The beginning of the new year means that NCUA’s modernized member business lending rule, which was approved by the Board in February 2016, is now effective.
Prior to the approval of this updated rule, credit unions originated member business loans for decades in accordance to prescribed limits outlined in the agency’s regulations. The modernized rule allows credit unions to govern their own business lending, set internal policy, decide for themselves what type of loans to grant members and define their own risk tolerance.
This change provides credit unions, especially those with well-established member business lending infrastructure and risk-management practices in place, greater flexibility in managing their member business lending programs.
To help the credit union system implement these revised regulations, NCUA crafted guidance for examiners to use in their reviews of credit union business lending programs. This guidance was published in Letter to Credit Unions, 16-CU-11, in November 2016 and has been incorporated into the new online Examiner’s Guide (opens new window) that’s available on NCUA’s website.
This guidance is based on prudent industry practices derived from a review of sound commercial lending programs. Going forward, examiners will focus on the effectiveness of the credit union’s risk-management processes and the aggregate risk profile of the credit union’s loan portfolio. The new guidance also features a comprehensive emphasis on the core elements of a sound commercial lending program. These core elements include, but certainly are not limited to, a credit union’s:
- Overarching principles for managing commercial loan risk;
- Credit approval process;
- Credit risk-grading systems;
- Process of structuring credit packages to properly align members’ needs with borrowers’ ability to repay; and
- n Risk-management processes for underwriting, administering and monitoring credit risk.
One of the fundamental changes you may notice is the new terminology. The term “commercial” will replace “business” in most cases and “credit” will replace “loan.”
What has not changed, however, is that effective risk-management practices are essential to operating a safe-and-sound commercial lending program. Ultimately, a credit union’s board of directors and management remain accountable for establishing the credit union’s risk-management culture and operating a safe-and-sound program.
Likewise, ensuring your credit union has staff that possesses the level of knowledge, experience and expertise relevant to the various types of loans being granted is essential to managing the risks associated with any commercial lending program.
For additional information on NCUA’s revised member business lending rule and its implementation, please visit NCUA’s online Examiner’s Guide at (opens new window).