NCUA's new rule on member business lending marks a new era for NCUA and for credit unions. This new era will be defined by principles-based regulations, not by prescriptive limits on credit unions.
Of course, NCUA will continue to enforce any limits imposed by law. However, wherever possible, we will eliminate unnecessary restrictions in our rules.
The new MBL rule (see story on page 1) removes the prescriptive limits that were needed when many credit unions were just entering the business-loan marketplace. Today, the vast majority of credit unions making these loans have well-established business lending infrastructures and solid risk management in place.
The results have been remarkable. Over the last 15 years, credit unions' total business lending portfolio has grown 14 times larger, from $4 billion in 2000 to more than $56 billion today. And the portfolio has grown in a safe and sound manner. Credit unions' delinquencies and charge-offs on business loans have been steadily reduced.
It is now time to transition away from prescriptive limits, toward over-arching principles that provide greater flexibility for credit unions to serve more business owners.
We understand that business lending is not appropriate for every credit union. Business lending carries unique safety and soundness risks. When poorly managed and highly concentrated, business loans have led to the costly failures of several credit unions.
Producing Tangible Benefits
However, safely expanding business lending will produce three tangible benefits. It will:
- Diversify loan portfolios, thereby improving credit unions' ability to withstand economic downturns;
- Grow small businesses, by providing capital that entrepreneurs may not be able to obtain from other institutions; and
- Strengthen communities, by creating jobs and fostering local economic development.
Entrusting Credit Union Boards
Whether to engage in business lending is a strategic decision for each board of directors. If you decide to engage in business lending, under this new rule, your board of directors and management team will have the freedom to develop your own policy governing how you will do business.
For example, your policy can set guidelines for personal guarantees, loan-to-value ratios, and construction-and-development thresholds you feel are most appropriate for your credit union.
Addressing Unintended Consequences
This new rule also addresses two unintended consequences I heard from credit union officials:
- Personal Guarantees—I heard loud and clear that when credit unions are required to place a personal guarantee on every business loan, they lose business from some of their best members. Members who have well-established, strong businesses often take their business to other lenders who don't require personal guarantees. That's why I insisted on removing the personal guarantee requirement as soon as possible, even before the rest of our new rule is implemented.
- Blanket Waivers—I also heard loud and clear that the provision for blanket waivers was not working as intended. Applying for blanket waivers covering loan-to-value limits, construction-and-development limits, and non-member participations, in addition to personal guarantees, resulted in massive amounts of paperwork. The waiver process had become a burden, both for credit union officials and NCUA staff. Instead, we're providing relief through this new rule, and removing the waiver process altogether.
Preserving States' Rights
Commenters also agreed on another important issue: state member business lending rules. Our proposed rule sought comments on three options for states that currently have MBL rules approved by NCUA, as well as other states that may want to write their own rules in the future. We also invited comments on any other options.
Clearly, the majority of commenters preferred the option to grandfather the seven states with pre-approved rules—while also allowing all states to submit new rules for NCUA approval. It's important to note that among this majority was the National Association of State Credit Union Supervisors. The NASCUS comment letter recommended that the NCUA Board "exempt federally insured, state-chartered credit unions in a given state from NCUA's member business loan rule if NCUA approves the state's rule..."
Despite this position from the trade association representing state regulators, a minority of stakeholders argued for states to implement their own MBL rules without any review by NCUA. However, just like every other insurer, it is incumbent upon NCUA to set standards. NCUA has a statutory responsibility to protect the safety and soundness of all federally insured credit unions. This includes state charters as well as federal charters.
Our new rule is designed to serve as a floor, or a baseline minimum safety and soundness standard. States have flexibility to impose a higher standard, but not a lower standard.
As we've done in the past, when reviewing proposed state MBL rules, NCUA's rule will guide our decision. But our interpretation will not be rigid. As long as the state rule includes all of the core risk management principles of NCUA's rule and is consistent with the Federal Credit Union Act, NCUA will determine the state rule is no less restrictive.
The vast majority of states follow NCUA's rule as prescribed. So, in addition to training all NCUA field staff on our new rule, we have also committed to train state examiners on this rule.
Empowering Credit Unions
In addition, before the final implementation date, supervisory guidance will be designed for examiners and distributed to all federally insured credit unions at the same time.
Our modernized and flexible rule, implemented by well-trained examiners, will empower federally insured credit unions to safely and soundly serve more of our nation's growing and thriving small businesses. And as a result, it will allow those credit unions to grow and thrive, providing jobs and economic resources in their communities, in a new era of regulatory relief.