Credit unions’ ability to lend to businesses may receive a boost if proposed NCUA regulations are approved. Business loans are becoming an increasingly important part of credit unions’ operations. Total business loans at federally insured credit unions grew from $13.4 billion in 2004 to $51.7 billion in 2014, growing from 3% of all total credit union loans to 6.8% over the same period. As of 2014, 36% of credit unions offer business loans, the vast majority of which (76%) are held by credit unions with assets greater than $500 million.
However, certain business loans, termed “member business loans” (“MBLs”), are limited by statute and regulation. An MBL is defined as a loan through which the borrower uses the proceeds for commercial, corporate, agricultural, or other business purposes, excluding extensions of credit that:
- are fully secured by a lien on a 1- to 4- family dwelling that is the primary residence of a member;
- are fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions;
- are made to a borrower or associated member that has a total of all such extensions of credit in an amount less than $50,000;
- the repayment of which are fully insured or fully guaranteed by an agency of the Federal Government or of a State; or
- are granted by a corporate credit union to another credit union.
The Credit Union Membership Access Act (“CUMAA”) of 1998 introduced an explicit limitation on a credit union’s total amount of MBLs outstanding: either “1.75 times the actual net worth of the credit union,” or “1.75 times the minimum net worth required . . . for a credit union to be well-capitalized.” The CUMAA required a net worth ratio of 7% in order to be well capitalized, This effectively created an MBL limit of 12.25% of a credit union’s total assets (1.75 x 7% = 12.25%). The 12.25% limit was explicitly codified the following year by NCUA regulations, which, among other provisions, also created a waiver application process through which borrowers could petition an NCUA Regional Director for relief from the various MBL requirements.
This July, the NCUA proposed new rules intended to shift credit union MBL requirements from prescriptive rules to general principles. Under the proposed rules, “all of the specific prescriptive limits and requirements related to collateral in the current rule have been eliminated and replaced with the fundamental principle that commercial loans must be appropriately collateralized.” Specifically, the rules would eliminate prescriptive risk management by loan-to-value ratios, minimum equity investments, portfolio concentration limits for types of loans, and personal guarantees from the principal of the borrower. The need for credit unions to petition for waivers of these requirements would thus also be abrogated.
In place of these requirements, the NCUA’s proposed rules would require a credit union offering MBLs to create a comprehensive written commercial loan policy and establish procedures for commercial lending. The proposed rules do list several requirements for a credit union’s commercial loan policy, including loan approval processes and underwriting standards, but the specific terms would be left to the credit union’s discretion. Additionally, credit unions with both assets less than $250 million and total commercial loans less than 15% of net worth, that are not regularly originating and selling or participating out commercial loans, would not be required to create such a commercial loan policy at all.
The proposed rules would also remove the explicit 12.25% cap on MBLs, instead referring back to the capitalization requirements of the CUMAA. If Congress changes the capitalization requirements, as it may if proposed Basel III capitalization requirements are adopted, credit unions could exceed the previous 12.25% limit. The proposed rules would further relax business lending restrictions by drawing a distinction between “the specific category of statutorily defined MBLs and the universe of commercial loans that a credit union may extend.” The rules would add a new definition of “commercial loans” that includes two types of non-MBL loans:
- Any commercial, industrial, agricultural, or professional loan in which a federal or state agency has committed to fully insure repayment, fully guarantee payment, or provide an advance commitment to purchase the loan in full.
- Any non-member loan or non-member participation interest in a commercial, industrial, agricultural, or professional loan. However, for a non-member participation to qualify as a commercial non-MBL loan, the “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 limit.”
Since these two types of commercial loans would not be considered MBLs, they would not contribute to the statutorily mandated MBL aggregate limit under the proposed rules.
Additionally, the proposed rules would expand the limit of the aggregate dollar amount of commercial loans to a single borrower. Under the current rules, borrowers may not exceed the greater of 15% of the credit union’s net worth or $100,000. The proposed rules would allow a borrower to borrow an additional 10% of the credit union’s net worth if the amount that exceeds the 15% general limit is fully secured at all times with a perfected security interest by readily marketable collateral.
Reaction to the proposed rules has been mixed. Over 90% of the comment letters the NCUA received were from bankers, who opposed expanding MBL lending authority for credit unions. The Independent Community Bankers of America (the “ICBA”) argued that Congress instituted a hard cap of 12.25% in order to “ensure that any risks to the taxpayer are mitigated,” and that “[a]ny attempt to circumvent this limitation . . . that results in a higher concentration of member business lending above this statutory cap defies Congressional intent.” The ICBA noted that the NCUA itself admitted that “poorly managed business lending activities were a contributing factor in the failure of at least five credit unions since 2010.” In light of such failures, the ICBA argued that credit unions are not equipped to engage in large amounts of commercial lending, and existing limits on MBLs and commercial loans should thus be maintained. The ICBA further argued that the use of an abstract framework of sound judgment in place of tangible limits would threaten safety and soundness of credit unions.
The American Bankers Association (the “ABA”) echoed the ICBA’s concerns regarding the safety and soundness of the proposed rules’ principles-based framework. The ABA also expressed particular concern that even though the proposed rules would require that any non-MBL or participation loan be in compliance with applicable laws and must not be part of a swapping or trading scheme with other credit unions to circumvent the limit, the NCUA did not articulate how such a provision would be enforced or monitored. Accordingly, the ABA claimed that the proposed rules effected a potential circumvention of the congressionally mandated MBL cap.
In contrast, nearly all letters from credit unions and industry leaders supported the proposal. The National Association of Federal Credit Unions (“the NAFCU”) specifically praised the elimination of the waiver application process. The NAFCU also supported the effective end of the prescribed limit on non-MBL commercial loans, which it claimed would “not only provide necessary regulatory relief for the industry, but . . . also allow credit unions much-needed flexibility in their diversification strategies.”