CUNA Comment Letter
CUNA Comments on NCUA's MBL Proposal and Refutes ABA
June 3, 2003
Ms. Becky Baker
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314
Dear Ms. Baker:
On behalf of the Credit Union National Association, we are pleased to provide comments to the agency on the National Credit Union Administration Boards proposal to amend its member business loan regulation in a number of significant ways. By way of background, CUNA is the largest trade association representing more than 90% of our nations 10,000 state and federal credit unions.
Summary of CUNAs Comments
Here is a summary of CUNAs comments on the member business loan proposal.
- Because of the significance of this proposal to credit unions, CUNA devoted considerable resources to our review of the proposed changes and to the development of our recommendations, drawing upon the expertise of several CUNA groups, leagues and credit unions.
- CUNA supports the proposal, with recommended modifications, and commends the NCUA Board for its leadership in developing the amendments.
- CUNA finds the ABAs comment letter offensive and misleading, and we have addressed the specious charges presented by the ABA.
- CUNA recommendations include the following changes:
- NCUA should revise Section 701.22(a)(4) to make it clear that credit unions may purchase member business loan participations from their CUSOs.
- NCUA should eliminate the dollar ceiling on unsecured loans to one borrower.
- NCUA should impose a risk weighting factor to member business loans of 6% for the lowest risk loans and no greater than 8% for loans in the other tiers.
- For loans made under the auspices of the Small Business Administration, NCUA should remove the inconsistencies between the requirements of the SBA and NCUAs MBL rule.
- NCUA should continue to allow states to seek variances in their MBL rules.
- NCUA should consider whether additional latitude may be provided in the area of mortgage lending that is for personal investment rather than business enterprise purposes.
We also note that the CUNA/CSSI program to support member business lending offers credit unions the resources they need to facilitate member business loans.
CUNA Has Devoted Considerable Resources to Reviewing the Proposal
The comments presented here were developed by CUNAs Examination and Supervision Subcommittee and CUNAs Committee on Business/SEGs Services, which we chair respectively. These two groups have devoted many hours to reviewing the proposal as well as the current rule. In the course of these reviews, the Examination and Supervision Subcommittee, along with representatives of the Committee on Business/SEGs, met with NCUA officials and held several conference calls to consider credit union comments and evaluate the proposal in light of their concerns. CUNAs Governmental Affairs Committee, League staff and some League committees also provided their views on the proposal and shared comments provided by credit unions. In addition, we want to acknowledge useful input from CUNAs Accounting Task Force Chair, Scott Waite, and member, Watt Prichard.
CUNA has undertaken its extensive review of the proposal because of the significance of the proposed changes to credit unions and their business members. While most credit unions today do not make member business loans -- only 1600 are engaged in such activity currently -- we agree with NCUA Board Chairman Dollars assessment regarding the role of member business lending. As the Chairman has stated, Going forward, credit unions may not be able to serve their memberships and their communities adequately unless they provide member business loans. We wholeheartedly agree.
CUNA Commends the NCUA Board
CUNA wishes to commend the NCUA Board for developing the proposal, which is clearly designed to facilitate member business lending, in a manner that is fully consistent with the Federal Credit Union Act and the highest standards of safety and soundness. In particular, we commend NCUA Board Vice Chair JoAnn Johnson for her leadership in organizing an internal working group to develop the proposal. We also applaud Board Member Deborah Matz for recommending the review and for Chairman Dollars steadfast support of this and similar agency efforts to remove the heavy hand of excessive regulation from the daily operations of credit unions.
CUNA Responds to ABAs Repetitive, Unfounded Allegations
Before addressing other aspects of the proposal, CUNA feels compelled to address and correct the specious charges the American Bankers Association has leveled against not only the proposal, but also the National Credit Union Administration, impugning NCUAs capacity to interpret and implement the Federal Credit Union Act properly.
The ABAs letter is offensive for both its tone and insinuations regarding NCUA. For example, the ABA accuses NCUA of proposing to permit credit unions to engage in a shell game to circumvent Congressional intent that credit union resources be focused on serving consumer lending, not commercial lending, by evading the aggregate business loan cap. We show below why these insulting allegations do not withstand scrutiny.
It is certainly regrettable that the banking industry, which has experienced record profits for the last several years, continues to target credit unions which, in the case of member business lending, hold less than one percent of this type of loan.
Yet, no one should be surprised that the ABA has attacked this proposal, given its record of relentless opposition to new regulatory or legislative amendments that would enhance the ability of credit unions to serve their members needs, even when such amendments are clearly within the confines of the Federal Credit Union Act. The charges the ABA has made against the member business loan proposal are very similar to the ones they repeatedly made against the field of membership proposals the agency issued to implement the Credit Union Membership Access Act. Their charges are as unoriginal as they are unfounded and appear to be motivated not by genuine public policy considerations but by a singular desire to limit the growth of credit unions in order to increase the domination of the banking industry in the financial services market.
Since the first insertion of the member business loan limits in the developing Credit Union Membership Access Act, the ABA has made a concerted effort to misrepresent member business lending at credit unions. The ABA portrayed such loans as large, commercial loans to big businesses and has criticized the expertise of credit unions to make such loans.
These depictions ignore the facts. Most credit unions member business loans are relatively small, with the average member business loan amount around $110,000. Also, the default rate for member business loans at credit unions is lower than the default rate for bank commercial loans.
The ABA fails to understand that, by and large, individuals coming to credit unions for business loans are not big business conglomerates but are the same consumers turning to their credit union for other loans. Nothing NCUA has proposed will change those dynamics.
Credit unions, as member-owned and -operated institutions, engage in the activities that their members request and need. Credit unions want to offer member business loans not to reap big profits, but because their business members are coming to them, often out of frustration because they cannot get a loan from the local bank or cannot get a loan at rates that are as favorable as the credit union could provide. However, credit unions are controlled by consumers/members who, now and always, determine the services their credit unions offer. They will continue to turn to their credit union as the primary source of auto lending, mortgage lending and other consumer loans and will want those activities to dominate their credit unions loan portfolios.
Having misunderstood credit unions and mischaracterized their member business lending activities, the ABA proceeds to advocate that NCUA needlessly restrict member business loans. This comes hard on the heels of a decades-long effort by the ABA to construe banking regulations as narrowly as possible.
In this vein, the ABAs first charge is that the proposal would violate the intent of the Credit Union Membership Access Act because Congress intended to limit member business lending. As evidence, the ABA cites the report of the Senate Committee on Banking, Housing and Urban Affairs on HR 1151, which ultimately became the Credit Union Membership Access Act, and a floor statement from Senator Phil Gramm.
The ABAs letter fails to acknowledge the comments of then Senate Banking Committee Chairman Alphonse DAmato during the floor consideration of HR 1151 on July 27, 1998. He was specifically addressing the member business loan provisions that seven Senators were seeking, unsuccessfully, to tighten. Let me leave you with one last thought (on this), he said. If every institution were able to and I am talking about every credit union recognizing that only 13 percent make commercial loans were to be engaged in business lending, the total would come to something under $40 billion nationwide Come on. I say to my colleagues, lets be serious. What are we trying to do here? That would be approximately 3 percent of all the commercial loans, $1.1 trillion in commercial loans that are out there.
While the documents the ABA has selectively cited have historical significance, they do not conclusively demonstrate congressional intent. Just as the Office of the Comptroller of the Currency or other federal regulatory agency, NCUA has the right and even the duty to apply the language Congress adopted and may not substitute language the ABA wishes Congress had approved.
While pushing the bank regulators over several years for new bank powers, some of which were not codified until the passage of the Gramm/Leach/Bliley law, the ABA charges NCUA has circumvented the aggregate member business loan limit by altering the definition of member business loan to exclude business loans sold as a participation interest without recourse; not counting MBL participations purchased against the aggregate loan limit; and permitting CUSOs to originate business loans.
In the area of regulatory burden and compliance, the Bush Administration has come to stand for the principal that regulatory agencies have latitude to alleviate such burdens where a statute does not expressly require them, and some other public policy reason does not necessitate their imposition. That is exactly the course of action the National Credit Union Administration has followed in issuing the member business loan proposal.
Under Section 203 of the Credit Union Membership Access Act, no insured credit union may make any member business loan that would result in a total amount of such loans outstanding at the credit union at any one time equal to generally, 12.25% of the credit unions assets (italics added). Also under the Act, NCUA has been given the authority to implement those provisions, and it has determined that loan participations do not fit the elements of that definition. A loan participation sold is not a loan outstanding at the credit union selling the participation, and thus may be excluded from the aggregate loan limit. Likewise, a participation purchased is not a loan made by the purchasing credit union and thus, may be excluded. This interpretation of the law is consistent with what the statute expressly states. No public policy reason requires NCUA to stretch the language of the law to define or include participations as member business loans for purposes of the total loan limit.
On the contrary, public policy dictates a narrow rendering of the statutory provisions so as to avoid unnecessary constraints on credit unions and on the flow of credit to small business around the country.
The ABA charges that these changes will jeopardize safety and soundness and will create an underestimation of member business loans, counter to proper risk-management oversight expected of a federal financial institution regulator. This is not correct, for several reasons. One, while participations will not count toward the member business loan limits, NCUA is proposing to require such instruments be counted in the loans-to- one-borrower limits, in the risk-based net worth requirements under PCA, and to require adequate, ongoing reporting of such participations. Further, loan participations would be sold without recourse and loan participations purchased would have to be made to a credit union member only. These safeguards are not required by the Federal Credit Union Act, but will help NCUA and credit unions ensure that safety and soundness is maintained whenever credit unions engage in member business lending and in selling or purchasing loan participations.
The ABA also focuses on NCUAs proposal that would allow a federal credit union to invest or lend to a Credit Union Service Organization (CUSO) that originates member business loans. The ABA characterizes this as gaming of the system as it feels the aggregate loans limits would be thwarted, but there is no evidence that Congress intended to apply to the aggregate limits to CUSOs as it could have readily done with the passage of the other member business loan provisions in HR 1151. Also, little additional member business lending volume could be shifted from one credit union to a CUSO as the credit union is limited to investing 1% of its paid-in and unimpaired capital and surplus in a CUSO and has the same restrictions on lending to a CUSO.
In short, there is nothing in the Federal Credit Union Act that requires NCUA to prevent credit unions from lending to or investing in a CUSO that originates member business loans. We wonder if the ABA is suggesting that banks and their affiliates have gamed their regulatory system by participating in activities through an affiliate rather than the regulated and insured bank.
Throughout its comment letter, the ABA criticizes NCUA for endangering safety and soundness. However, allowing credit unions to be involved with a CUSO that originates member business loans will minimize risk to the credit union and to the National Credit Union Share Insurance Fund. As you know, a CUSO is a separate legal entity from the credit union. Depending on the corporate structure of the CUSO, credit union owners of CUSOs are not generally liable for the obligations of CUSOs. Because CUSOs have no claim upon the assets of their credit union investors or lenders and thus, pose limited risk to the National Credit Union Share Insurance Fund or to the U.S. taxpayer, the federal government has only a marginal interest in the regulation of CUSO business lending activity. Whatever remote governmental interest may exist in such regulation is substantially outweighed by the public interest in facilitating the flow of credit to small businesses.
Even if there were some reason to believe that authorizing credit unions to be involved with CUSOs that originate member business loans will lead to abuse, less restrictive means exist for dealing with that problem than the broad ban on such activity that the ABA urges. Such less intrusive means should be targeted to address real problems with precision and without unduly burdening the extension of credit to small businesses.
Regarding safety and soundness, the ABA makes a number of groundless charges suggesting that the sky will fall if NCUA proceeds with the proposal. Not only does the ABA want to substitute its interpretation of the Federal Credit Union Act for NCUAs, but it also wants to dictate to NCUA what is safety and soundness for credit unions. This is arrogant and ludicrous.
The ABA states that the proposal will shift the portfolio of credit unions toward the riskier end of the spectrum. At best, this statement is hyperbole. First and foremost, the not-for profit, cooperative nature of credit unions tends to make them risk-averse. Credit unions simply have little incentive to undertake risky activities. Second, as stated above, less than 15% of credit unions offer member business loans and even if the proposal were adopted tomorrow, it would take a number of years for member business lending to become an important element of most credit unions lending activities. There are several reasons for this, including the requirement for a credit union to have member business lending expertise at the credit union or through a third party. A number of credit unions are reluctant to acquire such expertise, which is expensive, since they will reach the loan cap with just a few loans.
The ABA cites the proposals treatment of vehicle loans, which would be excluded from the loan-to-value requirements even if the vehicle is used for business purposes, as consumer vehicle loans are now. The letter mentions a Nebraska credit union that advertises financing up to 110 percent of the value of a new vehicle, which it claims would not be prudent if the loan were for business purposes. Contrary to the ABAs charge, there is no evidence, for example, that a car loan used by a house appraiser in her business, performs significantly differently than a standard consumer automobile loan. The ABA indicates that NCUA is equating the risk of one consumer loan to fleet commercial loans. That is not accurate. The proposal simply states that a single vehicle loan, regardless of purpose, will not be included in loan-to-value requirements.
The ABA criticizes the proposed authority for unsecured member business loans. The association does not state why it feels this type of lending constitutes a safety and soundness issue. Currently, some state chartered credit unions are permitted this authority, and it has not presented such concerns. One might infer from the ABAs letter that they would prefer for a small business to have to obtain a credit card line of credit, which some banks offer at less than favorable rates for business borrowers.
Other provisions opposed by the ABA are those that address risk weighting for member business loans under prompt corrective action. ABA points out that credit unions with a larger concentration of business loans would be allowed to hold less capital to absorb losses arising from member business lending. However, credit unions holding a larger proportion of member business loans would generally be those with greater expertise and a history of making such loans. Thus, their risk is likely lower than a credit union that only makes a few member business loans a year.
There are other aspects of prompt corrective action that support NCUAs proposed treatment of risk weighting for member business loans. The general experience of credit unions with member business lending demonstrates that the current risk factors overstate the risk associated with such loans. Also, risk-based net worth requirements, such as those for member business loans, supplement standard net worth requirements that are already far higher than those imposed on banks. In any event, under the Federal Credit Union Act, no new member business loans could be originated if a credit unions net worth fell below 6%. NCUA should not lose sight of the fact that because of the conservative nature of not-for-profit, cooperative credit unions, the average credit unions net worth is approaching 11% -- demonstrating that credit unions will tend to position themselves against risk voluntarily.
The ABAs letter states that banks are consistently making micro-small business loans and cites the policies and practices of two banks as evidence. The letter accuses NCUA Board Member Deborah Matz of making assertions that have no basis in fact when she recently commented that member business loans that credit unions make generally are relatively small, but they are particularly important to some members because banks wont be bothered with them.
However, the Federal Reserve Boards most recent Report to Congress on the Availability of Credit to Small Businesses (September 2002), referencing its 1998 survey as the most comprehensive information about small business credit, notes, among small businesses, larger firms were more likely than smaller firms to use each of the traditional credit types. It also states that, some small businesses may have wanted to use more credit than was reflected on the (survey) but were unable to obtain it. ...Some firms that may have wanted additional credit may not have applied for fear of denial. In fact 23% of the respondents indicated that they had forgone applying when the needed credit because of the fear of denial. The survey data indicate that younger and smaller firms were more likely to forgo applying for credit, suggesting that the demand for credit at smaller and younger small businesses may have been higher than the data of credit use suggest.
In sum, the ABAs comments on NCUAs member business lending proposal have misconstrued the Federal Credit Union Act and misrepresented safety and soundness concerns in order to justify and make more respectable its anti-credit union, anti-competitive, anti-small business agenda.
We now turn to CUNAs position on the various provisions in the proposal.
CUNAs Views on The Proposal
- Definition of Outstanding Loan Balance
NCUA is proposing a new definition for outstanding member business loan balance that, among other things, would clarify that any portion of a loan that is sold as a participation interest without recourse would be excluded from the definition. The Board notes in the Supplementary Information accompanying the proposal that it addressed this issue in the preamble, rather than the final rule in May 1999, and that it was the Boards interpretation that when participating out loan interests, an originating credit union should count only the amount of the loan it holds towards it aggregate limit . We are pleased that the Board is incorporating that view into the final rule. We also agree that the use of the outstanding loan balance, as now clarified, throughout the rule will aid credit unions in determining which portion of a loan must be included under the aggregate limit and/or loans-to-one borrower limits.
- Loan Participations
The proposed rule would also clarify that credit unions that purchase participation interests in member business loans that were originally made to credit union members are not required to include the purchase when calculating their aggregate loan limit. While such loans would be excluded from the total member business loan limits, they would be subject to risk-weighting under prompt corrective action and other requirements of Part 723. As stated above in the discussion of the ABAs letter, we agree that this change is supported by the language of the Federal Credit Union Act and we support its adoption. We also agree that the proposed treatment of participation interests will enhance safety and soundness by assuring sound policies and practices are followed when purchasing member business loan participations.
We do believe some further clarifications are in order, however, regarding the purchase of participations. The Supplementary Information states the sale and purchase of participation interests in MBLs among credit unions cannot be used as a means to circumvent the regulations aggregate loan limit. For example, credit unions may not enter into participation agreements that in effect, permit them to swap portions or all of their MBL portfolios and thereby, claims that the participation interests are excluded form the aggregate loan limit. Credit unions have commented that this guidance is less than helpful, and we recommend that NCUA further delineate between participation agreements that would be acceptable and those that would not be permissible.
Also, in the past there has been some confusion as to whether or not a credit union may purchase loans from lenders other than credit unions. The new regulations should specifically state whether or not credit unions may purchase loans from non-credit union lenders.
- Loans to Credit Unions and CUSOs
The proposed rule would clarify that loans made by federal, natural person credit unions to other natural person credit unions or credit union service organizations are not member business loans. Also, federally insured stated-chartered credit unions may exclude loans to credit unions and CUSOs when calculating their aggregate member business loan limit if the state supervisory authority determines that state law grants distinct authority to lend to credit unions and CUSOs separately from the authority to make member business loans. The corporate credit union rule would also be amended to remove the requirement that a corporates loans to corporate CUSOs comply with the aggregate limits under the member business loan rule. We support these changes.
- Construction and Development Lending
The revised proposal would lower the mandatory equity requirements for construction and development loans by requiring a borrower to have a minimum of a 25%, rather than a 35%, equity interest in any construction or land development project. We believe this will provide credit unions with additional flexibility to provide these types of loans on a more competitive basis, while maintaining safety and soundness.
- Member Business Loan Policy
The current rule requires the same documentation for every MBL, regardless of size, business or loan type. The revised rule would allow a credit union to adopt analysis and documentation requirements in its MBL policy that are appropriate for the type or types of MBLs the credit union intends to make. This is a positive change that will allow credit unions to vary the documentation requirements based on the kind of loan in question. Less sophisticated transactions should be subject to fewer documentation requirements than are more complex ones, as long as reasonable standards of safety and soundness are met.
- Vehicle Loans
The proposal would exclude member business loans made for the purchase of vehicles from the loan-to-value requirements if the vehicle is used for business purposes. As discussed above, we strongly support this practical and reasonable approach, as the distinctions between a loan for a car for a business purpose and a loan for a car for a consumer purpose are slim indeed. If, however, a credit union were financing a fleet of vehicles, we do think that arrangement would be covered under the member business loan rule.
- Personal Guarantee
The current rule requires principals to provide their personal liability or guarantee on member business loans unless the credit union receives a waiver from the credit unions NCUA regional office. The proposal would remove that requirement. This proposed change follows the lead that several states have taken and which variance from the federal rule was permitted by NCUA. We agree with this approach as a personal guarantee is not required by the Federal Credit Union Act or other statute, and there appear to be no safety and soundness issues that have arisen for state chartered credit unions making member business loans without the personal guarantee of the business borrower.
- CUSO Business Loan Originations
The NCUA Board is proposing several changes to its rules to allow credit unions to lend to or invest in a credit union service organization that originates member business loans. The Board believes that by authorizing CUSOs to engage in business loan originations, CUSOs will be able to serve credit union members better by offering loans to members that their credit unions may be unable to grant. We agree.
However, we believe several changes are in order to fully implement the Boards intent. We suggest the wording be changed in the CUSO rule, 12 CFR 712.5 to clarify that CUSOs may originate and fund business loans for credit union members. We also support a revision to Section 701.22(a)(4) to make it clear that credit unions may purchase member business loan participations from their CUSOs.
- Direct Experience Requirement
The current rule requires credit unions to use the services of an individual with lending experience that is directly related to the type of member business loans the credit union offers. The proposed amendment restates that the individual must understand the complexity and risk exposure of the credit unions member business loans, which is reasonable. However, in addition, the proposal would clarify that a credit union would be allowed to obtain the services of a third party to meet the direct experience requirement of the rule only if the third party has no interest or involvement in the MBL transaction. This would be a new restriction that was included to insure the independence of the review. However, this proposed limitation could needlessly restrict CUSOs and other service providers that offer a range of services to credit unions, including loan review, underwriting, servicing, etc. We believe NCUA was attempting to eliminate illegal conflicts of interest that result in inappropriate personal financial gain. We agree that type of activity should be prohibited. However, as long as such improper conflicts are avoided, we do not believe that a third party provider, which will have an interest and involvement in the transaction, should be precluded from assisting the credit union with its member business lending activity.
- Unsecured Loans
Credit unions would be permitted to make some unsecured member business loans under certain conditions, in addition to credit card line of credit programs offered to nonnatural person members, subject to certain limits. We support the change in policy that would allow unsecured member business lending.
However, we believe the limits are more restrictive than necessary. Under the proposal, a credit union may make unsecured member business loans if: (1) the credit union is "well-capitalized" (net worth of 7% or higher); (2) the aggregate of unsecured member business loans to one borrower does not exceed the lesser of $100,000 or 2.5% of the credit union's net worth; (3) the aggregate of all the credit union's unsecured member business loans does not exceed 10% of the credit union's net worth; and (4) the credit union addresses unsecured loans in its written MBL policy.
While the rule would permit a credit union to apply for waivers from these limitations, the limits should be less restrictive in order to encourage member business lending. This can be accomplished without jeopardizing safety and soundness.
We believe a more reasonable approach, which more accurately reflects risk, would be to eliminate the dollar ceiling on unsecured member business loans to one borrower and only retain the limit of 2.5% of the credit unions net worth for unsecured member business loans. Likewise, the Board should consider eliminating the limits on aggregate unsecured MBLs, which would then be subject to the general limits on member business lending.
- Risk-Based Net Worth Component for MBLs
The proposal would amend the prompt corrective action rule regarding the risk weighting of member business loans by expanding the current standard risk-based net worth component for member business loans. While this is a step in the right direction, the change is not as useful as it could be.
In our view, under both the standard risk-based net worth component and the alternative components, a credit union should be permitted to lower ts risk-based net worth component to reflect the credit unions experience, expertise and record of success in making member business loans.
The current rule provides that MBLs less than or equal to 12.25% of total assets would have a risk factor of 6% and loans above the threshold would have a risk factor of 14%. The proposal would establish three tiers a bottom tier would be risk weighted at 6% for member business loans less than or equal to 15% of total assets; a middle tier would be risk-weighted at 8% and apply to member business loans greater than 15% but less than or equal to 25% of assets; and the top tier would be risk-weighted at 14%, and would consist of the amount of member business loans over 25% of total assets.
Our concern about this proposal is that it still overstates the risk of making member business loans, particularly for experienced credit unions. We believe that the risk factors should be more closely related to the experience of the credit union and the aging of the credit unions member business loan portfolio.
From that perspective, as recommended by several members of our groups that have extensive experience with member business loans, the risk factor for the first tier should be no higher than 6% and no other risk factor should be higher than 8%.
We also recommend that NCUA allow for further risk reduction under PCA for member business loans that provide balloon and/or call provisions under which a loan matures within 5 years. Specifically, NCUA should also permit credit unions to include loans with 5 years or less in maturity in the lowest risk-weighted tier (6%) when calculating PCA.
- SBA Loans
There are some differences between NCUAs member business loan regulations and specific requirements the SBA has established for the 7(a) and/or 504 programs. These differences could place a credit union at a competitive disadvantage when offering SBA loans. We recommend NCUA include wording in the revised rule so that credit unions which are in compliance with SBA rules in the origination, underwriting, servicing, and portfolio audits will also be recognized as being in compliance with NCUA rules for the SBA loans only.
The following are some of the inconsistencies between SBA and MBL requirements. See table below for comparisons of maximum legal limits:
|Loan Type||MBL Requirement||SBA Requirement|
|Business Real Estate||80% loan to value||Flexible, but could be higher|
|Business Real Estate||Up to 20 years max. term||Up to 25 years max. term|
|Working Capital||Up to $100,000 max. loan limit||Limited only by SBA guaranty ($750,000)|
|Mixed Collateral||Up to 15 years max. term||Weighted average max. term|
If the regulations are not aligned, the credit union will need to seek waivers from the NCUA to comply with SBA requirements.
Furthermore, SBA loans typically have more than one component (real estate component, equipment, and working capital (unsecured)). The SBA considers this one loan yet NCUA regulations require credit unions to consider each component as a separate loan depending upon the nature and extent of the collateral used in securing the loan. NCUA should determine that as long as each component of the loan is in compliance with SBA requirements, the loan as a whole will be considered to be in compliance with NCUA requirements, and the credit union will not be required to make separate loans or account for them separately.
Some SBA loans secured by real estate can have terms as long as 25 years. Under NCUAs rule, a credit union must seek a waiver from NCUA to permit origination, closing, and funding of these SBA loans with such terms. NCUA should align the term limits to accommodate SBA loans under the 7(a) and 504 programs.
Finally regarding the SBA issues, we understand that it is NCUAs policy that only the non-guaranteed portion of SBA loans under the 7(a) and 504 program will be counted as member business loans. We encourage the NCUA Board to include that interpretation in its final rule.
- Allow States to Continue Seeking Variances
Even though NCUA has developed a set of changes to the federal member business loan rule that will facilitate this activity for credit unions, we believe the agency should continue to encourage states to look for ways to innovate in the area of member business loan regulation. We recommend that the preamble to the final rule clarify that NCUA will continue to entertain requests from state regulators for rule variances, even after the adoption of NCUAs final member business loan amendments.
- Mortgage Loans
The statutory definition of member business loans excludes a loan that is fully secured by a lien on a one-to-four family dwelling that is the primary residence of a member. While we appreciate that NCUA has made every effort to ease regulatory requirements associated with member business loans that are not necessitated by the statute, we request the agency give consideration to allowing a credit union to extend one additional mortgage loan to a member that could be used, for example, for retirement investment purposes and not be counted as a member business loan.
CUNA/CSSI Program to Support Credit Union Member Business Lending
As you know, in February, CUNA announced the development of a new alliance with Newtek Small Business Finance, Inc. CUNA embarked upon this endeavor to facilitate credit union loans under the Small Business Administrations 7(a) program as well as traditional member business loans. We believe this program, which provides an array of services to credit unions -- from a turnkey approach to consulting assistance that will help a credit union achieve SBA lender status -- will offer credit unions the resources they need to enter the member business loan market or enhance their current activities in this area. While originally organized under CUNA to expedite the development of the alliance, later this month the relationship with Newtek is scheduled to be transferred to CSSI. Also, through CUNAs Center for Professional Development, we are providing educational programs, webinars and materials to further support credit union member business lending. More information about these initiatives is available on CUNAs website at www.cuna.org.
In sum, CUNA strongly supports the NCUA Boards proposed changes to the member business loan rule, which we agree are firmly grounded in the Federal Credit Union Act and raise no safety and soundness concerns. Regrettably, we find the ABAs comments misrepresent the proposed rule and do not withstand analysis in light of the wording of the Federal Credit Union Act and the organization and structure of credit unions. The ABAs charges regarding safety and soundness concerns are speculative and not supported by the facts.
CUNA urges the NCUA Board to approve the proposed changes, with the modifications we have recommended. We applaud the Boards leaderships on this issue, and we look forward to working with the Board to support member business lending at credit unions. If you have questions about this letter, please feel free to contact CUNAs Senior Vice President and Associate General Counsel Mary Dunn at 202-508-6736.
CUNA Examination and Supervision
|Cc:|| NCUA Board Chairman Dennis Dollar
NCUA Board Vice Chairm JoAnn Johnson
NCUA Board Member Deborah Matz
NCUA General Counsel Robert Fenner
CUNA Examination and Supervision Subcommittee
CUNA Business/SEGs Services Committee
CUNA Governmental Affairs Committee