NCUA’s Attempt to Add Clarity to Section 701.21
Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel, NAFCU
On March 14th, the NCUA Board approved a final rule amending NCUA’s Loans to Members and Lines of Credit to Members rule found at 12 CFR § 701.21. In its proposal, NCUA attempted to clarify the rule to make it easier to use and it sought comments from stake-holders on two key issues: (1) whether NCUA should provide for longer maturity limits on certain loans and (2) whether NCUA should establish a single universal limit for loans to a single borrower (or group of associated borrowers).
Comments for a Future Proposal
It is important to note that section 107(5) of the FCU Act contains some significant statutory limitations on maturity limits for FCU loans, so NCUA can only propose changes within the limited discretion given to it by the law. NAFCU is currently advocating to Congress for credit unions to have more flexibility with regard to loan maturity limits.
Regarding longer maturity limits, NCUA stated that it received comments that generally fell into three categories: (1) comments asking NCUA to take actions that exceed its statutory authority under the Act; (2) comments asking NCUA to take actions it can take under the Act; and (3) unsolicited comments regarding lending that might be more appropriate handled by guidance and legal opinion letters, for example, addressing detached “mother-in-law suites.”
This first category can only be addressed by Congressional action (we’re working on it, and would love your support!). The second addressed maturity limits for principal residences, long-term residential real estate loans and for home improvement, mobile homes and second mortgage loans. NCUA is considering whether to issue another proposal to substantively change these rules. Regarding the third, NCUA said that appropriate guidance or legal opinions may be issued later this year. 84 Fed. Reg. 10972-3. So stay tuned for additional proposals and new guidance.
Clarifying the Current Rule
Currently, NCUA’s maturity limits are spread across subsections 701.21(c), (e), (f) and (g). NCUA (correctly) identified this smattering of maturity rules in the section as being confusing and difficult to work with. Beginning on April 24th, all maturity limits will be referenced in one subsection: 701.21(c)(4). 84 Fed. Reg. 10972. Unfortunately, these references in 701.21(c)(4) still just send you to other parts of the rule to actually identify the substance and requirements of the maturity limits, so unless you’re a noob compliance officer (some of us are) the change is fairly negligible in terms of improved usability.
NCUA also clarified that the maturity limits apply to any lending action qualifying as a “new loan” under GAAP, and that maturity limits should be calculated from the new date of origination. This is true regardless of whether the action is a new origination or a modification, as long as it qualifies as a “new loan” under GAAP - specifically NCUA refers to FASB's Accounting Standard Codification 310-20-35-9 and -10. 84 Fed. Reg. 10972.
Finally, NCUA’s concentration limits for single borrowers or groups of associated borrowers are spread across three provisions: § 701.21(c)(5) contains the general limit; § 701.22(b)(5)(iv) contains the limit on loan participations; and §723.4(c) contains the limit on commercial loans. Having each of these limits existing independently in three different parts makes understanding NCUA’s concentration limits difficult. To provide clarity, NCUA is adding new cross-citations and making technical corrections to existing ones. 84 Fed. Reg. 10973. Hopefully this change will provide compliance officers researching the issue some clarity and a sense of confidence that they have identified the full universe of single borrower limitations.
For more information about the changes, NAFCU members can read Final Regulation 19-EF-06. If you want to know when those rule proposals are released and what is in them, subscribe to NAFCU’s Regulatory Alert emails. If you would like to support H.R. 1661, the NAFCU-supported federal legislation to give NCUA greater flexibility in setting maturity limits, visit our Grassroots Action Center to find out how you can help.