NAFCU Compliance Blog

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 Board Meeting; NCUA-SBA Partnership; February NCUA Report

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA Board Meeting. Last week, the NCUA Board held its February open meeting. The following two agenda items were approved 3-0:

1. ​Proposed IRPS 15-1 and Proposed Rule, Part 791.8(a) of NCUA’s Rules and Regulations, Regulatory Flexibility Act Definition of Small Entity for Consideration of Regulatory Relief.
2. Taunton Federal Credit Union (Taunton, MA), Request to Expand Community Charter.

With regard to the first item, The NCUA Board approved a proposed rule that would revise the “small entity” designation under the Regulatory Flexibility Act by increasing the defining threshold to include federally insured credit unions with less than $100 million in assets. The current rule imposes a $50 million threshold. Comments on NCUA’s proposed rule and IRPS 15-1 will be due to the agency 60 days after publication in the Federal Register. NAFCU is preparing a Regulatory Alert for members, which will be available here.

The NCUA Board was also briefed on the agency’s ongoing field-of-membership working group. NCUA staff advised that the working group, which is comprised of internal NCUA staff, has inventoried the issues that need to be addressed as: (1) procedural; (2) regulatory; and (3) legislative. The procedural and regulatory issues will be presented to the NCUA Board for its action. NCUA staff also explained that the working group will begin reaching out to credit union stakeholders next month for their input. NAFCU has been working closely with the agency to include our members on the working group.

Finally, the NCUA Board was briefed about the state of the National Credit Union Share Insurance Fund (NCUSIF).

NCUA’s Board Action Bulletin is available here.

***

NCUA-SBA Partnership. Earlier this month, NCUA announced a partnership with the Small Business Administration (SBA) for a series of educational initiatives during the next three years aimed at helping small businesses connect with their local credit unions for better access to capital.

The first initiative of the new partnership will be a joint webinar entitled “Balancing Member Business Loan Portfolios with SBA Guarantees,” on March 4, 2015, at 2 p.m. Eastern.  Registration is available here.  Participants can submit questions in advance via email at [email protected], and should include the subject line “SBA Guarantees Webinar.”

Last week, NCUA also announced a new “Small Business Lending Resource Center” webpage designed to provide information about NCUA’s member business lending rules, supervisory guidance, links to the SBA’s loan programs, and other resources.

***

February NCUA Report. NCUA also recently released its February 2014 Report. One article in particular caught my eye – the Region V Report: Consider an Asset-Liability Management Committee to Help with Interest Rate Risk. The article discusses some of the reasons NCUA thinks credit unions should consider using an Asset Liability Management (ALM) Committee to review interest rate exposure. From the article:

“While not required in NCUA’s regulations, our experience has shown that a committee like this can be a useful best practice for credit unions with a concentration of mortgage-related investments and loans.

An Asset-Liability Management Committee oversees the board-approved asset and liability management policy for the credit union. These committees are staffed by members of the credit union’s board and staff from across a credit union’s business lines. The committee evaluates and monitors all of the variables that could affect a credit union’s interest rate risk position, such as its internal controls, cash flows, maturity schedules, and how it implements its risk-management policies.”

The article includes links to various guidance documents on managing interest rate risk (IRR), and is available in its entirety here.  Speaking of IRR, my colleague JiJi recently blogged about NCUA’s IRR rule, currently available guidance, and what may be coming down the pike.

***

NAFCU Webcast. Regulation Z: Five Challenges and Their Solutions – The Truth in Lending Act (TILA), as implemented by Regulation Z, is the oldest federal consumer credit law. While it's important to stay up-to-date on the latest changes, it's just as important not to overlook some of its fundamental principles.  Register here for this NAFCU webcast for a refresher on five core issues that arise across product types and how to address them. You'll gain a greater understanding of: what is and is not a finance charge, Regulation Z's rules for calculating annual percentage rates, how to satisfy Regulation Z's advertising requirements, the difficulties that can arise when disclosing variable rates, and how to meet the operational challenge of ensuring that Regulation Z disclosures are correctly completed.

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.

***

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!