NCUA’s New MBL and Commercial Lending Rule Is Now Effective
Written by Pamela Yu, Special Counsel for Compliance and Research
Happy Friday! On January 1, 2017, NCUA's new MBL rule finally went into effect. While the personal guarantee provision had an early implementation in May 2016, the bulk of the new rule was not implemented until the beginning of this year. While NAFCU's Compliance Team has continued to blog about this topic since NCUA proposed comprehensive changes to its MBL rule in June 2015, now that the entire final rule is effective, let's do a quick recap of the new rule and then talk a little more about another one of the key areas of the new rule that members have been asking about: the small credit union exemption.
In February 2016, the NCUA Board approved a final rule to amend Part 723, NCUA's MBL rule. The new rule fundamentally changes the manner in which NCUA approaches commercial lending, from both a regulatory and supervisory perspective.
NCUA adopted its first regulation governing MBLs in 1987 and has amended the rule several times over the years, including amendments to incorporate MBL provisions enacted in 1998 in the Credit Union Membership Access Act (CUMAA). Among other things, CUMAA limited the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the FCU Act for a credit union to be well capitalized. This statutory aggregate limit on MBLs was incorporated in Part 723 of NCUA's regulations. Part 723 also defined MBLs, established minimum safety and soundness standards for making MBLs, and implemented various statutory exceptions from the aggregate MBL limit. Prior to the new final rule, NCUA had not significantly changed Part 723 since 2003.
Historically, Part 723 has treated commercial lending as synonymous with the statutory member business lending definition under the FCU Act. The new final rule, however, expands the scope of the rule to apply to commercial loans as newly defined under the regulation. The rule delineates loans subject to the statutory MBL cap and those subject to the safety and soundness policy and infrastructure requirements.
The new rule further diverges from prior iterations of the MBL rule by moving from a prescriptive regulatory framework to a broad, more flexible, principles-based regulatory approach. This means that credit unions are no longer subject to strict underwriting requirements including collateral and security requirements, equity requirements, and loan limits expressly set out in the regulation. Instead, the new rule sets out the broad elements that NCUA believes are necessary to ensuring that a credit union's commercial lending policies and programs are safe and sound. It is up to individual credit unions engaging in business lending to address these elements in their own commercial lending policies with risk-based limitations and requirements that are suitable to their own business lending activities.
Notably, because regulatory waivers are inconsistent with a principles-based regulatory approach, the new final rule eliminates the agency's MBL waiver process.
Deep Dive: Small Credit Union Exemption
Section 723.1(b)(1) of the final rule includes an exemption for any credit union that is less than $250 million in assets and also meets both of the following requirements:
- The credit union's aggregate amount of outstanding commercial loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus any outstanding commercial loan balances and unfunded commitments sold and serviced by the credit union total less than 15 percent of the credit union's net; and
- In a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15 percent of the credit union's net worth.
Smaller credit unions meeting these conditions are exempt from the final rule's requirements regarding board of director and management responsibilities and commercial lending policies in §723.3 and §723.4 of the final rule.
In the preamble to the final rule, NCUA described the purpose of the exemption:
. . qualifying credit unions, especially smaller institutions which are only occasionally granting a loan(s) that meets the rule's commercial loan definition, [are] alleviated from the burden of having to develop a full commercial loan policy and commercial lending organizational infrastructure.
81 Fed. Reg. 13530, 13535 (Mar. 14, 2016).
The small credit union exemption provides significant regulatory relief for qualifying credit unions. Section 723.3 of the new rule addresses the board duties and organizational requirements that a credit union must address in order to administer a safe and sound commercial loan program, including board oversight and approval of a credit union's commercial loan policy, experience and expertise for personnel involved in member business lending, and necessary qualifications for senior executive officers and staff. Section 723.4 of the new rule requires that credit unions involved in commercial lending must adopt and implement comprehensive written commercial lending policies and procedures for commercial lending that provide for ongoing control, measurement, and management of the credit union's commercial lending activities. Credit unions meeting the qualifying conditions for the exemption do not have to comply with these key provisions of the final rule.
For smaller credit unions that are minimally involved in commercial lending activities, meeting these more rigorous board oversight, infrastructure, and policy requirements could be difficult and, without the exemption, some credit unions would be hindered from providing credit access to small businesses. The small credit union exemption in the final rule avoid[s] the inclusion of credit unions that infrequently originate minimal amounts of loans that technically meet the regulatory commercial loan definition. 81 Fed. Reg. at 13535.
NCUA has cautioned, however, that the exemption is not meant to be a means for credit unions to circumvent the regulatory requirements of §723.3 and §723.4 by strategically keeping its held-in-portfolio amount below 15 percent of net worth. To avoid circumvention of the rule, the final rule makes it clear that the 15 percent exemption threshold is measured against all commercial loans originated by the credit union, including commercial loans on the balance sheet, commercial loans sold and serviced, and commercial loans sold and not serviced.
NCUA has also emphasized in its recently-issued commercial loan and MBL guidance that all credit unions must have a board-approved loan policy covering their lending activity in general (See, 12 C.F.R. 701.21(c)(2)), including those credit unions that qualify for the exemption.
So, exempt credit unions, you're not completely off the hook: Exempt credit unions must still ensure their general loan policy covers the types of commercial loans the credit union makes, including satisfying all other applicable commercial lending requirements in Part 723.
As credit unions adjust to the new rule, we may continue to provide information on the rule, either on the NAFCU Compliance Blog or in other publications. Of course, as always, members are encouraged to reach out to the Compliance Team with any questions.