Credit Union FAQs: Implementing the New MBL Rule
It’s been more than six months since the National Credit Union Administration (NCUA) issued its revised member business lending (MBL) rule in January 2017. Among other things, the new MBL rule further defines the difference between commercial and member business loans and states that non-member loans do not count toward the statutory MBL cap.
With the new rule in effect, the NCUA has received several questions regarding its implications. In this quarter’s NCUA Report, several of these questions have been addressed and are summarized below.
Is there NCUA guidance on the MBL rule?
The NCUA recently updated the Examiner’s Guide to include what it described as a clear framework for supervisory expectations for managing a commercial lending program. “While the guidance outlines the expectations for examiners, credit unions will benefit from reviewing it because it gives definitive information about what NCUA considers to be safe and sound practices,” according to the NCUA Report.
The Examiner’s Guide outlines the NCUA’s expectations of credit union commercial lending programs, and the regulator recommended credit unions understand how their own commercial lending programs may vary from those expectations. A credit union’s policies should appropriately outline the procedures set forth to manage commercial loan risk, particularly when its practices differ from those outlined in the guide.
What are expectations under the new MBL rule?
According to the NCUA Report, “The new rule requires active oversight by senior managers and the board.” However, instead of broadly issuing regulatory requirements, the NCUA offers credit unions flexibility in establishing their own policies and program controls. The new MBL rule “takes a more principles-based approach to managing a commercial loan program and allows management to tailor appropriate risk-management practices to suit their individual circumstances.”
While the new rule offers room for interpretation, it requires the following from credit unions building an MBL portfolio:
– Known levels of risk
– Adequate size of qualified staff
– Comprehensive policies
– Procedures to track risk, including an appropriate risk rating system
How should credit unions prepare for supervisory review on MBL?
Having extensive, well-documented risk management procedures is key. “The best preparation is to adhere to active risk management principles for sound lending,” notes the NCUA Report. “A well-developed program with appropriate monitoring and controls, and appropriate audit and oversight, should best prepare credit union management for the next examination.”
In the quarterly report MBL Q&A, the following steps were given as an example of an acceptable procedure for risk management:
1. Assess risk at loan inception
2. Assign initial credit risk rating
3. Record risk assessment and rating in credit approval document
4. After the loan closes, re-evaluate risk level through regular reviews of borrower’s financial condition
5. Address any change in risk and update risk rating
6. Require regular independent loan reviews to evaluate adequacy of program
7. Develop action plan to address any issues identified in the loan review
While the new MBL rule allows increased flexibility in growing member business portfolios, credit unions must understand the implications of the new rule in order to implement their programs and successfully manage commercial loan risk. Taking a proactive approach to risk management, keeping well-documented policies, and conducting regular reviews will lead to building a fruitful MBL portfolio.
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