Compliance Blog

Written by Alicia Nealon, Director of Regulatory Affairs

Welcome back to the second installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of RBC2 and highlight the key issues that we are looking for your feedback on.  Today’s topic is the treatment, or lack thereof, of Member Business Loans (MBLs).

A key change between this proposal and the original involves the treatment of Member Business Loans (MBLs).  The original RBC proposal would have assigned risk-weights based on a loan’s status as an MBL under Part 723’s general definition regardless of other underlying risk factors such as the type of collateral used to secure the loan. RBC2, however, would assign risk weights to “commercial loans” rather than “MBLs.”  Specifically, risk-weights for commercial loans under RBC2 would generally be determined by three factors: (1) the purpose of the loan; (2) the use of the proceeds of the loan; and (3) the type of underlying collateral. In other words, the revised proposal recognizes the reality that some business loans are riskier than others -- a move sought by NAFCU during the original proposal.

Under RBC2, the definition of “commercial loans” includes all commercial purpose loans regardless of dollar amount other than business purposes loans that meet the proposal’s definition of “residential real estate loan.” Generally this would exclude business loans:

• Secured by a first-lien on a one-to-four-family non-owner occupied dwelling (i.e. rental properties), and
• Secured by a vehicle generally manufactured for personal use, except for those used for fare paying or fleet purposes.

RBC2 would also assign a lower risk-weight to the portion of a commercial loan that is insured or guaranteed by the U.S. Government, U.S. Government agency or another public sector. Additionally, these loans would not count toward the proposal’s 50 percent asset concentration threshold. RBC2 would also assign a lower risk-weight to any amount of a contractual compensating balance (i.e. shares secured by the loan) associated with a commercial loan and on deposit in the credit union. These commercial loans also would not count such amounts toward the 50 percent asset concentration threshold.

Is your head spinning yet? As someone who has an aversion for numbers, I find charts exceptionally helpful.  Below is a chart illustrating RBC2’s treatment of commercial loans by risk-weight.

Under RBC2, business loans secured by a first-lien on a one-to-four-family non-owner occupied dwelling, which are treated as MBLs under Part 723, would be categorized and risk weighted as a residential real estate loan rather than a commercial loan. NCUA estimates that a significant amount of MBLs are business loans secured by a first-lien on a one-to-four-family non-owner, and thus would receive the lower, applicable residential real estate risk-weight. 

It is important to note that RBC2 would not change Part 723’s definition of MBLs for purposes of complying with the statutory cap.  Instead, RBC2 seeks to utilize a more relevant definition of commercial loans for purposes of risk weighting to better reflect underlying risk factors. Credit unions must still comply with the statutory limitation on MBLs and all applicable sections of Part 723.

What does everyone think? Does your credit union believe the revised definition of commercial loan better captures the loans made for a commercial purpose that have similar risk characteristics? Does your credit union think the risk-weights are appropriately weighted for the risk involved for assets outlined in the chart above?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-02, our Capital Reform Issue Page, or reach out to me directly (anealon@nafcu.org, 703-842-2266) with your thoughts. 

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday for Presidents' Day weekend. We will be back to blogging on Wednesday. Have a great weekend!