How Will Your Commercial Loan Underwriting and Deal Structure Change with the New MBL Rule?

The NCUA Board approved the final member business loan rule in February. The change to the MBL personal guarantee requirement went into effect on May 13. The remaining provisions take effect Jan. 1, 2017.

The rule shifts its focus from the current prescriptive approach to a more principles-based methodology that emphasizes sound risk-management practices. The new rule applies to all federally insured credit unions except those state-chartered credit unions where the state supervisory authority administers an NCUA-approved member business lending rule. There are seven states with pre-approved rules. Those rules are grandfathered and will remain in effect.

The new rule should have no material effect on the way you source, underwrite and approve loans if your credit union currently and historically has managed your MBL department and portfolio well. Examples of a well-managed program include:

• Measured growth;
• Lower delinquencies and charge-offs;
• Comprehensive risk management;
• Effective systems for rating the risk associated with the loan;
• Sound policies with appropriate concentration limits; and
• Fewer regulatory actions or loan exceptions.

The new rule will allow your credit union to develop commercial underwriting standards commensurate with your risk appetite and capacity. As a result, this may require you to modify your existing lending policies.

The rule sets the expectation that credit unions will establish risk-management procedures and controls that are appropriate for the management and financial capacity of the credit union.

Appropriate risk management involves a comprehensive risk assessment that identifies the borrower's needs and the ability to repay. After the loan is made, it requires regular contact with borrowers, along with financial reporting from borrowers to stay up-to-date with their operations. Active risk management provides for the early detection of problems, which enables a credit union to better assist a member that may be experiencing problems.

Examples of moving from the prescriptive to the principles-based approach are the changes in the personal guarantee requirement and expectations for collateral. The new rule no longer explicitly requires a personal guarantee of the principal, but sets the expectation that in most cases a personal guarantee is appropriate for the types of commercial loans offered by credit unions. However, the credit union has the flexibility not to require the guarantee when there are strong mitigating factors and it is to meet the needs of a financially strong member.

In addition, the rule no longer sets a specific collateral loan-to-value level, but sets the expectation a credit union will establish collateral requirements that are appropriate to offset the level of risk associated with the loan transaction.

The new rule also introduces new terms and concepts that you should be aware of and incorporate into your program. Some of those terms and concepts are:

• Establishing the definition of "commercial loans" to distinguish between loans that are subject to the rule's safety and soundness provisions, as opposed to MBLs that are subject to the statutory cap contained in the Federal Credit Union Act.
• Requiring the use of a "credit-risk rating system" as well as a requirement to identify, report and monitor loans approved as exceptions to a credit union's policy.
• Changes the term "associated member" to "associated borrower." It also introduces new definitions for the terms, "common-enterprise," "control," and "direct benefit," which are used within the associated borrower definition. Corresponding changes were also made to NCUA's participation rule.
• Eliminating the two-year experience for credit union staff and replacing it with a requirement to use personnel with specific knowledge, skills and abilities in commercial lending.
• Clarifying the commercial construction and development loan definition, and establishing procedures for valuation methods and administration requirements.

The final MBL rule will provide federally insured credit unions greater flexibility and more autonomy. The rule allows credit unions to establish credit-risk management programs that are appropriate for the size, complexity and risk profile of their organization, and to operate commercial loan programs in a safe and sound manner. Through sound business lending, credit unions are able to manage risk and benefit their members by offering financing tailored to members' specific circumstances and within their financial capacity.

For more information on the updated member business lending rule, go to http://go.usa.gov/cGQWm, and visit NCUA's Small Business Lending Resources Center at http://go.usa.gov/cSFJw for more information about member business lending.