, the strict personal guarantee requirement died on Friday the 13^th.

For the period between May 13^th and the end of 2016, after which the remainder of NCUA’s new commercial lending rules go into effect, a transitional provision has been added to 12 C.F.R. § 723.7:

“§723.7   What are the collateral and security requirements?

[…]

(f) Transitional provision: A federally insured credit union that, between May 13, 2016 and January 1, 2017, makes a member business loan and does not require the full and unconditional personal guarantee from the principal(s) of the borrower who has a controlling interest in the borrower is not required to seek a waiver from the requirement for personal guarantee, but it must determine and document in the loan file that mitigating factors sufficiently offset the relevant risk.”

So, credit unions wishing to make MBLs without a personal guarantee no longer need to seek a waiver, but they must determine and document the mitigating factors which offset the risk of not requiring the personal guarantee. However, it is important to remember that there is still a strict personal guarantee requirement for member small business loans guaranteed by the SBA, such as SBA 7(a) Loans and SBA 504 Loans.

Section 120.160 of the SBA’s Business Loans Regulations requires a personal guarantee from all business owners holding a 20% or more ownership interest:

“§120.160   Loan conditions.

The following requirements are normally required by SBA for all business loans:

(a) Personal guarantees. Holders of at least a 20 percent ownership interest generally must guarantee the loan. SBA, in its discretion, consulting with the Participating Lender, may require other appropriate individuals to guarantee the loan as well, except SBA will not require personal guarantees from those owning less than 5% ownership.”

The SBA does not provide waivers for the personal guarantee, except regarding loans to an employee stock ownership plan (ESOP). See, 13 C.F.R. § 120.354.

Historically, SBA-guaranteed loans have always been exempt from the collateral and security requirements of section 723.7 of NCUA's MBL rules. See, 12 C.F.R. § 723.4(c). But with the removal of NCUA’s strict personal guarantee requirement, it is important to remember that not all strict personal guarantee requirements are going the same way.

Programming Note.

NAFCU’s office will be closed at noon today, and all day Monday, in observation of Memorial Day. For those men and women who have served or are serving their country in the armed forces, NAFCU thanks you. We will be back to blogging on Wednesday. Everyone have a great long weekend!

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.

NCUA Finalizes MBL Rules

Written by Brandy Bruyere, Director of Regulatory Compliance

As many of you know, on Thursday the NCUA Board finalized broad changes to its member business loan (MBL) rules. Most of these provisions will not become effective until January 1, 2017 and we will address some of those changes in future blogs. Today I want to highlight a change that will become effective in late April, 2016 relating to the personal guarantee.

As a reminder, for MBLs, section 723.7 currently requires the personal guarantee of the principals of the organization, with an exception carved out for non-profit organizations. A credit union’s regional director can waive the personal guarantee requirement, but this process can take time that a credit union may not always have when a member is seeking a loan.

The final MBL rule contains a transitional provision specifically for the personal guarantee requirement that will allow credit unions some flexibility in this requirement. Under revised section 723.7(b)(1), if a credit union does not require the principal’s full and unconditional guarantee, the credit union must document mitigating factors that will offset the relevant risk. This provision does not become effective until 60 days after the MBL rule is published in the Federal Register, meaning credit unions will still be required to obtain a member’s personal guarantee until sometime in late April, 2016, absent a waiver from the credit union’s regional director. Here is an excerpt from p. 65 of the section-by-section analysis in the rule’s preamble:

The Board clarifies that the rule allows credit unions to grant loans without the personal guarantee of the principal(s) only when there are strong mitigating factors to offset the additional risk created when the loan is not guaranteed by the primary beneficiary of the transaction, which is generally the principal(s) of the borrower…The credit union’s decision to forego the use of a guarantee should only be approved when it meets the needs of a financially strong member and other credit-risk mitigations exist.

The Board reiterates that having the principal(s) of the borrower commit their personal liability to the repayment obligation is, in many cases, very important for commercial lending. Accordingly, the rule makes clear that excusing principals from providing their personal guarantee for the repayment of the loan may only be done with appropriate corresponding underwriting parameters and portfolio safeguards. The credit union should set prudent portfolio limits for these types of loans, measured in terms of a reasonable percentage of the credit union’s net worth. Commercial loans without a personal guarantee should be tracked and periodically reported to senior management and the board.

The final rule is located here, and NCUA created this summary of the changes. NAFCU’s Regulatory Affairs team is working on a Final Regulation for our members which will be available in the coming weeks.

MBL: A New Look at Commercial Lending, pt 4.

Written by Alicia Nealon, Director of Regulatory Affairs

Welcome back to the fourth and final installment of our Compliance Blog series on the NCUA’s MBL proposal, where we have highlighted the key issues that we are looking for your feedback on.  Last week, we discussed what would have to be included in a credit union’s board approved commercial lending policy.

This week, instead of seeking feedback from you about the proposal, I want to clarify the answer to a question that we have received from several of our members: How will this proposal treat nonmember MBL loan participations for the purposes of the statutory cap?

The short answer is that currently, and under the proposal, nonmember MBLs do not count towards the statutory cap. NCUA, however, under its current regulation, requires a credit union to apply for a waiver if its non-member loan participation balance in MBLs is going to exceed the lesser of 1.75 times the credit union's net worth or 12.25 percent of the credit union's total assets.  Essentially, even though non-member loan participations don't count towards the MBL cap, NCUA's current rule requires a credit union to apply for a waiver if its non-member loan participation balance is going to exceed the cap. The proposal will eliminate the need to apply for that waiver.  As a result, credit unions will be able to purchase non-member business loans without seeking NCUA approval when their commercial lending portfolio gets to a certain concentration. Credit unions will still need to comply with NCUA's general loan participation rule regarding non-member MBLs.

While this may have been the final installment of NAFCU’s MBL blog series, please continue to reach out to me directly ([email protected], 703-842-2266) with your thoughts as you and your credit unions review and digest NCUA’s proposal in advance of the August 31, 2015.

MBL: A New Look at Commercial Lending, pt 3.

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Monday! And welcome back to the third installment of our Compliance Blog series on the NCUA’s MBL proposal, where NAFCU highlights the key issues that we are looking for your feedback on.  Last week, we discussed the scope of NCUA’s proposed exemption for small credit unions. Today, we will focus on what will be required of credit unions that are covered by this proposed rule, specifically what must be included in a credit union’s board approved commercial lending policy.

Currently, NCUA’s MBL Rule (Part 723) contains prescriptive requirements that are not nearly as flexible as NCUA’s general lending rule (12 CFR 701.21) in terms of policy or underwriting standards.  NCUA’s proposal will eliminate Part 723’s prescriptive underwriting standards and instead allow a credit union’s Board of Directors to establish its commercial lending standards with general safety and soundness requirements in mind. 

While the proposal, on its face, eliminates the existing prescriptive requirements for LTV ratios, minimum equity investments, portfolio concentration limits for types of loans, and personal guarantees, it will now require these risk management considerations to be adopted in the credit union’s internal commercial loan policy.  In essence, the proposal would require a credit union's commercial lending policy to be much more robust than currently mandated by Part 723, and it would require that the policy address broader commercial lending activities.

The proposal would require a credit union to establish underwriting standards to include LTV ratio limits and methods for valuing all types of collateral authorized prior to extending any commercial loans or MBLs.  In particular, as proposed, §723.4 would require that a credit union’s commercial loan policy
address each of the following areas:

(a) Type(s) of commercial loans permitted to ensure that the credit union staff has appropriate expertise.

(b) The credit union must identify the trade area it wishes to serve, so that the credit union can make periodic site visits to monitory the borrower’s operations.

(c) Establish a maximum amount of assets, in relation to net worth, allowed in secured, unsecured, and unguaranteed commercial loans.

(d) Create qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting commercial loans.

(e) Loan approval processes, including establishing levels of loan approval authority commensurate with the individual’s proficiency in evaluating commercial loan risk.

(f) Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and borrowing relationships contemplated by the credit union.

(g) Risk management processes commensurate with the size, scope and complexity of the federally insured credit union’s commercial lending activities and borrowing relationships. This process must include a credit risk rating system and it must be subject to periodic review by the board of directors.

While the proposal will provide a credit union the flexibility to adopt commercial lending standards that are appropriate for its institution and membership, it is important to keep in mind that NCUA will be focusing its examinations on the accuracy and effectivities of the credit union’s risk management methodologies, underwriting standards, and loan approval process. In the preamble to the proposed rule, the NCUA Board explains that “the proposed rule contemplates risk management processes that include procedures for achieving a comprehensive understanding of the borrower’s operations, financial condition, and the industry and market in which the business operates.”  See 80 FR 37898, 37905 (July 1, 2015).  The NCUA Board also notes an expectation that a credit union manage its commercial lending risk by submitting reports on the performance of the commercial portfolio “on a regular basis to senior management and the board of directors.”  Id.

What does everyone think? NCUA estimates each credit union will need to spend 16 hours updating its commercial lending policy to comply with the proposal. Additionally, NCUA estimates each credit union will spend 160 hours adopting a credit risk rating system, if it does not already have one in place. How much time does your credit union think it will need to cohere your existing polices to those dictated by the proposal? Also, how much time will you need to develop and implement a credit risk rating system if you don’t already utilize one? Overall, after reviewing these provisions, do you agree with NCUA’s estimated compliance burden? If not, how much time do you think your credit union will need to spend to update its current commercial lending policy to bring it in compliance with the proposed rule?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts. 

MBL: A New Look at Commercial Lending, pt 2.

Written by Alicia Nealon, Director of Regulatory Affairs

Welcome back to the second installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s MBL proposal and highlight the key issues that we are looking for your feedback on.  Last week, we discussed the scope of the proposal and NCUA’s new definition of “commercial loan.”  Today, we are going to address the scope and applicability of NCUA’s proposed exemption for small credit unions from this rulemaking. 

Extending commercial loans, as detailed in last week’s blog post, would trigger the proposal’s safety and soundness risk management provisions, which would require a credit union to develop a full commercial lending, board-approved policy, and organizational infrastructure.  The proposal, however, would exempt a credit union from these risk management policy and infrastructure requirements if the credit union has BOTH:

1. Assets less than $250 million; and
2. Total commercial loans less than 15% of net worth.

To qualify for the exemption, a credit union must also not regularly originate, sell or participate out commercial loans.  

It is important to note that even if a credit union qualifies for this exemption, it would still need to have a board-approved policy covering is general lending activity, as mandated by Section 701.21.  The proposed exemption would merely allow qualifying credit unions to make sure their existing loan policy provides for the types of commercial loans granted, rather than having to develop a full commercial loan policy and commercial lending infrastructure.

In developing this exemption, the NCUA Board explains that it wants to “avoid inclu[ding] credit unions that infrequently originate minimal amounts of loans that technically meet the proposed commercial loan definition, or that infrequently reduce their risk profile by selling or participating part of their loan portfolio.” See 80 FR 37898, 37900 (July 1, 2015). 

What does everyone think?

Does this exemption capture the credit union that deserve relief from the proposed risk management policies and infrastructure requirement? Should the exemption be asset-driven? If so, do you think that the asset size of $250 million is appropriate? If not, what would be a more appropriate measure? Perhaps the exemption should only consider a credit union’s commercial lending portfolio, rather than its asset size? 

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts.  

MBL: A new look at commercial lending

 Written by Alicia Nealon, Director of Regulatory Affairs

In case you didn’t see, NCUA’s MBL proposal was published in Federal Register last week, and the comment deadline has been set for August 31^st.  With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the proposal and highlight the key issues that we are looking for your feedback on.  Today’s topic is the scope of the proposal.  Specifically, how the proposal would define and treat “commercial loans” versus “MBLs” – and how the distinction between the two would trigger different regulatory requirements.

NCUA’s MBL proposal would comprehensively overhaul the way that the agency approaches commercial lending, from both a regulatory and supervisory perspective. Currently, Part 723 considers commercial lending as synonymous with the member business lending definition under the Federal Credit Union Act (FCU Act). This proposal, however, would expand Part 723’s scope to apply to commercial loans as newly defined under the proposal. So what is that definition? Well, its pretty broad and would generally include any credit extended for commercial, industrial, agricultural or professional purposes…..But this wouldn’t be the Compliance Blog if NAFCU didn’t give you the direct citation

“Commercial loan means 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 investment or personal expenditure purposes. Excluded from this definition are loans made by a corporate credit union; loans made by a federally insured credit union to another federally insured credit union; loans made by a federally insured credit union to a credit union service organization; loans secured by a 1- to 4- family residential property (whether or not it is the borrower’s primary residence); any loan(s) to a borrower or an associated borrower, the aggregate balance of which is equal to less than $50,000; any loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions; and loans secured by a vehicle manufactured for household use.” 

Loans falling under this definition would trigger the proposal’s safety and soundness risk management provisions, which would require a credit union to develop a full commercial loan, Board-approved policy, and commercial lending organizational infrastructure.  But would loans falling under this definition count towards the cap? As is always the case in our world of regulatory compliance, it depends….

The proposal includes several distinctions between commercial loans and a statutorily defined MBL.  All commercial loans are subject to the proposal’s safe and soundness requirements, whether MBLs or not, but only MBLs, as defined by the FCU Act, are subject to the cap. 

So how do these distinctions interplay? Well, we end up with some loans that are subject to the proposed safety and soundness provisions, but are not MBLs and therefore do not count towards the cap. Specifically, any commercial, industrial, agricultural, or professional loan in which a federal or state agency (or its political subdivision) has committed to fully insure repayment, fully guarantee payment, or provide an advance commitment to purchase the loan in full is a commercial loan but not an MBL.  Also, any non-member loan or non-member participation interest in a commercial, industrial, agricultural, or professional loan is a commercial loan but generally not an MBL.

On the other hand, there are two types of loans that are not commercial loans subject to the proposed safety and soundness provisions but they are MBLs and thus, must be counted against the credit union’s net member business loan balance. Specifically, loans secured by a 1- to 4- family residential property that is not the borrower’s primary residence, and loans secured by a vehicle manufactured for household use that will be used for a commercial purpose are generally not commercial loans, but they are MBLs.

Is your head spinning yet? Mine sure is, so hopefully this chart will help you and me both keep it straight:

Type of Loan	MBL	Commercial Loan
Loan fully secured by a 1- to 4- family residential property (borrower’s primary residence)	No	No
Member business loan secured by a 1- to 4- family residential property (not the borrower’s primary residence)	Yes*	No
Member business loan secured by a vehicle manufactured for household use	Yes*	No
Business loan with aggregate net member business loan balance less than $50,000	No	No
Commercial loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions	No	No
Commercial 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	No	Yes*
Non-member commercial loan or non-member participation interest in a commercial loan made by another lender	No	Yes*

 

* If the outstanding aggregate loan balance is greater than $50,000.

Over the next few weeks, NAFCU’s Compliance blog will be breaking down more specific aspects of the proposal, and posing questions for the industry to consider.  In the meantime,be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your questions or thoughts. 

NCUA Proposes to Eliminate MBL Waiver Process

Written by Brandy Bruyere, Regulatory Compliance Counsel

During its Thursday, June 18^th 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. 

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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:

 

CFPB TILA/RESPA Implementation Delay; NCUA Board Meetings Results

Written by JiJi Bahhur, Director of Regulatory Compliance

The Consumer Financial Protection Bureau (CFPB) and National Credit Union Administration (NCUA) have been busy bees this week with announcements and issuances that credit union professionals will definitely want to know and hear more about.

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Delayed Implementation of TILA/RESPA.  On Wednesday, Director Richard Cordray of the CFPB announced that the bureau will be issuing a proposed amendment to delay the implementation deadline for the Truth in Lending Act and Real Estate Settlement Procedures Act (TILA/RESPA) Integrated Mortgage Disclosure requirements until October 1.  This delay would provide credit unions two more months to comply with the rules, which are currently scheduled to go into effect on August 1, 2015.

“The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015,” CFPB Director Richard Cordray said in a prepared statement. “We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks.”

While this delay is a step in the right direction, and one that NAFCU welcomes, a two-month delay may still not be enough to meet credit unions’ needs. Credit unions have been gearing up and working diligently with vendors to ensure timely compliance with the TILA/RESPA Integrated Mortgage Disclosure rule, but there are still a number of ambiguities in the rule that need to be addressed by the CFPB. 

At this point, it’s hard to tell what this will mean or how this will affect credit unions, but once the CFPB releases its proposal on delayed implementation of TILA/RESPA, NAFCU will provide greater detail on what it entails on our compliance blog. 

As an aside, what I would love to see the CFPB do between now and the new October 1 effective date is issue an FAQ detailing answers to questions and ambiguities the bureau has been made aware of. 

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NCUA Board Meeting Results. On Thursday, the NCUA Board held an open meeting to discuss the following items, all of which were unanimously approved:

1. Final Interagency Rule, Part 760 of NCUA’s Rules and Regulations, Loans in Areas Having Special Flood Hazards.
2. Board Briefing, Final Interagency Policy Statement Establishing Joint Diversity Assessment Standards.
3. Final IRPS 13-1, Minority Depository Institution Preservation Program.
4. Notice and Request for Comment, Regulatory Review in Accordance with the Economic Growth and Regulatory Paperwork Reduction Act.
5. Federal Credit Union Loan Interest Rate Ceiling.
6. Proposed Rule, Part 723 of NCUA’s Rules and Regulations, Member Business Lending.

While it would bring me great pleasure to go into all the details surrounding each of these agenda items, I’ll save you from having to read a 5-page blog on a Friday morning.  That being said, we plan to cover some of these items in detail on the blog next week.  If you would like to get a head start on your reading, take a look at NCUA’s Board Action Bulletin, available here. 

Taxi Medallion FAQs Issued by NCUA; Little Big Man

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, the National Credit Union Administration (NCUA) released an FAQ document that provides additional guidance on taxi medallion lending.  This guidance comes about a year after NCUA’s issuance of Letter to Credit Unions 14-CU-06 and Supervisory Letter 14-04 which we blogged about here.  The FAQs do not impose new requirements, but rather are intended to clarify the guidance provided in the 2014 supervisory letter. 

Credit unions that either make taxi medallion secured loans, participate in these loans, or that are contemplating doing so, may find this additional guidance helpful.  The FAQs contain nine questions related to taxi medallion lending and address, among other things, financial reporting of taxi medallion loans, methods for valuing taxi medallions and influences on the value of the medallions as collateral.

Here’s a taste of what you’ll find:

“What is the “speculative” (or market) premium that is mentioned in the guidance?

A taxi medallion is an income-producing asset. Income-producing assets are generally valued by determining the asset’s net operating income (NOI), which is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest. The NOI is the basis for determining the economic value of the asset, that is, the value of the asset based on its ability to generate income.

However, the value of a taxi medallion is also influenced by the number of medallions made available by the local taxi authority. A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand. Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.

Examiners should understand that the portion of the value that is identified as the speculative premium is less stable than the economic value supported by the ability of the medallion to generate income. Any change in the market (e.g., increased competition, reduced supply of drivers or other market changes) will have a more pronounced impact on medallion values.

In addition, because the speculative portion of the price is not supported by the taxi medallion’s NOI, repayment of the speculative portion will have to be from another source (such as, the borrower’s liquidity or other earnings of the principal).

As communicated in the guidance to examiners, credit unions that perform proper credit analysis (that is, analysis that identifies sources of repayment and the reliability of those sources) should be able to withstand the impact of fluctuations in the value of taxi medallions. When the repayment relies on sources other than a borrower’s own operations, examiners should determine whether those repayment sources have been identified by the credit union and are committed to the loan repayment via guarantees or additional pledged collateral.”

To view the rest of the FAQs, click here. 

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Little Big Man.  I just had to share this photo . . . my little man is getting big way too quickly. 

 

SBA Announces New Business Credit Score Model; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

SBA Announces New Business Credit Score Model.  The Small Business Administration (SBA) is currently in the final phases of preparation before launching a new predictive business credit scoring model.  SBA Administrator Maria Contreras Sweet made this announcement as part of a speech on June 10, at the Center for American Progress in Washington, D.C.  The new model will produce a score based upon a combination of an entrepreneur’s personal and business credit scores, and it will be made available to all SBA lending partners for loans of $350,000 or less starting in July.

The SBA has been working on this initiative for over a decade, and the agency believes that transitioning over to this new model will “make it easier and less time-intensive for banks to do business with the SBA.”  One of the reasons that the SBA is touting the new model’s time savings is because under the new model a lender will no longer need to run an analysis of the borrowing company’s cash flow.  According to the agency, this step was a cumbersome one that delayed many loan decisions.  Furthermore, according to the SBA, the new model “ensures that risk characteristics – not socio-economic factors – determine who is deemed creditworthy.”

Along with announcing this new predictive business credit scoring model, SBA Administrator Contreras Sweet also spoke about the SBA One initiative during her speech that was largely focused on how the SBA and its programs need to continue becoming more inclusive of minorities and women.  SBA One, when launched, will be an interactive and user-friendly SBA lending platform that aims to save credit unions and other lenders processing time on the agency’s 7(a) loan program by replacing fax machines and paperwork with automated uploads of  documents, generation of forms and allows electronic signatures.  Contreras Sweet said, “[b]y making the process quicker, cheaper and more intuitive, these reforms will help existing lenders do more small-dollar lending.”  There is no launch date yet available for SBA One.

Along with announcing these two initiatives, Contreras Sweet talked about the agency’s focus on getting more loans to qualified business owners.  She highlighted three areas that the SBA will be focusing on in this effort.  First, the agency is planning to modernize and implement smart systems, so that the SBA is in a position to keep pace with technological advances.  Second, the SBA wants to create a more inclusive agency by tailoring programs that embrace the U.S.’s changing demographics and are more responsive to future demographic shifts.  Lastly, the agency wants to serve as a market maker for small companies by opening new business channels within the federal government, corporate supply chains, and international commerce.

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Free Kick.  The group stage is now two-thirds of the way done, and there is not much more than can be said about the quality of play other than - wow!  This World Cup has had it all so far: amazing goals (another one); heroic individual efforts; incredible upsets; and uplifting performances.  Here is a short primer on where we stand (from my perspective).

Most Impressive teams: Colombia, France, and Germany

Biggest surprise: Costa Rica

Biggest disappointments: Argentina and Spain

Top performers: Guillermo Ochoa, Thomas Muller, and Luis Suarez

In terms of my rooting interests, I am still on a high after Colombia booked its place in the Round of 16 last Thursday.  This is the first time that they have made it out of the group stage since 1990, and I think that Los Cafeteros can win a few more games during this tournament.  James Rodriguez has been excellent, the defense has been solid, Juan Cuadrado has been an unending creative spark in the midfield, and Jose Pekerman has been expertly pulling the strings both in terms of tactics and personnel.  VAMOS COLOMBIA!

Turning to the U.S. squad, I think that all of our collective hearts dropped when Portugal scored that equalizer at the last possible second.  That it came from a Cristiano Ronaldo cross after he had been forced into irrelevancy for 94 minutes was even more deflating.  So, where does that leave the U.S. in terms of qualifying for the business end of the tournament?  They have four points (tied with Germany atop the group, but in second place due to goal differential) entering the last pair of group matches.  Here are the qualifying scenarios facing the U.S. for Thursday’s game (12:00 pm EDT) against Germany:

• The U.S. wins the group if they beat Germany.
• The U.S. advances to the Round of 16 as the second place team in the group if:
  • They draw against Germany;
  • They lose against Germany and the Ghana-Portugal game ends in a draw;
  • They lose against Germany, Portugal beats Ghana, and Portugal’s goal differential in the final game is greater than the U.S.’s by four or less;
  • They lose against Germany by one goal, Ghana beats Portugal by one goal, and Ghana scores an equal number or less goals than the U.S. in their last games; or
  • They lose against Germany by a score of 3-0, Portugal beats Ghana by a score of 2-0, and the U.S. wins the drawing of lots against Portugal.

LET'S GO USA!

NCUA Releases Taxi Medallion Supervisory Letter; NCUA’s “Small Dollar Lending” Webinar; Free Kick; Helpful Webcast

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Last week, the NCUA released Supervisory Letter 14 – 04, Taxi Medallion Lending.  The letter is intended to give NCUA examiners further guidance on how the agency wants them to review taxi medallion loans inside of a credit union’s member business lending portfolio.  Furthermore, the letter also gives credit unions insight into how the agency views the unique risks associated with taxi medallion lending.  The NCUA has released this letter in light of the recent increases to medallion values in several major metropolitan areas, thus leading to increases in medallion lending and the potential risks that go with such lending.

The Supervisory Letter is divided into three main sections: background information on medallions; exam procedures; and additional guidance/resources available to both credit unions and examiners.  The background section is particularly helpful in understanding the NCUA’s view with regards to medallion lending through its discussion of how the medallion business model works and what risks are associated with the medallion’s valuation.  While the bulk of this information is geared towards examiners that may have not encountered much taxi medallion lending during previous examinations, the information is particularly helpful for credit unions to be able to anticipate the questions/concerns from examiners with regards to this unique form of member business lending.

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Next week, on Wednesday, April 16, the NCUA will be hosting a free webinar titled Small Dollar Lending.  The webinar, hosted by Tom Penna, Jr., Economic Development Specialist with NCUA’s Office of Small Credit Union Initiatives, will cover the benefits and requirements of NCUA’s Alternative Payday Loan.

Penna will be joined by Lucinda Johnson, Program Officer in NCUA’s Office of Examination and Insurance, and representatives from two credit unions active in small-dollar lending.  Together, they will discuss how various credit unions have created short-term lending programs that work for their members and factors to consider before starting such a program, including:

• The benefits short-term, small-dollar loans can bring to a credit union’s portfolio mix;
• Regulatory concerns governing this type of product offering; and
• The costs associated with developing or initiating short-term loans.

The webinar will be held at 2:00 pm EDT.  Interested participants must register online in order to participate in the webinar.

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Free Kick.  The Premier League has but one month before it closes its 2013-2014 season.  It has been an exciting season so far that has produced a tight race for the championship, and an equally exciting race for survival at the bottom of the table.  Here are my brief thoughts on how this season will close out.

Bottom Three: While there will inevitably be a surprise or two, I think that Cardiff and Norwich are as good as gone from the Premier League.  I think that Fulham will join them in the Championship, as well.

The Fight for Fourth: A few weeks ago, I said that I thought the top-four had been settled.  Well, sadly, Arsenal has fallen apart these last couple of weeks and they are now in a true dogfight for the final Champions League spot.  While the Gunners have been unable to find any quality, Everton is on a true roll and currently control their destiny by being one point back with one game in hand.  That said, I just have a hard time envisioning Everton maintaining such a strong form over their final six games.  Their run in is just too hard for them to snatch fourth from Arsenal.  I see them dropping at least eight points in three of those matches – at home in the games against Man City and Man U, and away to Southampton.  Arsenal’s final five games are at home to West Ham, Newcastle, and West Brom, and away to Hull and Norwich.  I see them, at most, dropping 5 points over that stretch, and hanging on to fourth.

Top Three: With Liverpool and Man City facing off this coming Sunday, I suspect that the championship race will be defined by what plays out at Anfield that day.  There is just something special happening in that Liverpool clubhouse right now, and I have a feeling that they will find a way to get a positive result on Sunday.  That will put them in the driver’s seat for the last few games, but I don’t think it will be enough.  I see this as another Man City title year with Liverpool a hair behind them in second and Chelsea finishing several points behind in third.

All that said, the Premier League has shown its unpredictability over the last few years, so it would not surprise me at all if the season’s final month takes a few more crazy turns that lead to a completely unforeseen outcome.  No matter what happens, I will just sit back and enjoy the football!

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Webcast.  NCUA & CFPB Updates: What You Need to Know, Now

Get a jump on regulatory preparedness with an update on the most critical upcoming NCUA and CFPB regulations. NAFCU’s Regulatory Affairs team will cover what will be new around capital reform, risk-based capital, interest rate risk, and more.

August 2013 NCUA Report Released; Illinois Follows Suit with ATM Fee Disclosure Requirements; NAFCU’s 2013 Compliance GPS Updated; NAFCU Office Closures

Written by JiJi Bahhur, Regulatory Compliance Counsel

August 2013 NCUA Report.  Earlier this week, the NCUA released its August 2013 NCUA Report.  There are several featured articles, but I’d like to bring attention to the Region II Report: Understanding Member Business Loan Waivers (Report). 

Member business loan (MBL) waivers were addressed in NCUA Letter to Credit Unions 13-CU-02.  The purpose was to clarify the waiver process under Part 723 of the NCUA Rules and Regulations.  However, even with the guidance, the subject remains confusing and has resulted in a number of frequently asked questions (FAQs).  In this Report, NCUA provides the FAQs that it receives on MBL waivers.  The combination of 13-CU-02 and these FAQs can assist credit unions with proper management of their MBL programs.

To review the FAQs, click here.  To review the August 2013 NCUA Report in full, click here.

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ATM Fee Disclosures.  You may recall that the federal requirement for an “on the machine” fee notice for ATMs was removed in late 2012 when President Obama signed the ATM Fee Disclosure Bill (the CFPB officially amended Reg E in March). However, there are still state laws that could require this "on the machine" notice. New York was one of those states until August 1, when Governor Andrew Cuomo signed legislation to remove the requirement from New York law.  And, Illinois Governor Pat Quinn signed legislation to remove the “on the machine” requirement – effective on August 16 – from Illinois law.

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NAFCU’s 2013 Credit Union Compliance GPS has been updated to include recent regulatory changes.  What is this GPS, you ask?  It is a compliance officer’s dream!  NAFCU’s GPS is a must-have, electronic resource for all credit union compliance officers and staff. It explains complex regulatory language in plain English and covers everything from the basic anatomy of a federal credit union to specifics of the NCUA, CFPB, and important credit union regulations including Regulation E, BSA and much more.  For more information and a sneak-peek into the GPS, click here.

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Programming Note.  NAFCU’s offices will close today at noon and remain closed Monday for the long holiday weekend.  We’ll be back to blogging next Wednesday!  Have a great weekend!

June 2013 NCUA Report

Written by Michael Coleman, Regulatory Compliance Counsel

NCUA Report. The June 2013 NCUA Report is now available, you can find it here. This month's issue covers: 

• Board Proposes Limited Derivatives Authority to Manage Interest-Rate Risk
  
• Chairman's Corner: A Surprising Success Story
  
• Board Actions: Board Approves Amendments to Agency Regulations and Issues Proposed Rule on Derivatives 
• Board Perspective: It's Time for Congress to Act
  
• Office of Consumer Protection Report: Hurricane And Disaster Preparedness for Credit Unions
  
• Office of the Chief Economist Report: First-Quarter 2013 State Data Show Growth in Loans, Assets and Membership
• Region V Report: Loan Servicing Discrepancies
• Office of Small Credit Union Initiatives Report: 2013 Grant Initiative Application Period Begins June 17
  
• Office of Consumer Protection Report: Help Your Members Become Prepared Financially for Hurricane And Severe Weather Season
• Fastest First-Quarter Loan Growth in 5 Years

As always, the report includes some interesting articles and information. In this issue's "Board Perspective" section, NCUA Board Member Michael Fryzel calls on Congress to act on pending legislation concerning raising the member business lending cap, as well as legislation concerning supplemental capital. Here are a couple excerpts from the article: 

"The Credit Union Small Business Job Creation Act of 2013 (H.R. 688) introduced in the House Representatives in February, and the Small Business Lending Enhancement Act of 2013 (S. 968) introduced in the Senate in May, would provide the much needed increase in the member business lending cap. In addition, the proposed legislation spells out strong criteria that credit unions, who are aggressive member business lending participants, must meet. With the passage of this legislation in its current form and with proper regulations in place, credit unions will be able to provide the much needed funding for small business expansion and improved economic growth. It’s time for Congress to act.

There is also proposed legislation on alternative capital sources. The Capital Access for Small Business and Jobs Act (H.R. 719), introduced in February, would permit credit unions to utilize uninsured, non-share accounts to supplement capital. In addition, the bill would stop an unfortunate practice that has become all too common—credit unions turning away deposits to protect their net worth ratios."

NAFCU supports H.R. 688 and S. 968, as well as H.R. 719. Check out NAFCU's issue brief on member business lending (scroll down to see NAFCU's numerous comment letters on the issue), and our issue brief on supplemental capital (including this support letter for H.R. 719). We hope that Congress heeds Board Member Fryzel's call to action! 

NCUA Report: What Makes a Sound Member Business Lending Program?

Written by Steve Van Beek

I wanted to highlight an article from the December NCUA Report (the CFPB threw a wrench (or forest) into my reading pile) from Region IV on What Makes a Sound Member Business Lending Program?

If your credit union does member business lending, this is a great article to read and pass along to others at your credit union.  The article discusses four critical elements to a MBL program: (1) capital adequacy and planning, (2) policies and procedures, (3) staffing, and (4) systems.

For example, the article includes this on policies and procedures:

"Comprehensive policies and procedures tailored to the types of MBL products targeted in the strategic plan should drive MBL programs.  This includes underwriting guidelines consistent with the desired risk profile.  Policies and procedures should provide loan officers and underwriters flexibility while holding them to the standard dictated by the board's tolerance for risk."

And, this for staffing: 

"MBL personnel should have experience specific to the loan and collateral types booked to the portfolio.  In addition, an MBL department should have the appropriate mix between business development and loan underwriting personnel.  The proper balance ensures adequate controls between loan sales, underwriting and administration." (emphasis in original).

The article concludes with this summary:

"Credit unions are proven small business lenders. When building an effective MBL program, a credit union needs to acquire the systems necessary to service a portfolio, prepare marketing and strategic plans prior to implementation, and develop policies and procedures commensurate with the size and complexity of the program. Putting in place the infrastructure necessary for a successful and safe and sound MBL program takes commitment and can be expensive, but credit unions have shown a ready willingness to provide the critical resources their members need to start and grow a small business."

Again - if your credit union offers member business loans (or is thinking of doing so in the future), be sure to read the article.  

NCUA Issues Guidance on Obtaining Member Business Loan Waivers

Written by Steve Van Beek

On Friday evening, NCUA issued Letter to Credit Unions 13-CU-02 and Supervisory Letter 13-01 on Member Business Loan Waivers.  NAFCU has requested clarification and guidance in this area for the past couple of years.  We'd heard from credit unions regarding the confusing MBL waiver process - including which areas could obtain waivers, the scope of the waivers and the fulfillment of requested waivers by NCUA.  In other words, this guidance has been asked for by NAFCU and credit unions for a long time and should help credit unions understand and navigate the waiver process.  And, just as importantly, the guidance explains the process to both credit unions and NCUA examiners to ensure everyone is on the same page.

Below is information from the Letter to Credit Unions and the Supervisory Letter.  We'll get into additional details in future blog posts.  The full Supervisory Letter sent to NCUA examiners is here.

The Letter to Credit Unions states:

"I am providing you with a copy of this Supervisory Letter so you can understand how NCUA approaches waivers of the various regulatory requirements for MBLs.

The Supervisory Letter incorporates feedback NCUA received during my Listening Sessions last year, as well as various requests for clarifications regarding when waivers are needed.  In particular, the Supervisory Letter will help you better understand the following:

• What types of waivers are available under Part 723 of NCUA's Rules and Regulations.

• When and how you can obtain a "blanket " waiver applicable to a broader range of member business lending conducted by your credit union.

• Under what circumstance waivers are not needed for actions related to managing existing loans.  In particular, the letter clarifies waivers are not needed for activities not meeting the generally accepted accounting principles (GAAP) definition of a "new loan."

• Which of the borrower's principals are required to provide a personal guarantee and the type of guarantee required based on different ownership structures for the business.  The letter also clarifies what constitutes an associated borrower.

• The documentation you will need to submit and standards you will need to meet to request and qualify for a waiver.

• New NCUA procedures intended to streamline the process for obtaining waivers for credit unions buying a participation interest in an MBL.

...

If your credit union makes or plans to make MBLs, I encourage you to review the attached supervisory guidance.  It will not only help you understand the MBL waiver process, it also contains guidance on sound risk management practices that will aid you in maintaining a safe and sound MBL portfolio."

The introduction of the Supervisory Letter also has a good summary:

"The risks associated with each business borrower are unique; therefore the rule allows for waivers of certain regulatory provisions in order to give credit unions the necessary flexibility to meet the needs of the members they serve.

...

In particular, the guidance:

• Defines the two general types of MBL waivers; an individual loan waiver and a blanket waiver.

• Establishes the specific financial attributes a credit union should exhibit along with the risk management processes a credit union needs to have to qualify for a waiver.

• Streamlines the procedure for processing a waiver request for participated loans.

• Addresses specific issues associated with waiver requests for LTV, personal guarantees and associated borrower.

• Adds clarity to determining the principals and associated borrowers in an MBL relationship.

• Reinforces expectations and best practices related to business lending."

If your credit union makes MBLs, be sure to review the full 15-page Enclosed Supervisory Letter. 

NAFCU's Regulatory Compliance School Just Got Better - Regulatory Update Day

Written by Steve Van Beek

We've heard you!  For the past couple of years, we've received the following feedback about NAFCU's Regulatory Compliance School (paraphrased, of course):

"School is great and provided a solid foundation for understanding the regulatory requirements credit unions face on a daily basis.  BUT, the rules are changing so fast that it would be great to receive updates on what has just changed and what is changing next."

With this in mind, we've created Regulatory Update Day at NAFCU's 2013 Regulatory Compliance School (March 18-23 in National Harbor, Maryland).  

Regulatory Update Day (Thursday, March 21st) will provide:

• A clear understanding of what changes NCUA has in store for 2013 – including their Exam Focus

• An overview of the scope and applicability of the CFPB’s seven new mortgage regulations*

• A detailed look at the CFPB’s Qualified Mortgage/Ability-to-Repay requirements*

• Answers to Frequently Asked Questions on the mortgage rules from NAFCU’s compliance team*

• Insight from credit union attorneys and practitioners on how best to set up your implementation strategy

You can find more information on Regulatory Update Day here.  The three sessions with the "*" are sessions that are also part of NAFCU's Mortgage Reform Webcast Series.

The other 4 days of Compliance School will remain the same as will the opportunity to take the NAFCU Certified Compliance Officer (NCCO) exams.  Good luck!  

***

And, all attendees at NAFCU's 2013 Regulatory Compliance School will receive NAFCU's 2013 GPS (coming soon!) as well as NAFCU's Scope & Applicability Charts.

Remember:  You do not need to be a NAFCU member credit union to attend NAFCU's conferences or webcasts.  In fact, you don't even need to work at a credit union.  Each School usually features a handful of consultants, vendors and other credit union "peeps" who support credit unions - in one way or another - on a daily basis.      

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Updated Q&A on "Fleets"; Feedback on NAFCU's Book of Answers

Written by Steve Van Beek

Yesterday's blog post stated it would be great if NCUA updated their legal opinion letters when they were superseded.  Well, we had an eagle-eyed reader who was searching NAFCU's Book of Answers (member-only) and asked if we were going to update our Q&A.  We sure are - it is below (and will be updated in the Book of Answers soon):

Question: One of my credit union's members has done plumbing work on the side over the years. Recently, her "side" business has taken off, and she'd like to expand. She approached us for a loan to purchase three vans to help the expansion. We are aware of NCUA's Member Business Loans Regulation, and the loan-to-value (LTV) requirements found at 12 C.F.R. §723.7. That regulation, however, exempts the LTV requirements for vans - as long as the van is not part of a fleet. We'd like to avoid the LTV requirements if we can, but our commercial lending department cannot agree on what constitutes a "fleet." Has NCUA issued guidance in this area?

Answer: Yes. NCUA has defined “fleet” in Legal Opinion Letter 12-0764 which superseded NCUA’s prior guidance from Legal Opinion Letter 05-1038.  As you noted, NCUA's Member Business Loans (MBL) Regulation contains LTV requirements for secured loans. Subject to certain exceptions or an NCUA waiver, the maximum LTV for secured MBLs is 80 percent. The LTV requirement, however, does not apply to cars, vans, SUVs, or pick-up trucks - as long as the vehicle is not part of a "fleet." 12 C.F.R. § 723.7(e). The regulation does not define "fleet," however, the 2012 opinion letter defines “fleet” as “five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire.  In the letter, NCUA emphasized that the “fleet” definition is composed of the numerical component – five – as well as the central control and used for a business purpose component.  Both components are required before the vehicles would be deemed to be part of a fleet.  In your question, the member has three vans and would be below the numerical component.  Thus, the vans would not be part of a “fleet” and the credit union would not be bound by the LTV requirements of 12 C.F.R. § 723.7.

***

NAFCU's Book of Answers.  We are working on an update to our Book of Answers and we want your feedback.  If you are a current user of the Book of Answers - we look forward to any feedback you have on how to improve this NAFCU member benefit.  What would make the Book of Answers better?  Is it too big and bulky?  Should the Book of Answers be split up by sections (i.e., all lending questions on one PDF)?  

If you are a NAFCU member and haven't used the Book of Answers, take a look (log-in required) and let us know what you think. 

As always, any and all feedback is appreciated.  Feel free to leave a comment on this blog post or email us: [email protected].

NCUA Amends Definition of Fleet for Member Business Loans; Outdated Guidance

Written by Steve Van Beek

Yesterday, NCUA issued Legal Opinion Letter 12-0764 which amends the definition of "fleet" for purposes of NCUA's Member Business Lending regulation - specifically the LTV ratio requirement under 12 CFR 723.7(e).  This is a welcomed change and one that NAFCU has advocated for in the past - including our 2011 Regulatory Review comment letter.

The amended definition of "fleet" applies when there are more than five vehicles:

"We found a wide variety in the number of vehicles that constitutes a fleet.  Among those many descriptions, however, we found that a range from five to ten vehicles was not uncommon.  We were particularly persuaded by Internal Revenue Service (IRS) publications on this topic and treatment of fleets by auto industry fleet programs.  The IRS, in addressing mileage rate deductions, refers to five or more vehicles as being a fleet operation.  In addition, a number of auto manufacturers generally use five as a base number for providing fleet discounts.  We believe this similar treatment by government and industry provides a reasonable basis to conclude that a minimum of five vehicles constitutes a fleet.  Also, we believe that increasing the number to five provides regulatory relief to most credit unions making vehicle MBLs without diminishing necessary safety and soundness precautions.  Accordingly, we believe five or more vehicles is an appropriate number to define a fleet for our purposes."

NCUA also went on to clarify and update the "business purpose" component of the "fleet" definition to require central control of business use for the purpose of transporting persons or property for commission or hire.  Thus, the updated definition of "fleet" is:

"Accordingly, we amend the definition of “fleet” as follows:  A fleet is five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire."

As always, the full legal opinion letter is the best source for a full discussion and analysis.  

***

Piles of Outdated Guidance.  We've blogged in the past about the regulatory burden caused by outdated guidance from regulators - including NCUA.  Yesterday's announcement gives NCUA a great opportunity to change their existing practice and further reduce the regulatory burden for credit unions.  How?  By going back to their 2005 legal opinion letter and clearly indicating it has been superseded by the 2012 legal opinion letter.  

Two years from now, if a credit union searches for "fleet" on NCUA's website - which legal opinion letter will come up first?  If it is the 2005 letter, will that letter clearly indicate that it has been superseded?  If not, a credit union may stop their research after finding the 2005 letter.  After all, the 2005 letter directly addresses the issue of what is considered a "fleet."  

Look to Other Regulators.  As we mentioned in our prior blog post, the OCC and the Federal Reserve already have procedures in place to clarify superseded guidance documents.  Or, check out this example from a past OTS guidance document.  

Hopefully NCUA takes these simple steps to prevent unnecessary regulatory burden in the future.  Credit union compliance officers work very, very hard to analyze and interpret current NCUA's regulations and guidance.  NCUA should work just as hard to help clarify which guidance and rules are applicable (the 2012 letter) and which are outdated (the 2005 letter).  

CFPB Consumer Complaint Database Continued; Hearing on SBA; BSA Webcast

Written by Michael Coleman, Regulatory Compliance Counsel

Yesterday, the Consumer Financial Protection Bureau (CFPB) launched its new Consumer Complaints Database for credit cards, you can read about the details of the Complaint Database in our blog post from yesterday. Note that the database will only contain information of credit unions directly supervised by the CFPB, those with over $10 billion in assets.

Regarding the purpose of the database, the CFPB stated that: "Our goal is to improve the transparency and efficiency of the credit card market to further empower American consumers." You can take a look at their policy statement for more details. The CFPB has proposed adding complaints to the database about other financial products and services in the near future. 

At the top of the Complaint Database site there is the following disclosure: 

"This contains data from the consumer credit card complaints received by the Consumer Financial Protection Bureau. We do not verify the accuracy of these complaints, but we do take steps to confirm a commercial relationship between the consumer and the identified company."

The purpose of the disclaimer is to let people know that what is listed in the database are complaints, but more importantly, that the CFPB is not asserting the validity of the complaint. You may be asking yourself "Well, isn't this like trying to unscramble an egg?" A good question. The disclosure of unfounded compliants could impact a financial institution's reputation - an issue that NAFCU strenuously raised in our comment letter to the CFPB. 

***

Testimony on the Hill. Thursday June 21, 2012, Robert Marquette, president and CEO of Members 1st FCU in Mechanicsburg, Pa., and a NAFCU Board Member, will testify before the House Subcommittee on Investigations, Oversight and Regulations concerning credit unions' work with the Small Business Administration (SBA). You can read more about the upcoming testimony in this NAFCU Today article.  

***

NAFCU's BSA Webcast.  Now is the perfect time to get your annual BSA training.  Check out NAFCU's June 27th webcast: BSA for Compliance Experts.  Sign up by TODAY, June 20, to Save $100!

Overdraft Extension; NLRB Notice Delay; MBL Appraisal Opinion Letter

Written by Steve Van Beek

A pretty eventful Spring so far as the CFPB seems to be hitting their stride.  Apologies for politely asking the CFPB to start issuing guidance - who knew they'd begin blasting out Bulletins left and right?  I guess that does show how complex and confusing the existing regulatory environment has become.

Below are a couple of quick items.  Additionally, if you didn't catch yesterday's free webcast with CFPB Director Cordray you can still view the on-demand version (just register first and then view).  

***

Overdraft Comment Period Extended.  The CFPB issued a notice in today's Federal Register that it would be extending the comment period for its Overdraft Inquiry until June 29, 2012.  If your CU hasn't submitted comments yet, be sure to take this additional time to do so.  NAFCU's Regulatory Alert is here (12-EA-07) but feel free to send your comments directly to the CFPB as well.  

NLRB Notice.  The deadline for the National Labor Relations Board (NLRB) poster was scheduled for April 30th, 2012.  However, a recent court decision has delayed this requirement until further notice.  Here is from the NLRB's website:

"Important note: The DC Circuit Court of Appeals has temporarily enjoined the NLRB’s rule requiring the posting of employee rights under the National Labor Relations Act. The rule, which had been scheduled to take effect on April 30, 2012, will not take effect until the legal issues are resolved. There is no new deadline for the posting requirement at this time."   

Prior blog postings on this issue can be found here and here.  

NCUA Opinion Letter.  NCUA recently issued their third opinion letter of 2012 - this one on appraisals when selling a participation interest in a member business loan.  If your CU is involved in these types of issues it is best to review the full letter - 11-1126.    

Ask CFPB; Reg School; New MBL Bill; 5 Months

Written by Steve Van Beek

A couple of items for Monday morning.

Ask CFPB.  The CFPB announced a new initiative - Ask CFPB - which includes answers to over 350 common questions from consumers (mostly on credit cards and mortgages for now).  The CFPB's blog post is here and the press release is here.

For a split second I thought the CFPB might have taken a step to help regulated entities understand the confusing regulatory requirements.  Alas, we'll keep plowing through piles of cross-references and staff commentary to find the actual requirements. 

Regulatory Compliance School.  We had a great crowd at Reg School with over 150 attendees and 90 of those taking their NAFCU Certified Compliance Officer (NCCO) exams.  Here are a couple of NAFCU Today stories on School:  March 20 (with photo) and March 26.

For those who took the NCCO exams, we hope to have the results to you by the end of this week.  

MBL in Senate.  The Small Business Lending Enhancement Act was reintroduced in the Senate last week as S. 2331.  The new bill is identical to S. 509 but was reintroduced due to procedural reasons which might allow a vote in a shorter period of time.  The NAFCU Today has news stories from last Thursday and Today.    

***

Last Friday marked 5 months since our wedding.  I wanted to put together a "Top 5 Things I've Learned" list but it really just comes down to one thing:  Happy Wife, Happy Life.

NAFCU Today: On the Hill; Derivatives; CFPB Expands Complaint Program

Written by Steve Van Beek

As we mentioned on Friday, the NAFCU Compliance Team will be in and out of the office this week as we'll have nearly 150 compliance officers in town for our Regulatory Compliance School.

***

NAFCU Today.  I wanted to pass along a couple of recent stories from the NAFCU Today which is written by NAFCU's Communications Team.  If you or someone at your organization wants to receive this daily news feature, you can subscribe to the NAFCU Today here.

As with the Compliance Blog, the NAFCU Today is open to everyone that is interested in learning more about issues impacting credit unions.

Member Business Lending.  Grassroots efforts initiated to urge support of S. 509 - the Small Business Lending Enhancement Act.  

Exam Bill.  Senate bill S. 2160 has been introduced.  This bill is a companion bill to H.R. 3461 and would bring additional transparency and consistency to bank and credit union examinations.    

CFPB Complaints.  The Consumer Financial Protection Bureau has recently expanded their complaint process and are now accepting complaints on consumer checking accounts and private student loans.  

Note:  All the links below will take you to recent NAFCU Today stories.  To see the March 12 edition of the NAFCU Today, you can go to the NAFCU homepage.  

Regulatory Compliance School; NCUA Board Meeting & NCUA Report; Division 3 Update

Written by Steve Van Beek

Just wanted to provide a short note regarding next week.  

Reg School.  NAFCU's Regulatory Compliance School takes place next week.  Our Compliance Team will be in and out of the office next week giving presentations, so please bear with us as our response times will be a little longer than normal.  The blog will continue as usual.  

Study Guide & GPS.  For those attending school next week, we've put together a handy Study Guide to help if you will be taking the exams to obtain your NAFCU Certified Compliance Officer (NCCO) designation.  Additionally, be sure to download your version of the Updated 2012 NAFCU Credit Union Compliance GPS (you will also receive a hard copy of the GPS at School).

Note:  For those not attending Compliance School, the Updated GPS will be available for purchase very shortly.  Blog readers will be the first to know when the Updated GPS is available.    

***

NCUA Board Meeting.  Late yesterday, NCUA announced their agenda for next Thursday's NCUA Board Meeting.  You can find the agenda here.

NCUA Report.  NCUA also released their March 2012 issue of the NCUA Report.  This looks to be a good one to read, here is what is discussed:

• Chairman Matz's Corner: CFPB Director Cordray Answers Key Questions on NCUA Webinar 
• Building Wealth and Deposits: An Opportunity for Credit Unions – Individual Development Accounts, Part II
• Board Perspective: Interest Rate Risk Policy and Program
• Board Perspective: The Rites of Spring
• Understanding Credit Union Indirect Lending Programs
• Elements of an Effective Member Business Lending Program
• Trends in Member Complaints and Consumer Inquiries

Quite a few of those look like good reads.  Be sure to pass those along to others at your credit union who might be interested.  

***

A quick update on the potential Division 3 basketball matchup between Hope College (my alma mater) and the College of Wooster (my wife's alma mater).  Wooster held up their end of the bargain but Hope fell in double-overtime.

I was really hoping for this matchup as I thought it would be a lot of fun.  I can't say the same about my wife.  Wooster's game finished a good half hour before Hope finally lost.  She spent the majority of that time on the phone with her Dad - who works at the College of Wooster - discussing the potential matchup and rooting against Hope.  As she so elegantly stated it:  "I want Wooster to win and that means Hope needs to lose, so be it."   

MBL Testimony; Repealing Durbin; State of CU Industry; Best Practices

Written by Steve Van Beek

Below are just a couple of items for your Friday.  

NAFCU Today has a detailed recap of Wednesday's testimony on H.R. 1418 - a bill to increase the credit union member business lending cap.

***

On Wednesday, Rep. Jason Chaffetz (R-UT) and Rep. Owens (D-NY) introduced H.R. 3156 which would repeal the Durbin Amendment.  NAFCU Today has additional information on this first step of an uphill climb.

***

NCUA issued Letter to Credit Unions 11-CU-16 which discusses the State of the Credit Union Industry and includes Financial Trends.  Included in the Letter is this information:

"While overall loan growth remains relatively flat, historically low-rate first mortgage real estate loans continue to grow.  This trend could impact credit unions’ future earnings potential.  Accordingly, NCUA is focusing supervisory efforts on credit unions with elevated levels of credit, interest rate, concentration, and strategic risk." 

NCUA follows this language with additional details on each of these risks that is worth taking a look at.  

***

I wanted to thank everyone for the great advice as the Wedding Day approaches (currently in the single digits at 8 days!!)

I also wanted to share my own advice to those who may be in a similar situation now or in the future:

• Try not to move within 30 days of the wedding - especially when your move date coincides with the RSVP response date.  The USPS might be pushing their mail service reliability - but it can take a while for that RSVP from Aunt Edna to finally hit your new mailbox.
• No matter how much you want to say it, please do not mention the fact that if your favorite team continues on in the playoffs they will have a championship game during the wedding.  If you fail this, please do not compound the mistake by indicating the cocktail reception room - with the large TVs - would make a great viewing area.
• And on a serious note - remember that it is not possible to say Thank You enough to your significant other.

Have a great weekend - and Go Blue!      

MBL Hearing; Cordray; BSA Blast

Written by Steve Van Beek

This afternoon the House Financial Institutions Subcommittee will hear testimony on H.R. 1418 - the Small Business Lending Enhancement Act.  In September, we blogged on the details of H.R. 1418.  The increase in each credit union's Member Business Lending cap would not be automatic if this legislation passed and was signed by President Obama.

Gary Grinnell, CEO of Corning CU, will testify on behalf of NAFCU.  NAFCU Today has additional details on today's hearing.  

***

The Senate Banking Committee voted last Thursday on Richard Cordray's nomination to be Director of the Consumer Financial Protection Bureau.  The Committee voted along party lines (12 Democrats for, 10 Republicans against).  It is unclear when and if the full Senate will take up Cordray's nomination.

Without changes to the CFPB's structure, it may continue to be a waiting game for a CFPB Director.  

Even without a Senate-confirmed Director, the CFPB can amend existing regulations impacting credit unions (such as Truth in Savings).  For a more detailed discussion of the CFPB's powers without a Director, check out this June 2011 blog post.     

***

NAFCU Members.  The October issue of the BSA Blast is now available.

Section 1071; Reg B and the CFPB; MLB

Written by Steve Van Beek

The Federal Reserve recently finalized a regulation regarding Section 1071 of Dodd-Frank.  Section 1071 will require creditors to collect and report data on women-owned and minority-owned businesses and by small businesses.  

Importantly, the CFPB will have authority for Section 1071 for credit unions.  The Federal Reserve's authority extends only to motor vehicle dealers.  Back in April, the General Counsel for the CFPB issued guidance indicating Section 1071 will not become effective until the CFPB proposes and finalizes regulations to implement the data and collection requirements.    

The recent final rule on Reg B indicates the Fed will follow the CFPB's lead and delay the collecting and reporting requirements until detailed regulations are written. 

Thus, while the new requirements of Section 1071 are not currently effective - it is something to keep on your radar if your credit union offers business loans.

In June, a NAFCU witness testified about the increased burden of Dodd-Frank - including Section 1071.

***

Apparently, there were some baseball games on last night.  I'm not sure there is any way to describe what happened.  If the playoffs were sneaking up on you (like they did me) - last night was a wake-up call.  

Member Business Lending Cap

Written by Steve Van Beek

Yesterday, NAFCU sent a letter to Speaker Boehner and Minority Leader Pelosi on H.R. 1418 - urging their action to increase the member business lending cap for credit unions.  This bill, The Small Business Lending Enhancement Act of 2011, would increase the member business lending cap to 27.5% of total assets if certain conditions are met.  The legislation is H.R. 1418 in the House, and S.509 in the Senate.

Under the proposed legislation, credit unions would be eligible for the increase if they meet the following:

• Must be considered well capitalized (currently 7% net worth ratio);
• Must have at least 5 years of member business lending experience;
• Must be at or above 80% of the current 12.25% cap for at least one year prior to applying for the increase; and
• Must be able to demonstrate sound underwriting and servicing based on historical performance and strong leadership management.

Additional information on NAFCU's attempts to increase the MBL cap can be found here.

***

Have a great weekend!  

NCUA Legal Opinion Letters - CUSOs; MBLs

Written by Steve Van Beek

NCUA recently published two legal opinion letters.  One discusses a credit union service organization's (CUSO) ability to lease property to credit unions and the members of affiliated credit unions.  The letter, NCUA Legal Opinion Letter 11-0642, is very detailed and fact specific so be sure to view the full letter.   

The second letter, NCUA Legal Opinion Letter 11-0734, discusses loans to professional musicians to purchase musical instruments.  From the letter:

"We do not consider IRS treatment of an expense to be determinative of whether a loan qualifies for MBL treatment under NCUA Part 723. Similarly, the fact that an item may be purchased for a non-business purpose is not controlling.  For example, a $50,000 loan to purchase an automobile for use as a taxicab or package delivery truck is an MBL and not a personal loan.  It is the loan’s actual purpose and amount, absent any applicable exemptions, that determine whether the loan is an MBL.

It is our view the instrument loan provides a means for your professional musician members to purchase a musical instrument for use in their trade as paid musicians.  The musical instrument is a tool of the musician’s trade and is acquired for use in a business capacity.  Therefore, where a loan to a member for this purpose totals $50,000 or more when aggregated with other such loans to the member,  the loan is an MBL and subject to Part 723."  (emphasis added).

 ***

Michigan Alert:  Perhaps not the most scientific poll - but Good Morning America viewers did name Sleeping Bear Dunes on Lake Michigan the "Most Beautiful Place in America."  

If you get a chance to visit northern Michigan, you will not be disappointed.   

Hearings on Business Lending; Changes at NCUA

Written by Steve Van Beek

Last Thursday was a busy day on the Hill with NAFCU testimony in both houses of Congress.  Mike Lussier, President/CEO of Webster First FCU and NAFCU Board Chair, testified before the Senate Banking Committee on raising the member business lending cap.  The hearing focused on S. 509 which would raise the member business lending cap from the current 12.25% up to 27.5% if certain conditions are met.  Additional information on this bill and a similar version in the House can be found here.

In the House, Mark Sekula, Executive Vice President and Chief Lending Officer of Randolph-Brooks FCU, testified on NAFCU's behalf before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access.  One of the points raised by Sekula was the impact Dodd-Frank would have on member business lending.  Specifically, Section 1071 of Dodd-Frank includes a new collection and reporting requirement for business lending. 

As I've mentioned before, the CFPB has issued one piece of regulatory guidance - which is on the effective date of Section 1071.  A letter from the CFPB's General Counsel indicates these requirements will not take effect until regulations are finalized by the CFPB.

The Federal Reserve maintains oversight of Section 1071 requirements for certain motor vehicle dealers and followed the CFPB's lead - issuing a proposal that delays the effective date of Section 1071 for these entities as well.

***

Earlier this week, NCUA announced a few retirements and a couple of promotions.  Bob Fenner, the longtime NCUA General Counsel, will retire August 1st and be replaced by current Deputy General Counsel Mike McKenna.  In the Office of Examination & Insurance, Larry Fazio will be taking over as Director.  Current Director Melinda Love will move to Fazio's current position as Deputy Executive Director until her retirement at the end of the year.  The changes take place August 1st.     

Two Posts?; MBLs; Interchange Delay?; Loan Originator Compensation

Posted by Anthony Demangone

Here's a short one today.

Two blog posts?  You may have seen two posts, one of which was a "Welcome" post for the blog.  That post will be featured on the top of the NAFCU Compliance Blog, so that folks who come to the blog will see an overview of what it offers and how they can sign up to receive regular updates.  I'm sorry for any confusion!

MBLs. Sen. Mark Udall (D-Colo.) introduced S. 509 to ease MBL restrictions for credit unions.

Udall introduced S. 509, the Small Business Lending Enhancement Act, late Tuesday with 13 original cosponsors. It would allow a gradual increase in eligible credit unions’ MBL cap from 12.25 percent assets to 27.5 percent, in accordance with strict safety-and-soundness measures. It awaits action of the Senate Banking Committee.

Here's a link to the legislation. 

Interchange.  A "delay" bill is expected soon regarding debit interchange. 

Loan Originator Compensation.  The Fed will offer a webinar via its Outlook Live portal on the Fed's recent rule regarding Loan Originator Compensation.  It is free, and will be held on St. Patrick's Day. 

Guidance is not a regulatory requirement; Interchange

Posted by Anthony Demangone

I try to monitor a number of different websites related to credit union operations.  You never know where a compliance nugget or two will surface.  One of the websites I monitor is that of NACUSO.  Recently, NACUSO published a series of communications to and from NCUA regarding Letter to Federal Credit Unions 10-FCU-03.  As you may recall, that guidance document discussed NCUA expectations for federal credit unions who establish and operate third party brokerage arrangements for sales of nondeposit investment products.

Read the NACUSO posting here.  For credit unions that offer nondeposit investment products, be sure to read the post, including NCUA's response.  But I will highlight one paragraph that caught my eye.  And it was written by NCUA's General Counsel, Robert Fenner. 

As a preliminary matter, you should note that 10-FCU-03 is guidance recommending best practices for FCUs involved with third party brokerage arrangements; it does not carry the weight or force of formal regulation. Indeed, the first sentence of 10-FCU-03 expressly states that "[t]he purpose of this letter is to provide guidance to federal credit unions on the establishment and operation of third party brokerage arrangements for the sale of of nondeposit investment products." (Emphasis added.) The letter does not impose regulatory requirements on FCUs.

This distinction is so very important, and I'm glad that Mr. Fenner raised it in his response to NACUSO.  I also would recommend that NCUA make such letters publicly available for the entire credit union industry. Had NACUSO not taken the proactive step to publish NCUA's response, we would not have seen the useful information.

***     

The issue of debit interchange is front and center this week, as Congress will hold a hearing looking into the economic impact of the Durbin amendment. NAFCU has been pushing our message out to anyone and everyone who will listen. What is our message?  Well, take a look and a listen for yourself.

 StopTheDebitCardRule.com (YouTube video).

This ad will run in a number of publications this Wednesday.

This and That; A Well-Fed Elmo

Posted by Anthony Demangone

Here's a few things to finish off the week.

NCUA.  NCUA held its monthly board meeting yesterday.  There was a minor tweak to its Truth in Savings regulation to bring it into line with Regulation DD.  The also disclosed their priorities for 2011.  You can access the items from the board meeting here.  In addition, we did write an article for today's NAFCU Today on the meeting.   NCUA also issued its most recent edition of the NCUA Report.  This issue tackles some timely issues:

• Financial literacy
• Recent board actions
• Risk management on online banking
• Trends in mortgage delinquencies
• Contingency fund planning

Privacy.  The OTS has issued a compliance guide for the model privacy notice. While this would have been handy dandy three months ago, the guide looks to be written in a clear manner and should be useful if you still have issues in that area. 

MBLs.  Here's a nice historical look at member business lending at credit unions. (Elliot Kashner, at CreditUnions.com)

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Here's how we found Elmo the other day, thanks to Kate.  I'm just glad that Elmo didn't ask for cottage cheese.  I'm off to State College this weekend to visit family and kneel at the shrine. Have a great weekend, everyone!

A Busy Year

Posted by Anthony Demangone

Not too long ago, I shared my general outlook for 2011.   That post dealt more with general trends.  But we do expect some specific things.  Regarding NCUA, look out for the following in 2011.

• Regulations on interest rate and concentration risks.  If you've been keeping up with the Material Loss Reviews issued by NCUA's Office of Inspector General, you already know that concentration risk has played a huge role in credit union failures.  And that risk affects more than just credit unions.  I was at a meeting recently where an OTS and OCC official both agreed that concentration risks played a role in every major bank failure as well.
• Member business lending. Rather than a major overhaul, look for NCUA to incorporate guidance documents into the regulation.
• CUSOs.  NCUA will ramp up its focus on CUSOs, and they may seek examination authority.
• Examinations.  NCUA will overhaul its examiner's manual.  This is one process to track closely.  In my view, the examiner's manual is a massive guidance document that can affect your operations and NCUA examinations.  For that reason, it is very important to see how they change it. 
• This and That.  NCUA may also overhaul its investment rule (Part 703) and it may direct examiners to review new credit union products/services at each exam. 

Keep in mind that we can't say for certain that NCUA will act on any one of these issues.  But based on our conversations with NCUA officials, these are some of the areas of interest.  Stay tuned!

MBL Guarantees

Posted by Anthony Demangone

Since NCUA issued its final rule to whittle down amend its RegFlex regulation, we've received quite a few questions concerning the soon-to-be-gone "principal guarantee" exception.  One of the more common questions is this: Assuming a business is owned by three principals, could we have each principal guarantee just one-third of the loan amount each?  

No, as explained in this legal opinion letter.   Each principal, as outlined in the regulation, would each guarantee the full amount of the loan. Here's a snippet of the opinion letter.

Who is a principal with respect to a limited liability partnership or a limited liability corporation, where the managing partner usually has a minority ownership position but has the authority to borrow and pledge assets?  You further ask whether the managing partner must guarantee the entire amount of the loan or just the managing partner’s pro rata share? 

Natural person partners having a majority ownership interest in a partnership must each guarantee the full amount of a loan to a partnership

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We now think it is more likely that NCUA's final rule on fiduciary duties will be addressed during the NCUA December board meeting. 

BSA CMP; Flood Lapse; NCUA OIG Report; NCUA Report

Posted by Anthony Demangone

Here are a few things that were kicking around my inbox.

• The OTS issued a $5 million civil money penalty against Pamrapo Savings Bank, SLA, (New Jersey) for alleged Bank Secrecy Act violations.  Is this a huge, international bank?  It doesn't seem so.  It has 87 employees, and just under $600 million in assets.  The OTS agreement linked above doesn't say much about what they allegedly did wrong.  Perhaps the biggest lesson here is that you don't have to be massive to get a massive fine when it comes to BSA.
• Congress has allowed the National Flood Insurance Program to lapse again. 

  FEMA issued this letter last month to warn us that Congress was close to letting the National Flood Insurance Program lapse. The letter includes a link to "guidelines" that FEMA created to address what happens in such "lapse" situations. 

• NCUA's Office of Inspector General issued a "material loss review" concerning the failure of High Desert Federal Credit Union.  The OIG office wanted to determine what led to the failure and to grade NCUA's supervision of the credit union.  The report found that NCUA examiners did not adequately evaluate the risk of the credit union real estate construction portfolio. In addition, NCUA failed to adequately ensure that the credit union addressed issues repeatedly highlighted on DORs.  Finally, the report found that NCUA failed to adequately monitor waivers given to the credit union.  The report covered additional ground, so please give it a read.  My gut tells me that NCUA will be more likely to play hardball with credit unions that fail to address NCUA concerns about member business loans in the future.  No one likes to be called out in a report. 
• The March NCUA Report has a nice little article on interest rate risk.   NCUA does not throw stuff into these newsletters for no reason.  If they write about interest rate risk, they believe that many credit unions need the information. Hint hint. 

NAFCU's Offices Closed Again; MBL Risk Management

Posted by Anthony Demangone

What a week.  NAFCU's offices are closed, today.  The Fed shut down its Washington, D.C. offices following yesterday's blizzard.  As you now probably know, we follow the Fed's lead.  NAFCU members - if you need us, please email us at [email protected].  We'll do our best to respond remotely.

Oh, no photo today.  If you want to know what yesterday looked like, just stare at a blank sheet of white paper.  Yes, it was that bad.

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Recently, NCUA issued Letter to Credit Union 10-CU-02.  The letter was used to share a Supervisory Letter that NCUA sent to its field staff to provide them an overview of current risks in member business lending.  The letter also shares what NCUA considers to be sound risk management strategies.  The letter provides a good overview of member business lending, and the risk management ideas could work for general lending as well,in my humble opinion.  Add this letter to the library of member business lending guidance documents.   If your credit union does MBLs or is thinking about it, you should read and understand this letter.

Grab Bag

Posted by Anthony Demangone

For those working on Regulation Z issues, you're probably aware of this upcoming requirement:

Proposed § 226.7(b)(12)(iv)(A) provides that a card issuer must provide through the toll-free telephone number disclosed pursuant to proposed § 226.7(b)(12)(i)(E) or (ii)(E) the name, street address, telephone number, and Web site address for at least three organizations that have been approved by the United States Trustee or a bankruptcy administrator pursuant to 11 U.S.C.  111(a)(1) to provide credit counseling services in the state in which the billing address for the account is located or the state specified by the consumer.

Wouldn't it be great if a web site existed that organized all of these approved organizations by state?  It does, right here. 

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Remember that member business lending webinar hosted by NCUA?  It is now available on NCUA's website.   As much as I love the webinar, I really love the fact that NCUA has posted a series of 49 Questions and Answers to go with it.  All of the Q and A's deal with MBL issues.  You know I love me some FAQs.

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The Fed has published its most recent issue of its Consumer Compliance Outlook.  As usual, it is a very good read.  There's an article on E-SIGN. (Read it.) Payroll cards.  (Read it.)  And a fantastic grouping of consumer-compliance-related resources.  (Read it. Love it.  Live it.)  And there's more.  (Read that, too.)

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Have a great weekend, everyone!

NCUA Board Meeting

Posted by Sarah Loats

NCUA conducted a busy Board meeting yesterday. The items on the agenda were:

1. NCUA's 2010/2011 Operating Budget

2. NCUA's Overhead Transfer Rate

3. NCUA's Operating Fee Schedule

4. Proposed rule for the Corporate system

5. Final rule for the NCUSIF premium and one percent deposit

6. Insurance Fund report.

The major proposed revisions to the corporate credit union rule involve 5 areas: 1) corporate credit union capital; 2) investments; 3) asset-liability management; 4) governance; and 5) CUSO activities.

NCUA Board Member Hyland hosted a free member business lending webinar on Wednesday November 18 where she stated she expects NCUA's 2010 budget to include funding to ensure that each region has appropriate expertise to ensure effective MBL examinations. See NAFCU Today's article for more on the webcast. The budget does propose $5,778,000 to implement the Annual Examination Program. The program calls for, among other things, the addition of 57 positions to the regions including 4 lending specialsts. For those of you that missed the webinar but would like to watch it, NCUA should have an archived version available soon.

Another item from the budget that caught my attention was the proposal to create the Office of Consumer Protection within the agency. The office will include 2 divisons, the Division of Consumer Protection and the Division of Consumer Access. The office will: a) provide consumer services, including consumer education and complaint resolution; b) establish, consolidate, and coordinate consumer protection functions within the agency; c) act as the central liaison on consumer protection with other federal agencies; d) nationalize field of membership (FOM) processing; e) absorb centralized chartering activities; and f) assume the activities of the agency’s ombudsman. The ombudsman investigates complaints and recommends solutions on regulatory issues that cannot be resolved at the regional level.

Corporate Stabilization; SBA; Shameless Plug

Yesterday, NCUA released a communication designed to help credit unions communicate the effects of NCUA's corporate stabilization program to their memberships.  Access the communication here.   The communication describes what happened, and it displays the NCUA logo. 

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Yesterday, President Obama announced plans to use government funds to purchase securities backed by SBA loans.  Coupled with tweaks to SBA programs (higher guarantees, lower fees), the Obama administration hopes this will kick-start lending to small businesses.  Read the press release here.  Read a Q and A document that describes the hopes of the new program here.  The following two Q and A's sum things up quite nicely, in my humble opinion.

Why will purchasing securities on the secondary market help small business owners?

Under normal circumstances, many banks sell a portion of their loans to companies that pool them together and sell them as securities to investors. This provides banks with new capital that they can use to make additional loans. The result is that the secondary markets significantly increase the amount of lending banks can do to small businesses.

Over the past year, however, the secondary markets for 7(a) and first lien 504 securities have ground to a virtual halt. The institutions that securitize these loans have been unable to find buyers for the securities they have already packaged. This has in turn reduced their willingness to purchase new loans from banks. Since banks depend on the secondary markets for liquidity, they have increasingly become reluctant to extend credit to small businesses. Today’s announcement will help unlock secondary markets by providing assurances that the government will stand ready to purchase 7(a) and 504 first-lien securities. If you apply for a 7(a) or 504 loan at your local community bank, that bank will be more willing to lend because it will have confidence that the Treasury Department will be a ready buyer of the loan in the secondary markets.

Which loans are affected by the fee elimination and higher guarantees?

Beginning this week, the SBA will temporarily raise guarantees and eliminate fees for borrowers on certain of its 7(a) loans. 7(a) loans, which are partially guaranteed by the SBA, are issued by a bank to a small business to support its operations.

Additionally, the SBA has temporarily eliminated fees for borrowers and third party lenders on its 504 Certified Development Company Loans. These loans offer growing small businesses long-term, fixed-rate financing for major fixed assets, such as land, buildings and machinery and equipment. These loans are aimed at fostering community development, creating jobs and encouraging modernization.

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Here's the shameless plug.  Next year will be a bear, from a compliance officer's perspective.  One of the largest issues will be complying with Regulation Z.  NAFCU is offering a webcast in April that will provide an overview of the changes that will take affect July 1, 2010.  Believe me, with a change this large, you can never start planning early enough.  Access information about the webcast here.   NAFCU also has planned a series of webcasts this year that break down the changes into bite-sized sections.  Go here to see more about the NAFCU Reg Z series.

I'm just a bill...

Here's an update regarding what's up on Capitol Hill:

Cram down.   HR 1106 passed the House.    The legislation would give bankruptcy judges the power to "cram dowm" the outstanding balance on certain mortgages so that the balance is in line with the property's value.  While the legislation as currently drafted would be very problematic for credit unions that do real estate loans, the bill now moves to the Senate.  The word on the street is that the Senate is more likely to limit the scope of the legislation.  For example, the scope could be limited to subprime loans.  NAFCU's lobbyists are keeping a close eye on this and are communicating credit union concerns to all the right people.

Member business lending (MBL).  Senator Charles E. Schumer (D-NY) announced plans to assist small businesses by eliminating the MBL cap found within the Federal Credit Union Act.  (Wait.  It can't be!  Good news?!?)   However, it is worth noting that such a change would involve a bill that passes both Houses and gets the signature of President Obama.  But we'll keep a close eye on this one.

Financial reform.  Representative Barney Frank (D-MA) announced that he will continue his vigorous financial reform agenda.  Areas of interest include mortgage lending, overdraft protection, regulatory restructuring and credit cards.  (That's a short but powerful list.)