National Credit Union Administration (NCUA) Member Business Loans (MBL) and Commercial Lending Rule
On February 19, 2016, the NCUA Board unanimously approved a final MBL rule that amends Part 723 of NCUA's Rules and Regulations regarding the ability of federally-insured credit unions to make MBLs. The majority of the rule is effective January 1, 2017, while the personal guarantee requirement was eliminated in May 2016.
The rule removes the prescriptive underwriting criteria and personal guarantee requirements of the previous regulation, thereby eliminating the waiver process. Instead, the rule allows credit unions to implement a principle-based risk management policy related to their commercial and business lending activities. Addressed as part of the NCUA's regulatory modernization initiative, the final rule:
- Gives credit union loan officers the ability, under certain circumstances, to not require a personal guarantee;
- Replaces explicit loan-to-value limits with the principle of appropriate collateral and eliminating the need for a waiver;
- Lifts limits on construction and development loans;
- Exempts credit unions with assets under $250 million and small commercial loan portfolios from certain requirements; and
- Affirms that non-member loan participations do not count against the statutory MBL cap.
This rule comprehensively overhauls the way that NCUA approaches commercial lending, from both a regulatory and supervisory perspective. Previously, Part 723 considered commercial lending as synonymous with the member business lending definition under the Federal Credit Union Act. The final rule, however, expands Part 723's scope to apply to commercial loans as newly defined under the proposal. The rule also delineates which loans are subject to the statutory MBL cap and which loans are subject to certain safety and soundness policy and infrastructure requirements.
To learn more about the final MBL rule, please read NAFCU’s Final Regulation summary and analysis. The NCUA has also issued supplemental guidance to accompany the regulation. To learn more about the evolution of credit union MBL, see this NAFCU article.
In March 2019 the NCUA Board approved technical changes to the loans to members rule, including clarifications on maturity limits. NAFCU published a Final Regulation that explains the rule.
ICBA Sues NCUA Over 2016 MBL Rule
On September 7, 2016, the Independent Community Bankers of America (ICBA) filed a lawsuit against the NCUA challenging the agency's member business lending rule. ICBA's complaint alleges that the NCUA violated the Administrative Procedure Act by carving out new commercial lending exemptions not expressly authorized by the Federal Credit Union Act. NAFCU continued to advocate for implementation of the rule, which eases regulatory burdens and allows credit unions to safely and soundly address the needs of their small-business members.
On January 24, 2017, the United States District Court for the Eastern District of Virginia issued a decision granting the dismissal of ICBA's lawsuit. The Court dismissed the lawsuit on procedural grounds, noting that the suit was untimely and ICBA lacked standing because it could not show an impending harm to its members as a result of the MBL rule. Aside from these procedural defects, the Court opined that the MBL rule would still pass muster under federal law.
Past Legislative Efforts to Reform MBL
In past sessions of Congress, there has been NAFCU-supported legislation to increase or remove the arbitrary business lending cap that currently applies to credit unions. Past measures include:
- H.R. 1133, introduced on March 2, 2015 by former Chairman of the House Veterans Affairs Committee, Representative Jeff Miller (R-FL), would exempt loans made to “veterans” (including anyone who served on active duty, and who was discharged or released under conditions other than dishonorable) from the MBL cap. This legislation would help to ensure that veterans have more resources to aid their success after their service.
- The Credit Union Small Business Jobs Creation Act (H.R. 1188) was re-introduced on March 2, 2015 by Representatives Ed Royce (R-CA) and Greg Meeks (D-NY). The bill would lift the arbitrary MBL cap from 12.25 percent to 27.5 percent of total assets. Under the bill, credit unions would need to meet the following criteria to be deemed eligible:
- Must be considered well capitalized [currently seven percent net worth ratio]
- Must have at least five years of member business lending experience
- Must be at or above 80 percent of the current 12.25 percent cap for at least one year prior to applying
- Must be able to demonstrate sound underwriting and servicing based on historical performance and strong leadership management
- The Small Business Lending Enhancement Act (S. 2028) was introduced on September 10, 2015 by Senators Rand Paul (R-KY), Sheldon Whitehouse (D-RI) and Jack Reed (D-RI). Similar to H.R. 1188, S. 2028 would also lift the member business lending cap from 12.25 percent to 27.5 percent of total assets.