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**7535-01-U**

**NATIONAL CREDIT UNION ADMINISTRATION**

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# 12 CFR Part 723 

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### RIN 3133-AD42

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### Member Business Loans

**AGENCY:** National Credit Union Administration (NCUA).

**ACTION:** Advance notice of proposed rulemaking and request for
comment (ANPR).

**SUMMARY:** NCUA is considering amending its member business loans
(MBL) rule to clarify or revise current provisions including those
related to: loan-to-value (LTV) ratio requirements; collateral and
security requirements; credit union service organization (CUSO)
involvement in the MBL process; MBL loan participation; and waivers.
NCUA seeks comment on these issues and any others commenters think NCUA
should consider.

**DATES:** Comments must be received on or before August 25, 2008.

**ADDRESSES:** You may submit comments by any of the following methods
(**Please send comments by one method only**):

-   Federal eRulemaking Portal:
    [**http://www.regulations.gov**](http://www.regulations.gov/).
    Follow the instructions for submitting comments.

-   NCUA Web Site:
    [**http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html**](http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html).
    Follow the instructions for submitting comments.

-   E-mail: Address to **<regcomments@ncua.gov>.** Include "\[Your
    name\] --

> Comments on Advanced Notice of Proposed Rulemaking for Part 723" in
> the e-mail subject line.

-   Fax: (703) 518-6319. Use the subject line described above for
    e-mail.

-   Mail: Address to Mary Rupp, Secretary of the Board, National Credit
    Union Administration, 1775 Duke Street, Alexandria, Virginia
    22314-3428.

-   Hand Delivery/Courier: Same as mail address.

**FOR FURTHER INFORMATION CONTACT:** Frank Kressman, Staff Attorney,
Office of General Counsel, at the above address or telephone: (703)
518-6540.

**SUPPLEMENTARY INFORMATION:**

### A. Background. 

In addition to making regulatory changes as the need arises, NCUA's
policy is to review all of its existing regulations every three years.
Interpretive Ruling and Policy Statement (IRPS) 87-2, Developing and
Reviewing Government Regulations, (Sept. 18, 1987), as amended by IRPS
03-2 (May 29, 2003). This review is conducted on a rolling basis so that
a third of the regulations are reviewed each year. This helps NCUA
update its regulations to address current regulatory concerns. NCUA
provides notice to the public of the regulations under review so the
public has an opportunity to comment. This ANPR is the result of that
process and comments received from the public and NCUA offices.

Under Part 723, an MBL is any loan, line of credit, or letter of credit,
where the proceeds will be used for a commercial, corporate, other
business investment property or venture, or agricultural purpose. 12 CFR
§723.1. There are several exceptions to this general definition. The MBL
rule contains statutory and regulatory requirements and limitations,
such as collateral and security requirements, equity requirements, and
loan limits. The potential amendments discussed below cover a wide
variety of MBL issues.

**B. Discussion of MBL Issues.**

**1. Loan-to-Value Ratio Requirements and Unsecured MBLs**

Generally, the MBL rule requires all MBLs to be secured by collateral.
12 CFR §723.7(a). The maximum LTV ratio permitted for all liens is 80%
unless the amount in excess of 80% is covered by private mortgage
insurance or is otherwise insured, guaranteed or subject to an advance
commitment to purchase by certain government agencies. 12 CFR
§723.7(a)(1). In any event, the LTV ratio may not exceed 95%.

The MBL rule has various exceptions to the LTV requirement. One
exception permits well capitalized natural person credit unions and
corporate credit unions that maintain required minimum capital levels to
make unsecured MBLs. 12 CFR §723.7(c)(1). Unsecured MBLs to any one
member or group of associated members are limited to the lesser of
\$100,000 or 2.5% of a credit union's net worth and all unsecured MBLs
may not exceed 10% of net worth. 12 CFR §723.7(c)(2) and (3). Another
exception available under certain circumstances is that the requirements
and limits in §723.7 do not apply to credit card lines of credit offered
to nonnatural person members. 12 CFR §723.7(d). Finally, a credit union
can make vehicle MBLs, without being subject to LTV requirements, if the
vehicle is a car, van, pick-up truck, or SUV and not part of a fleet.

NCUA has received comments on several aspects of the LTV requirements.
One commenter suggested lowering the borrower equity requirement for
construction and development loans (C&D loans) from the current 25% to
20%. This translates to raising the maximum LTV limit for C&D loans from
the current 75% to 80% and making it the same as the general LTV
requirement. The commenter suggested this will make credit unions more
competitive in this lending area.

NCUA believes C&D loans are the riskiest of all MBLs and, therefore,
require greater regulatory restrictions to ensure safe and sound
lending. NCUA is willing, however, to consider comments in support of
easing restrictions on C&D loans. Commenters should address the greater
safety and soundness concerns of C&D loans. NCUA notes that credit
unions can seek approval to waive the borrower equity requirement under
the MBL rule's waiver provision. 12 CFR 723.10(c). If commenters support
easing LTV requirements for C&D loans, they should address the
sufficiency of the waiver provision. As noted below, NCUA is inviting
comments generally on the sufficiency of the MBL rule's waiver
provisions.

Other comments have included a request to modify the LTV requirements
for loans on fleet vehicles to make credit unions more competitive and a
request for NCUA to narrow the definition of "fleet" from that
articulated in OGC Legal Op. 05-1038 (December 8, 2005) so it would
capture fewer business vehicles. [See]{.underline},
[www.ncua.gov/RegulationsOpinionsLaws/opinion_letters/2005/05-1038.pdf](http://www.ncua.gov/RegulationsOpinionsLaws/opinion_letters/2005/05-1038.pdf).
NCUA would appreciate comments on this suggestion and asks commenters to
address relevant safety and soundness ramifications.

NCUA welcomes general comments on any aspect of the MBL LTV requirements
and unsecured MBL exception including if there should be a regulatory
credit limit placed on business credit cards. One commenter suggested
the LTV limits should be raised or eliminated. Although it is unlikely
NCUA would entirely eliminate LTV requirements for MBLs, commenters are
encouraged to comment and provide suggestions on improving or clarifying
these provisions. This includes comments on whether NCUA has clearly
explained how a credit union is to establish the value of a property for
purposes of calculating the LTV ratio, defined what costs and fees may
properly be included in calculating a borrower's equity in a project,
and how the unsecured MBL exception should be applied when a credit
union is making an MBL under a Small Business Administration guaranteed
loan program. NCUA also is interested in comments on whether the
differences between various kinds of collateral would support using a
tiered approach to LTV limits so that a loan secured by safer collateral
would have a higher LTV limit.

**2. Experience Requirement and CUSO Activities**

The MBL rule requires a credit union making MBLs to use the services of
an individual with at least two years direct experience with the type of
lending in which the credit union will engage. 12 CFR §723.5(a). The
experience must provide the credit union with sufficient expertise given
the complexity and risk exposure of the contemplated MBLs.
[Id]{.underline}.

NCUA solicits comment on the adequacy of the two-year experience
requirement. Also, there appears to be some confusion among credit
unions regarding how this requirement can be met or is to be calculated
using both in-house employees and third party contractors. Also, there
appears to be confusion as to what role CUSOs may play in providing that
expertise to non-owner credit unions and credit unions that wholly or
partially own the CUSO. Additionally, credit unions appear uncertain on
the application of the conflict of interest provision in the MBL rule to
circumstances where a CUSO or other third party is used to meet the
two-year experience requirement. 12 CFR §723.5(b).

NCUA solicits comment on the need to clarify §723.5 and, if commenters
believe it needs clarification, NCUA welcomes specific suggestions for
amending the regulation. For instance, it would be helpful to know if
commenters think §723.5 needs substantive revision or if adding specific
examples in the regulatory text would be sufficient to clarify the
standards. NCUA is also interested if commenters believe other aspects
of CUSO involvement in the MBL process could be improved.

**3. Loan Participations**

Credit unions are authorized to sell participation interests in their
MBLs to the same extent as non-business loans. In noting many of the
benefits of engaging in loan participations, NCUA stated:

> Specifically, engaging in loan participations is an effective tool for
> FCUs to manage liquidity and concentration risk. Loan participation is
> also a way for FCUs to comply with NCUA or self-imposed lending
> limits. Small FCUs are able to improve the diversification of their
> loan portfolios by participating in loans originated by larger FCUs
> that have the resources to underwrite a wider variety of loan types.

68 FR 75110 (December 30, 2003). NCUA's loan participation rule provides
the basic regulatory requirements for all loan participations, including
participations of MBL loans, and credit unions that purchase or sell MBL
participations must comply with the loan participation rule requirements
as well as the MBL rule. 12 CFR §701.22.

The MBL rule specifically addresses MBL loan participations by
instructing credit unions how they must account for MBL participations
in member and non-member loans and how the participations will affect
the credit union's aggregate limit on net member business loan balances.
12 CFR §723.1(d) and (e); §723.16(b).

NCUA believes some credit unions overlook the link between the MBL and
loan participation rules and have had difficulty in accurately
accounting for MBL participations. In addition, it appears some credit
unions may not understand or be aware of the waiver process available
where nonmember MBL participations may otherwise cause a credit union to
exceed the aggregate limit on MBLs.

Accordingly, NCUA would like comments to help it assess the degree to
which credit unions need additional guidance in this respect and
solicits suggestions for how best to address this. For example, NCUA
would appreciate comments on the utility of including cross-references
in §701.22 and part 723 and revising existing regulatory provisions to
enhance clarity. Specific suggestions and supporting rationales for
those suggestions would be appreciated.

**4. Waivers**

Section 723.10 enables credit unions to seek waivers from a variety of
limitations and requirements in the MBL rule. While NCUA may not grant
waivers from statutory provisions carried over into the MBL rule, the
menu of available waivers is extensive. Despite this, it appears credit
unions may not be taking full advantage of waiver opportunities. NCUA
solicits comments on whether this is the case and, if so, why. Also, it
would be helpful to know if this perceived issue is the result of a
procedural problem and what NCUA can do to resolve it.

**5. Degree of Regulatory Limits**

Some observers believe credit unions that are experienced business
lenders are well equipped to manage the risks associated with making
MBLs and should be given more flexibility with fewer regulatory
restrictions. Others believe the increasing amount of MBL risk on credit
union balance sheets is cause for concern and NCUA should impose greater
regulatory restrictions to protect against the increased risk. One
commenter suggested greater restrictions should include increasing the
list of underwriting factors required by §723.6(g). 12 CFR §723.6(g).
NCUA would appreciate comments on whether part 723 would be a more
effective regulation with more, less, or the current degree of
regulatory limits. Commenters are reminded that some limitations in part
723 are required by statute and should take that into account when
providing comments.

**C. Request for Comments.**

The NCUA Board invites comment on any of the issues discussed above
including if, and how, NCUA's regulations should be amended to address
the issues discussed in this ANPR. Commenters should not feel
constrained to limit their comments to the above issues. Rather,
commenters are encouraged to discuss any other relevant MBL issues they
believe NCUA should consider.

By the National Credit Union Administration Board on June 19, 2008.

Mary F. Rupp

Secretary of the Board