Compliance Blog

Jul 27, 2015
Categories: Business Lending

MBL: A New Look at Commercial Lending, pt 3.

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Monday! And welcome back to the third installment of our Compliance Blog series on the NCUA’s MBL proposal, where NAFCU highlights the key issues that we are looking for your feedback on.  Last week, we discussed the scope of NCUA’s proposed exemption for small credit unions. Today, we will focus on what will be required of credit unions that are covered by this proposed rule, specifically what must be included in a credit union’s board approved commercial lending policy.

Currently, NCUA’s MBL Rule (Part 723) contains prescriptive requirements that are not nearly as flexible as NCUA’s general lending rule (12 CFR 701.21) in terms of policy or underwriting standards.  NCUA’s proposal will eliminate Part 723’s prescriptive underwriting standards and instead allow a credit union’s Board of Directors to establish its commercial lending standards with general safety and soundness requirements in mind. 

While the proposal, on its face, eliminates the existing prescriptive requirements for LTV ratios, minimum equity investments, portfolio concentration limits for types of loans, and personal guarantees, it will now require these risk management considerations to be adopted in the credit union’s internal commercial loan policy.  In essence, the proposal would require a credit union's commercial lending policy to be much more robust than currently mandated by Part 723, and it would require that the policy address broader commercial lending activities.

The proposal would require a credit union to establish underwriting standards to include LTV ratio limits and methods for valuing all types of collateral authorized prior to extending any commercial loans or MBLs.  In particular, as proposed, §723.4 would require that a credit union’s commercial loan policy
address each of the following areas:

(a) Type(s) of commercial loans permitted to ensure that the credit union staff has appropriate expertise.

(b) The credit union must identify the trade area it wishes to serve, so that the credit union can make periodic site visits to monitory the borrower’s operations.

(c) Establish a maximum amount of assets, in relation to net worth, allowed in secured, unsecured, and unguaranteed commercial loans.

(d) Create qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting commercial loans.

(e) Loan approval processes, including establishing levels of loan approval authority commensurate with the individual’s proficiency in evaluating commercial loan risk.

(f) Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and borrowing relationships contemplated by the credit union.

(g) Risk management processes commensurate with the size, scope and complexity of the federally insured credit union’s commercial lending activities and borrowing relationships. This process must include a credit risk rating system and it must be subject to periodic review by the board of directors.

While the proposal will provide a credit union the flexibility to adopt commercial lending standards that are appropriate for its institution and membership, it is important to keep in mind that NCUA will be focusing its examinations on the accuracy and effectivities of the credit union’s risk management methodologies, underwriting standards, and loan approval process. In the preamble to the proposed rule, the NCUA Board explains that “the proposed rule contemplates risk management processes that include procedures for achieving a comprehensive understanding of the borrower’s operations, financial condition, and the industry and market in which the business operates.”  See 80 FR 37898, 37905 (July 1, 2015).  The NCUA Board also notes an expectation that a credit union manage its commercial lending risk by submitting reports on the performance of the commercial portfolio “on a regular basis to senior management and the board of directors.”  Id.

What does everyone think? NCUA estimates each credit union will need to spend 16 hours updating its commercial lending policy to comply with the proposal. Additionally, NCUA estimates each credit union will spend 160 hours adopting a credit risk rating system, if it does not already have one in place. How much time does your credit union think it will need to cohere your existing polices to those dictated by the proposal? Also, how much time will you need to develop and implement a credit risk rating system if you don’t already utilize one? Overall, after reviewing these provisions, do you agree with NCUA’s estimated compliance burden? If not, how much time do you think your credit union will need to spend to update its current commercial lending policy to bring it in compliance with the proposed rule?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly (, 703-842-2266) with your thoughts.