The Ride-Share Conundrum: An Exception to an Exception
Greetings, compliance folks! I recently had the pleasure of enjoying a road trip from Northern Virginia down to sunny Orlando, Florida – my wife, our two kids and I piled into our car and drove over 800 miles to visit some relatives and then spend several days at Disney World. While waking up early every day and spending all day pushing a double-stroller around an amusement park was not necessarily “relaxing,” it was a fun trip and we made a lot of great memories.
In today’s blog we’ll be taking a different kind of road trip – into the nuances of Part 723 of the NCUA regulations and how the definitions apply to vehicles purchased for ride-sharing purposes.
Many Americans – perhaps even a member of your credit union – have decided they can earn some income by using their vehicles for a ride-share gig, such as driving for Uber or Lyft. So, what if a credit union member decides to apply for a loan from the credit union to purchase a vehicle that they will use in their ride-sharing endeavors? Well, NCUA’s commercial loan and member business loan regulations could apply.
Section 723.2 of the NCUA regulations defines “commercial loan” to mean:
“any loan, line of credit, or letter of credit (including any unfunded commitments), and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for personal expenditure purposes.”
Thus, generally speaking, if the loan is for commercial or business purposes, it’ll be a “commercial loan” under Part 723 and subject to the various commercial loan requirements, such as the requirement for the credit union to have a written commercial loan policy, to have staff with expertise in commercial lending, and the commercial loan concentration limit (which limits the amount of commercial loans that can be made to a single borrower or group of associated borrowers).
However, there are a number of exceptions to the definition of “commercial loan.” Most relevant to this ride-share discussion is the exception for “loans secured by a vehicle manufactured for household use.” Another part of section 723.2 defines what that term means, and states that it covers “a loan that, at origination, is secured wholly or substantially by a lien on a new and used passenger car and other vehicle such as a minivan, sport-utility vehicle, pickup truck, and similar light truck or heavy-duty truck generally manufactured for personal, family, or household use…” (emphasis added). Thus, generally speaking, if a member purchases a sedan, SUV, pickup trick, or other “household use” vehicle for commercial purposes, those will be excluded from the definition of “commercial loan” and thus will not trigger the commercial loan requirements discussed above. It should be noted, however, that even if a business-purpose loan qualifies for this exception, it could still be a member business loan (MBL) under section 723.8 and therefore count towards the MBL cap (if the loan is for $50,000 or more).
So far this sounds great, right? Members get to buy a vehicle to support their business, and the credit union doesn’t have to worry about regulatory compliance burdens of the commercial loan rules. However, there is an exception to the exception – the “loan secured by a vehicle manufactured for household use” exception does not apply if the vehicle will be “used as a fleet vehicle or to carry fare-paying passengers.” With regards to ride-sharing, that activity does involve carrying “fare-paying passengers,” and thus using a vehicle as a ride-share vehicle could mean that the loan no longer is excluded from the definition of “commercial loan” and must comply with the commercial loan requirements of Part 723 (unless another exception applies, which we’ll discuss below).
Interestingly, the preamble to a 2016 final rule on commercial lending discusses the ride-sharing situation and indicates that a credit union can consider the facts and circumstances when determining if a loan to purchase a vehicle for ride-share is actually a business purpose loan or a personal loan:
“…in general any vehicle loan that exceeds $50,000 and is secured by a vehicle used to transport fare-paying passengers (e.g., a commercial ride-share vehicle) will be considered a commercial loan under the final rule. The Board understands, however, that in some circumstances a member may purchase a vehicle primarily for personal use and use it only for a portion of the time to generate ride-share revenue. It is incumbent upon the lending credit union to determine the intended use of a financed vehicle and the borrower's level of dependence on ride-share revenue to repay the loan. For example, if more than 50 percent of the repayment source will come from ride-share activity and the loan or associated borrower relationship exceeds $50,000, the vehicle loan should be treated as a commercial loan and underwritten accordingly.”
In other words, NCUA has stated that when a member is planning to use the vehicle as his or her personal vehicle, and will only use it as an income-generating ride-share vehicle some of the time, the credit union should examine how frequently the borrower will use the vehicle for ride-share activity and how much the repayment of the loan will depend on ride-share earnings when determining if the loan is indeed a business-purpose loan and thus a “commercial loan” under section 723. This implies the alternative might be to label the loan as a loan for personal, family or household use, which would be excluded from Part 723. This is similar to the discussion in section 1026.3 and the accompanying staff commentary of Regulation Z, which also asks credit unions to determine the “primary purpose” of the loan (business vs. personal) when deciding if an exception to the regulations will apply. Unfortunately, this is fact-specific and thus the results may vary on a case-by-case basis.
As mentioned above, if the “vehicle manufactured for household use” exception cannot be utilized, then the loan could be a “commercial loan” unless another exception applies. One important exception looks at the amount of commercial loans owed. The definition of commercial loan excludes “loans that would otherwise meet the definition of commercial loan and which, when the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union to a borrower or an associated borrower, are equal to less than $50,000.” In other words, a credit union would take the value of the outstanding balance of commercial loans for the borrower and his or her associated borrowers and add the value of any unfunded commitments and then subtract the amount of any shares that have been pledged as collateral. If that formula results in an amount of less than $50,000, then the loan(s) are not treated as “commercial loans” under Part 723. In a situation in which a member has no outstanding commercial loans and is seeking to buy a vehicle for only $30,000 to use as a ride-share vehicle, then the loan could qualify for this exception and avoid the commercial lending rules, despite being a vehicle used to carry fare-paying passengers.
Ultimately, if a member indicates that he or she is planning to use their auto loan to purchase a vehicle for ride-share purposes, then a credit union may want to have procedures in place to consider the aggregate amount of commercial-purpose loans (and unfunded commitments) made to that member and any “associated borrowers” and may want to ask further questions regarding how frequently they will use the vehicle for ride-share and how much income earned from ride-share will be used to repay the loan, as those could all be factors to consider when determining if the loan is a business or personal purpose loan.
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About the Author
Nick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.