NCUA Board Meeting
September 24, 2003
Final Rule: Member Business Loans
In March I voted to modify our rule on fields of membership because it was
important to level the playing field between federal and state charters.
I strongly support today’s rule on member business lending for the same reason. I believe that federal credit unions should not be disadvantaged by expansive state regulations.
Working to improve the federal rule on member business lending was one of my first major initiatives at NCUA. I made this a top priority last year after I learned that this Board granted waivers to approve seven state business loan rules – rules that allowed more flexibility than our own.
As state-chartered credit unions were gaining greater business lending powers – under rules approved by this Board -- it did not seem fair to deny these same powers to federal credit unions.
So in May 2002, I asked our general counsel, Bob Fenner, to examine the state rules and suggest ways to make our federal rule more competitive -- without sacrificing safety & soundness.
This rule includes four provisions that resulted from my request:
1) Unsecured business loans will be allowed up to $100,000.
This is truly a milestone for credit unions. While other financial institutions have been able to make unsecured business loans for decades, credit unions have not been allowed to make any unsecured business loans. For all this time, credit unions have had to turn away good business to other institutions.
Even businesses that have established relationships with credit unions through secured loans had to be denied unsecured loans because of our outdated ban.
Today’s final rule will enable credit unions to provide loans to buy feed, restock inventory, and fund many of the day-to-day activities that keep small businesses running.
At the same time, the rule builds in protection from serious losses by placing new aggregate caps on unsecured loans.
2) A personal guarantee will no longer be required for business loans made by RegFlex credit unions.
This is another critical change to ensure parity with other institutions.
No other federal financial regulators require a personal guarantee for business loans. Removing this requirement is important because it would allow RegFlex credit unions to make business loans to cooperative entities with multiple members, where personal guarantees would be impractical or impossible.
However, regarding loans to individual members, today’s rule is very explicit. It strongly encourages all credit unions to require a personal guarantee as a safety & soundness measure.
3) Loans to CUSOs and loans to natural-person credit unions will not be considered member business loans.
These loans are made primarily for investment purposes, and are not made to individual members. They should not, therefore, be counted against credit unions’ member business loan cap.
4) The required equity interest in construction & development loans would be reduced from 35% to 25%.
This requirement ensures sufficient collateral while giving federal credit unions a better opportunity to meet their members’ needs.
These four provisions will enhance the federal credit union charter. They will bring parity with state chartered credit unions, as well as with other institutions that have fewer restrictions.
In addition, three important changes have been made from the proposed rule to provide additional safeguards:
1) Personal guarantees will still be required at credit unions that do not meet the RegFlex net worth and CAMEL standards.
2) Business loan participations will count against a credit union’s statutory member business loan cap when the loan involves a member of the purchasing credit union.
3) If non-member business loans or participations would put a credit union over the cap, an application for a waiver must be made to the NCUA Regional Director.
These changes address issues raised in the comment letter from the Treasury Department. Combined with other changes based on ideas from nearly 400 commenters, I believe that today we are presenting an even stronger final rule.
There are literally millions of reasons why I support this rule – one for each credit union member who needs business capital.
I want to make it clear: I’m not talking about loans for golf courses or high-rise buildings. I’m talking about loans that credit union members need to start a home cleaning business or an ethnic market, or to buy a dump truck or business supplies.
These are loans that banks generally won’t make – not because they are too risky, but because they are too small.
Credit unions’ average business loan is $118,000. Nearly 90% of banks’ business loans are larger. In fact, more than 70% of banks’ business loans are now over $1 million.
The situation facing small business owners is critical. The proportion of loans to small businesses has been cut in half since 1999. According to the Small Business Administration small businesses must now rely more on owner capital and less on external debt. This lack of credit makes it difficult for many small businesses to grow.
Business lending is an opportunity to reach many different types of credit union members, with a service most simply can’t get elsewhere.
Members need business loans at different times in their lives:
Just as I did when I voted for NCUA’s field of membership rule, I urge credit unions to reach out to everyone in their field of membership with new products and services. Events of the past six months underscore just how critical this is.
The products that generate most credit union assets are declining. Credit unions’ new auto loans are falling for the first time. And in a time of rising interest rates, credit unions must be careful not to hold extensive portfolios of fixed-rate mortgages.
Business loans can diversify credit unions’ assets and meet the needs of millions of members. And delinquencies on credit union business loans are just as low as delinquencies on all other credit union loans.
But business loans are not for every credit union. We spell this out in the preamble to the final rule. However, I am confident this final rule ensures that proper safeguards will be in place for all credit unions making business loans – federal and state charters alike.
Key members of Congress agree that small business owners are underserved by other financial institutions.
Congressman Don Manzullo, House Small Business Committee Chairman, believes “There’s a credit crunch going on in small business. There’s a hole that no one is filling. The hole is an opportunity to do something for small business people who are struggling.”
Senator Susan Collins pointed to credit unions as institutions that can seize this opportunity. She suggested that “the structure and philosophy of credit unions can serve many of the small businesses that are often forgotten.”
This sentiment is shared by House Financial Services Committee member Paul Kanjorski. He observed that “small businesses have a problem with access to capital.”
“Clearly,” he said, this problem can be solved “by credit unions. Credit union members are the entrepreneurs of the future.”
I want to conclude today by thanking the staff at NCUA – especially Bob Fenner, Christie Loizos, and Dave Marquis – for their months of work in bringing this final rule to the Board.
Shortly after I began the review of state business lending rules, Mrs. Johnson formed an internal NCUA working group to explore other changes that could be made. I thank Mrs. Johnson and the working group for making this such a complete and responsible final initiative.
Next month Mrs. Johnson and I will co-host a business lending workshop. The goal of this workshop is to educate credit unions to make business loans safely. This workshop is part of the PALS initiative, where credit unions learn from other credit unions’ Partnering and Leadership Successes.
I thank Chairman Dollar for supporting the PALS initiative as part of Access Across America, and for postponing this rule from our July agenda. Given the importance of this rule and the important revisions that were being made, it was critical to ensure that every provision in this rule received due diligence.
I am extremely proud to support this final rule. It will level the playing
field for federal credit unions, provide needed capital for millions of small
businesses, and enable more credit unions to offer a new service to more people
in their field of membership.