Credit unions will have greater latitude to make commercial lending decisions under a new member business lending rule (Part 723) unanimously approved by the Board.
"With this final rule, we begin a new era," NCUA Board Chairman Debbie Matz said. "The vast majority of credit unions making these loans have well-established member business lending infrastructures and risk management in place. So, it is time to transition from prescriptive limits to over-arching principles that will provide greater flexibility for credit unions to serve more member businesses."
Part of the agency's Regulatory Modernization Initiative, the final rule moves from prescriptive limits on credit unions—such as collateral and security requirements, equity requirements and loan limits—to principles-based regulation. As such, the rule eliminates the current member business loan waiver process.
The increased flexibility provided by the final rule will give federally insured credit unions greater autonomy to develop and maintain member business lending programs that best fit their members' needs and strategic goals. Credit unions making member business loans will need to have the people, processes and policies in place to ensure safety and soundness.
Key changes in the final rule include:
- Giving credit union loan officers the ability to not require a personal guarantee from borrowers;
- Replacing explicit loan-to-value limits with the principle of appropriate collateral and eliminating the need for a waiver;
- Lifting limits on construction and development loans;
- Exempting credit unions with assets under $250 million and small commercial loan portfolios from policy and staff requirements; and
- Affirming that non-member loan participations do not count against the statutory member business lending cap.
The final rule does not expand credit unions' business loan authority or modify the statutory limit on member business lending.
The changes made are also fully consistent with the requirements of the Federal Credit Union Act.
Speaking about the benefits of the rule, Matz said, "Safely expanding business lending will diversify portfolios and revenue sources, improving the ability of credit unions to withstand economic downturns. It will also grow small businesses, which may not be able to obtain capital from other sources, and strengthen communities by creating jobs and fostering economic development."
The credit union system's total member business lending portfolio has grown 14-fold, to $56 billion, from only $4 billion in 2000. Federally insured credit unions have generally conducted business lending safely, and the vast majority of credit unions making these loans today have well-established business lending infrastructures and solid risk management in place. Declining delinquencies and charge-offs for credit unions' commercial loans overall indicate the solid performance of these loans.
The rule empowers credit unions to write their own policies and limits appropriate to servicing members and within their capacity. Approximately 660 smaller credit unions that currently engage in a small level of commercial lending would be exempt from the requirement to establish a commercial loan policy and hire commercial lending staff.
Additionally, the new member business lending rule establishes a baseline minimum safety and soundness standard to protect the Share Insurance Fund. States may choose to impose higher standards, but not lower. The seven states with pre-approved member business lending rules are grandfathered, and any state may submit a new rule for NCUA review.
No additional funds will be budgeted to implement the final rule. An incremental one-time cost of $960,000 in 2016 for staff training is already included in the Board-approved 2016 Operating Budget. NCUA also will train state examiners and provide supervisory guidance for examiners and credit unions before the full implementation date.
Most provisions of the final rule, available online here, become effective Jan. 1, 2017. Removal of the personal guarantee requirement is effective May 13. For more information, go to (opens new window).