CUNA Regulatory Comment Call
April 2, 2003
Amendment of NCUA's Member Business Loan Rule
The Board has issued a proposal amending the agency's Member Business Loan (MBL) rule. Based on the review conducted by Vice Chair JoAnn Johnson's internal working group on member business lending, the Board believes it should amend the MBL rule in certain areas it liberalized in approving state rules. Further, the Board decided to revise and clarify certain provisions that have caused confusion or created unnecessary regulatory burden. The NCUA Board will continue to be responsive to changes in the MBL marketplace, either by approving state-specific rules or considering future revisions to this rule. Comments on this proposal will be due June 3, 2003.
The following are the significant proposed revisions to the MBL rule:
Outstanding Loan Balance
There would be a new definition for "outstanding member business loan balance": "[T]he outstanding loan balance and any unfunded commitments, excluding any portion of the loan that is secured by shares in the credit union, or by shares or deposits in other financial institutions, or by a lien on the member's primary residence, or fully or partially insured or guaranteed by any agency of the federal government, a state or any political subdivision of such state, or subject to an advance commitment to purchase by any agency of the federal government, a state or any political subdivision of such state, or sold as a participation interest without recourse." The definition is key to the determination of: whether a loan qualifies as an MBL, which portion of an MBL is included in the calculation of the loans to one borrower limit, and which portion of an MBL is included in the calculation of a credit union's total aggregate MBL limit.
Credit unions that purchase participation interests in MBLs made to credit union members need not count the purchase against the credit union's own aggregate limit under the amended rule. In order for a participating credit union to exclude participation interests it has purchased, it must otherwise comply with Part 723 of NCUA's Rules and subject these loans to the prompt corrective action (PCA) risk-weighting standards under Part 702 of NCUA's rules as though the credit union had originated the MBLs. This means that a participating credit union must have an MBL policy, employ an individual or use the services of an independent third-party with the requisite lending experience, perform appropriate due diligence, and comply with the collateral requirements and loans to one borrower limit, in addition to all other provisions of the MBL rule when purchasing a MBL participation interest from any eligible organization. Finally, the purchase must be a bona fide transaction to fulfill a business purpose. For example, credit unions may not enter into participation agreements that, in effect, permit them to swap portions of all of their MBL portfolios and, thereby, claim that the participation interests are excluded from the aggregate loan limit.
Loans to Credit Unions and Credit Union Service Organizations (CUSOs)
The proposed rule would clarify that loans made by federal, natural person credit unions to other natural person credit unions and CUSOs are not MBLs. The rule would also permit federally insured stated-chartered credit unions to exclude loans to credit unions and CUSOs in calculating their aggregate MBL 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 MBLs. The corporate credit union rule would be amended to conform with the MBL rule regarding loans to corporate CUSOs by removing the requirement that a corporate's loans to corporate CUSOs comply with the MBL rule's aggregate loan limit.
Construction and Development Lending
The revised rule would lower the mandatory equity requirements for construction and development loans by requiring a borrower to have a minimum of a 25% equity interest in any construction or land development project. The current rule requires a borrower to have a 35% equity interest or receive a waiver from an NCUA regional director. In the case of a loan to finance the construction of a single-family residence where a contract already exists between the builder, who is a member-borrower, and a prospective homeowner, who will purchase and reside in the property, such a loan would not be subject to the aggregate 15% of net worth limit or the proposed new 25% equity interest requirement. Instead, these loans would be subject to the normal MBL collateral requirements of Section 723.7. This same relief from the aggregate net worth limit and the equity interest requirement would be provided for one construction or development loan per member-borrower or group of associated member-borrowers for a single-family residence, irrespective of the existence of a contract with a prospective homeowner.
Direct Experience Requirement
The MBL rule requires credit unions to use the services of an individual, either an employee or third-party contractor, with lending experience that is directly related to the type of MBLs the credit union offers. The proposed amendment provides that this individual must understand the complexity and risk exposure of the credit union's MBLs. In addition, a credit union would be allowed to obtain the services of a third-party to meet the direct experience requirement of the rule if the third-party has no interest or involvement in the MBL transaction.
The current MBL 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.
- The proposal would exclude MBLs made for the purchase of vehicles from the loan-to-value requirements if the vehicle is a car, van, pick-up truck, or sports utility vehicle that is used for commercial purposes.
- The current MBL rule requires principals to provide their personal liability or guarantee on MBLs unless the credit union receives a waiver from its regional office; the proposal would remove that requirement. Credit unions may still require loan applicants to provide principal guarantees as a risk-reducing business practice.
- Credit unions would be permitted to make unsecured MBLs, in addition to credit card line of credit programs offered to nonnatural person members, subject to certain limits. A credit union may make unsecured MBLs if: (1) the credit union is "well-capitalized" as defined in 12 CFR 702.102(a)(1); (2) the aggregate of unsecured MBLs 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 MBLs does not exceed 10% of the credit union's net worth; and (4) the credit union addresses unsecured loans in its written MBL policy. Further, the rule would permit a credit union to apply for waivers from the unsecured loans to one borrower limitation and the aggregate unsecured loan limitation of the loan-to-value ratio section.
Reserves for Classified Loans
The MBL sections regarding classification of loans for losses and reserving requirements would be deleted under the amendment. In May 2002, NCUA adopted the Interpretive Ruling and Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Federally-Insured Credit Unions (IRPS 02-3). The IRPS supercedes the reserve provisions in the MBL rule. As indicated in the ALLL guidance, federally-insured credit unions should adopt methodologies and documentation practices appropriate for their size and complexity and may consider the value of collateral in determining the appropriate loss reserve - this includes reserves for MBLs. Click here to see CUNA's analysis of the IRPS, which contains a link to the text of the IRPS.
Standard Risk-Based Net Worth Component for MBLs
The proposal would amend the prompt corrective action rule regarding the risk weighting of MBLs. The current standard risk-based net worth (RBNW) component for MBLs in Part 702 of NCUA's rules would be expanded. The standard RBNW presently divides the portfolio of MBLs by a single threshold - 12.25% of total assets. The amount of MBLs less than or equal to that threshold is risk-weighted at 6%; the amount in excess of the threshold is risk-weighted at 14%. The proposal would expand the standard component to three tiers divided by 15% and a 25% threshold, respectively. The bottom tier, risk-weighted at 6%, would consist of the amount of MBLs less than or equal to 15% of total assets. The middle tier, risk weighted at 8%, would consist of the amount of MBLs greater than 15%, but less than or equal to 25% of total assets. The top tier, risk-weighted at 14%, would consist of the amount of MBLs in excess of 25% of total assets.
Credit Union Service Organization (CUSO) Business Loan Origination
The CUSO rule would be amended to add business loan origination to the list of permissible activities. The Board believes that by authorizing CUSOs to engage in business loan origination, CUSOs will better serve credit union members by offering loans to members that their credit unions may be unable to grant.
Comments are due to NCUA by June 3, 2003. Please send your comments to CUNA by May 20, 2003. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org or to Senior Regulatory Counsel Catherine Orr at email@example.com; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004.
You may obtain a copy of the MBL proposal by contacting us or by clicking here.
QUESTIONS REGARDING THE PROPOSAL
- Do you agree with the proposed definition for "outstanding member business loan
Yes ______ No ______
If not, why not and what definition would you suggest instead?
- For construction and development lending, do you believe an equity interest of 25% as proposed would provide
sufficient collateral for a credit union and adequate incentive for a borrower to complete a project?
Yes ______ No ______
If not, what should the appropriate equity interest percentage be?
- Are there any other provisions which you would like to see added with respect to
residential real estate MBLs?
Yes ______ No ______
If yes, what are those provisions?
- Do you agree with the list of 4 criteria that must be met in order to make an unsecured MBL loan?
Yes ______ No ______
In not, please explain why not.
- Do you agree with the expansion of the standard risk-based net worth component for MBLs?
If not, what do you think the component should be?
- The proposal states, "By authorizing CUSOs to originate business loans, credit
unions can benefit from economies of scale by pooling their investments into a
business lending CUSO, thus affording their small business members access to
MBLs that may otherwise be unavailable through the credit union or other lenders."
Do you foresee that many credit unions will look to CUSOs to serve their members
by offering loans that the credit unions may be unable to grant?
Yes ______ No ______
- Are there any other provisions which you would like to see added to further facilitate
member business lending?
Yes ______ No ______
If so, what are those additional provisions?
- Other Comments.
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com