Dear Mr. Hirabayashi:
You have asked us to amend the definition of the term “fleet” as used in §723.7(e) of NCUA’s member business loans (MBL) rule. We believe the current definition, established in 2005, is overly restrictive from a safety and soundness perspective and no longer reflects marketplace realities. Accordingly, we amend the definition of the term “fleet” as discussed in detail below.
To enhance safety and soundness in the commercial lending arena, the MBL rule requires that all MBLs meet collateral and security requirements. With some exceptions,2 §723.7(a) of the MBL rule provides that all MBLs must be secured by collateral as follows:
(1) The maximum loan-to-value ratio for all liens must not exceed 80% unless the value in excess of 80% is covered through private mortgage insurance or equivalent type of insurance, or insured, guaranteed, or subject to advance commitment to purchase by an agency of the federal government, an agency of a state or any of its political subdivisions, but in no case may the ratio exceed 95%.3
Section 723.7(e) of the MBL rule provides that a credit union may make business vehicle loans without complying with the above loan-to-value (LTV) ratio provisions, provided the vehicle is a car, van, pick-up truck, or sports utility vehicle
and not part of a fleet of vehicles (vehicle exception).4 In addressing the fleet issue in the past, we have looked to the preamble of the final rule in which
the NCUA Board created the §723.7(e) vehicle exception. In that rulemaking, the NCUA Board articulated its concern about fleet vehicle loans because fleet vehicles tend to depreciate faster than non-business, personal use vehicles. Those loans, therefore, pose a greater degree of risk to the lending credit union due to the accelerated deterioration of collateral value.5 With that in mind, we issued a legal opinion to the Cypress Group LLC6 in 2005 that a “fleet” is two or more vehicles where a business uses the vehicles to deliver a product or provide services integral to the business.7
In your recent request, you have stated that, in your experience, the 2005 definition of “fleet” is too limiting. You have stated that restricting the definition of fleet to two vehicles can hamper a credit union’s ability to establish relationships with small businesses. You also have suggested that an updated definition of “fleet” would benefit small businesses that require more than one business vehicle.
Analysis and Revised Definition
We believe it is appropriate to update the definition of “fleet” at this time. In revising the definition of “fleet” to better reflect marketplace realities, we are providing regulatory relief to credit unions and enabling them to more effectively serve the business needs of their members. At the same time, however, we must ensure that an updated definition of “fleet” is not overly permissive and still serves its important safety and soundness function.
In reviewing how best to define “fleet,” we evaluated case law, how other government agencies use the term, and auto industry standards. Not surprisingly, our review revealed that there is no one universally accepted definition. Accordingly, in defining “fleet,” we borrow from several definitions that are widely used in government or industry. These definitions also are compatible with the goals we seek to achieve and the risks we seek to mitigate.
We found a wide variety in the number of vehicles that constitutes a fleet. Among those many descriptions, however, we found that a range from five to ten vehicles was not uncommon. We were particularly persuaded by Internal Revenue Service (IRS) publications on this topic and treatment of fleets by auto industry fleet programs. The IRS, in addressing mileage rate deductions, refers to five or more vehicles as being a fleet operation.8 In addition, a number of auto manufacturers generally use five as a base number for providing fleet discounts. We believe this similar treatment by government and industry provides a reasonable basis to conclude that a minimum of five vehicles constitutes a fleet. Also, we believe that increasing the number to five provides regulatory relief to most credit unions making vehicle MBLs without diminishing necessary safety and soundness precautions. Accordingly, we believe five or more vehicles is an appropriate number to define a fleet for our purposes.9
The number of vehicles, however, is only one component of the definition of “fleet.” We believe it is equally important that we clarify and update the business purpose component of the 2005 definition. The 2005 definition stated that two or more vehicles constitute a fleet “where a business uses the vehicles to deliver a product or provide services integral to the business.” We believe that aspect of the definition is too vague.
In updating this aspect of the 2005 definition, we found case law defining fleet and the IRS’s definition of business vehicle to be most helpful. Applicable case law holds that a fleet is a group of vehicles under common control used for a business purpose.10 The IRS differentiates a business automobile from a passenger automobile by stating that the term “passenger automobile” shall not include any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire.11 We believe the case law concept requiring central control of business use vehicles and the tax law concept requiring the transportation of persons or property for compensation or hire sufficiently address the universe of business purposes about which we are concerned, without unduly hindering credit unions’ ability to serve their members or maintain positive relationships with small businesses.
Accordingly, we amend the definition of “fleet” as follows: A fleet is five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire. The revised definition also addresses our safety and soundness concerns about collateral devaluation. In this definition, we intend to capture only those vehicles that depreciate at a faster rate than personal vehicles not used for a commercial purpose.
Notwithstanding the updated definition of “fleet,” NCUA continues to expect credit unions to properly underwrite MBLs, taking into account all risks posed by business lending.
Please contact Staff Attorney Justin M. Anderson or me if you have any further questions.