NCUA proposed rule: MBL flexibility for credit unions?
On June 18th, the board of the National Credit Union Administration (NCUA) unanimously approved five items, including a proposed rule aimed at modernizing member business lending (MBL). The rule would provide greater flexibility and autonomy for credit unions to better meet the needs of their members.
Small business lending at credit unions has continued to increase over the last several years. According to data from the NCUA, total business loans rose dramatically over the span of a decade to $51.7 billion in 2014 from only $13.4 billion in 2004. Business loans’ percentage of total loans also grew to 6.8 percent from 3 percent during the same time period. In addition, the percentage of credit unions offering business loans has risen to 36 percent from 19 percent, and 93 percent of credit unions above $500 million in assets now offer business loans to their members.
Even with the strong growth, credit unions have generally maintained safety and soundness in MBL, and delinquency and net charge-off rates have decreased to pre-recession levels. Further, of the credit unions that offer business loans, 98 percent are well-capitalized according to the NCUA.
However, there are still concerns and complexities for credit unions offering member business loans. The NCUA sought feedback on MBL regulations, and some of the common concerns were loan-to-value (LTV) ratio requirements, personal guarantee requirements and an often-cumbersome waiver process.
So that credit unions can continue to thrive in the space, the proposed rule, 12 CFR Part 723, seeks to alter the NCUA’s approach to regulating commercial lending, by “shifting from a prescriptive rule to a principles-based rule.” The proposed rule aims to eliminate “detailed collateral criteria and portfolio limits and instead focuses on broad yet well-defined principles that clarify regulatory expectations.”
A release by the NCUA highlighted some of the key changes of the proposed rule:
• Loan officers gain the ability to waive personal guarantees
• Removal of loan-to-value limits
• Eliminating the need for a waiver process
• Construction and development loan limits lifted
Under the proposed rule, a broader, more practical approach for “ensuring that credit unions have the pertinent staff expertise and organizational discipline necessary to support a safe and sound commercial loan program.” The rule also emphasizes that credit union boards are responsible for commercial loan risk. They must “establish adequate controls and provide sound governance for the credit union’s commercial lending program.”
Overall, the NCUA states the proposed rule will “empower credit unions to write their own policies and limits.” Debbie Matz, NCUA Board chairman, understands the importance of member business lending, commenting that it allows credit unions to diversify their loan portfolios so they can better withstand economic downturns. It can also have a beneficial impact on local economies.
Credit union professionals seeking additional information on the risks of MBL and how to overcome them can access this complimentary whitepaper: Member Business Lending Landscape – Managing Risk & Opportunity.