Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/mbl/
Timestamp: 2019-04-19 03:01:30+00:00

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Attention all credit union commercial lenders: NCUA has released its September 2017 Call Report Information, including the 3Q17 5300 Form and 5300 Form Instructions. The new 5300 Form and Instructions, effective September 30, 2017, include revisions to reflect the amendments to NCUA's commercial lending and member business loan (MBL) rule that became fully effective on January 1, 2017.
Hopefully, credit unions engaging in commercial lending activities are already implementing the new changes and are prepared to identify and start reporting on MBLs and commercial loans this fall. However, if you are still orienting yourself to the new changes, the 3Q17 5300 Call Report Instructions provide additional guidance that may help to clarify what qualifies as a commercial loan under the new rule.
By way of brief background, a key aspect of the new principles-based rule is its expanded scope to apply to commercial loans as newly defined by the rule. In the past, Part 723 did not distinguish between commercial loans and MBLs—which are expressly defined in the FCU Act. As a result, the safety and soundness risk management requirements contained in the former MBL rule were not consistently applied to commercial loans that did not qualify as MBLs. See, 80 Fed. Reg. 37898. Thus, the amended rule has two separate and distinct objectives. First, the rule establishes safety and soundness requirements for credit unions that engage in commercial lending to their members. Second, the rule incorporates the statutory cap on the aggregate amount of MBLs that a federally-insured credit union may make. In furtherance of these two objectives, the rule relies upon two separate definitions: "commercial loans" and "member business loans." The MBL definition is narrowly limited to its statutory definition and for the specific purpose of applying the statutory MBL cap. See, 12 C.F.R. §723.8.
"A member has $35,000 in commercial purpose loans and the credit union grants this member an additional $40,000 in a commercial purpose line of credit, the credit union should report both loans as commercial loans as of the date of the second loan is granted regardless of whether the line is drawn on.
In this example, the same member subsequently paid down the $35,000 commercial purpose loan to $15,000 and has a $34,000 balance on the business line of credit, making the total outstanding balance $49,000.The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is still $55,000. The credit union is required to list both of these loans as commercial loans.
If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and the credit union reduces the line of credit to $34,000. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans.
If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and makes no change to the $40,000 business line of credit, but adds $6,000 to a secured share account at the credit union. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans."
"If a member has $35,000 in business purpose loans and the credit union grants this member an additional $40,000 in business purpose loans, the credit union should report the additional $40,000 as a Member Business Loan.
If, in the case above, the member subsequently pays down the $35,000 business purpose loan to $15,000 and the $40,000 business loan to $34,000, making the aggregate total business purpose loans $49,000, the credit union is not required to list any of these loans as Member Business Loans since the new aggregate loan total is $49,000 and is now below the $50,000 threshold in §723.8(c) of NCUA’s Rules and Regulations."
It is worth noting that the commercial loan and MBL reporting examples in the 3Q17 Instructions are generally consistent with previous agency guidance addressing a credit union's MBL reporting requirements once the aggregate of the total business purpose loans to a member are paid down below $50,000, as well as a 2016 NCUA legal opinion indicating that when a single closed-end MBL falls below the $50,000 threshold, the loan is no longer classified as an MBL for purposes of the MBL cap. See, NCUA Legal Opinion Letter 16-0604. The 3Q17 Instructions clarify that a similar analysis applies in the reporting of commercial loans that are paid down below the regulatory dollar threshold.
February is for lovers, and we are loving the new MBL guidance from NCUA. Previously, my colleague gave an overview of some of the changes to the rule beginning January 1, 2017. Today, I would like to take a closer look at collateral for commercial lending, and also the new suggested LTV ratios for real estate.
Collateral is essential to commercial lending transactions. The credit union should ensure that the collateral is sufficient to offset inherent risks in the commercial lending transaction. According to the MBL guidance, “a credit union should make credit decisions based on the adequacy and reliability of a borrower’s source of repayment, the net earnings stream generated from a borrower’s business operations.” (See, section 723.5).
In general, commercial loans provide funding for members businesses to purchase an asset or to provide working capital that either fund the member’s inventory or accounts receivable during the business cycle. NCUA suggests that credit unions at least require member businesses to pledge the assets being financed as collateral. NCUA also warns that additional collateral may be needed if a member’s assets are less marketable or possess a higher degree of risk. The credit union should closely consider a member business’ creditworthiness and the marketability of their inventory or accounts receivable.
As a result, NCUA advises that less marketable, less stable, and less valuable collateral should be monitored more closely than highly marketable, highly stable, and highly valuable collateral. Credit unions should establish policies and procedures to monitor less marketable collateral. These policies and procedures should include systems and process to respond to changes in asset values and the condition of the pledged collateral.
Simply put, the more marketable an asset, the more easily it can be converted to cash. The age and condition of the collateral, as well as possible alternative uses for the collateral, impact its marketability. For instance depreciating assets, such as newer equipment or vehicles, warrant a relatively higher LTV ratio. Alternatively, single-purpose real estate, like a car wash, has limited alternative uses, which warrants a lower LTV ratio.
Moreover, the amortization of a loan should reflect how long the credit union anticipates the collateral will be useful. This is determined by the type and expected use of the collateral being pledged. To mitigate this risk, the credit union should offset the potential volatility of an asset with the LTV. NCUA advises that credit unions use a reasonableness standard and align its policies with prudent lending practices to establish commercial LTV limits.
Section 723.2 defines the term, loan-to-value ratio, as the aggregate amount of all sums borrowed including outstanding balances plus any unfunded commitment or line of credit from all sources on an item of collateral divided by market value of the collateral used to secure the loan.
(referring to loans for real estate). This version of the rule had a couple exceptions for construction loans or if the Regional Director granted a waiver. Otherwise, real estate loans had a loan-to-value cap.
The new MBL rule does away with the 80% cap for real estate and introduces loan to value ratio limits based on accepted industry and bank regulatory standards. NCUA also notes pursuant to section 723.4(f)(5) that credit unions should establish internal LTV ratio limits, which should be based on an internal risk management analysis and accepted financial institution industry standards.
NCUA does not require credit unions to strictly follow these guidelines. However, NCUA does view this guidance as a reasonable benchmark. The agency believes this guidance is in line with industry practice and is appropriately tailored to the risk associated with the various types of collateral.
This method ensures the risk is distributed between the credit union and the member business. NCUA wants to see the member with “skin in the game” or their own capital invested in the success of business.
NCUA warns that if a credit union seeks to approve any loans as an exception to the recommended loan to value policy highlighted above, then the credit union must implement prudent internal limits and set procedures to track and monitor these high risk loans.
As credit unions continue to adjust to the new MBL guidance, the NAFCU compliance team will continue to provide updates in future publications. As always, feel free to email us at Compliance@nafcu.org if you have any specific questions.
Upcoming Training and Webcasts. The Spring session of our Regulatory Compliance School is coming up April 10-14 in Arlington, VA. If you’re thinking about joining us, be sure to register with code SPRINGSAVINGS by Friday, 2/10 to save $200. If you want to challenge yourself to earn the bragging-rights title of NAFCU Certified Compliance Officer (NCCO), this is the place to do it. Already an NCCO? You’ll earn the full 24 CEUs needed to recertify, without having to retake the exams.
Happy Friday! On January 1, 2017, NCUA’s new MBL rule finally went into effect. While the personal guarantee provision had an early implementation in May 2016, the bulk of the new rule was not implemented until the beginning of this year. While NAFCU’s Compliance Team has continued to blog about this topic since NCUA proposed comprehensive changes to its MBL rule in June 2015, now that the entire final rule is effective, let’s do a quick recap of the new rule and then talk a little more about another one of the key areas of the new rule that members have been asking about: the small credit union exemption.
In February 2016, the NCUA Board approved a final rule to amend Part 723, NCUA’s MBL rule. The new rule fundamentally changes the manner in which NCUA approaches commercial lending, from both a regulatory and supervisory perspective.
NCUA adopted its first regulation governing MBLs in 1987 and has amended the rule several times over the years, including amendments to incorporate MBL provisions enacted in 1998 in the Credit Union Membership Access Act (CUMAA). Among other things, CUMAA limited the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the FCU Act for a credit union to be well capitalized. This statutory aggregate limit on MBLs was incorporated in Part 723 of NCUA’s regulations. Part 723 also defined MBLs, established minimum safety and soundness standards for making MBLs, and implemented various statutory exceptions from the aggregate MBL limit. Prior to the new final rule, NCUA had not significantly changed Part 723 since 2003.
Historically, Part 723 has treated commercial lending as synonymous with the statutory member business lending definition under the FCU Act. The new final rule, however, expands the scope of the rule to apply to commercial loans as newly defined under the regulation. The rule delineates loans subject to the statutory MBL cap and those subject to the safety and soundness policy and infrastructure requirements.
The new rule further diverges from prior iterations of the MBL rule by moving from a prescriptive regulatory framework to a broad, more flexible, principles-based regulatory approach. This means that credit unions are no longer subject to strict underwriting requirements—including collateral and security requirements, equity requirements, and loan limits—expressly set out in the regulation. Instead, the new rule sets out the broad elements that NCUA believes are necessary to ensuring that a credit union’s commercial lending policies and programs are safe and sound. It is up to individual credit unions engaging in business lending to address these elements in their own commercial lending policies with risk-based limitations and requirements that are suitable to their own business lending activities.
Notably, because regulatory waivers are inconsistent with a principles-based regulatory approach, the new final rule eliminates the agency’s MBL waiver process.
In a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15 percent of the credit union's net worth.
Smaller credit unions meeting these conditions are exempt from the final rule’s requirements regarding board of director and management responsibilities and commercial lending policies in §723.3 and §723.4 of the final rule.
81 Fed. Reg. 13530, 13535 (Mar. 14, 2016).
The small credit union exemption provides significant regulatory relief for qualifying credit unions. Section 723.3 of the new rule addresses the board duties and organizational requirements that a credit union must address in order to administer a safe and sound commercial loan program, including board oversight and approval of a credit union’s commercial loan policy, experience and expertise for personnel involved in member business lending, and necessary qualifications for senior executive officers and staff. Section 723.4 of the new rule requires that credit unions involved in commercial lending must adopt and implement comprehensive written commercial lending policies and procedures for commercial lending that provide for ongoing control, measurement, and management of the credit union’s commercial lending activities. Credit unions meeting the qualifying conditions for the exemption do not have to comply with these key provisions of the final rule.
For smaller credit unions that are minimally involved in commercial lending activities, meeting these more rigorous board oversight, infrastructure, and policy requirements could be difficult and, without the exemption, some credit unions would be hindered from providing credit access to small businesses. The small credit union exemption in the final rule “avoid[s] the inclusion of credit unions that infrequently originate minimal amounts of loans that technically meet the regulatory commercial loan definition.” 81 Fed. Reg. at 13535.
NCUA has cautioned, however, that the exemption is not meant to be a means for credit unions to circumvent the regulatory requirements of §723.3 and §723.4 by strategically keeping its held-in-portfolio amount below 15 percent of net worth. To avoid circumvention of the rule, the final rule makes it clear that the 15 percent exemption threshold is measured against all commercial loans originated by the credit union, including commercial loans on the balance sheet, commercial loans sold and serviced, and commercial loans sold and not serviced.
NCUA has also emphasized in its recently-issued commercial loan and MBL guidance that all credit unions must have a board-approved loan policy covering their lending activity in general (See, 12 C.F.R. 701.21(c)(2)), including those credit unions that qualify for the exemption.
So, exempt credit unions, you’re not completely off the hook: Exempt credit unions must still ensure their general loan policy covers the types of commercial loans the credit union makes, including satisfying all other applicable commercial lending requirements in Part 723.
As credit unions adjust to the new rule, we may continue to provide information on the rule, either on the NAFCU Compliance Blog or in other publications. Of course, as always, members are encouraged to reach out to the Compliance Team with any questions.
Greetings to all of you out there in regulatory compliance land. On Tuesday, November 29, 2016, NCUA issued Letter to Credit Unions 16-CU-11 notifying credit unions that long-awaited guidance on the revised member business lending rule has been added to the NCUA Examiner’s Guide with just over a month before the effective date of the rule. The agency originally promised that guidance would be shared with credit unions in the preamble to the final rule published in the Federal Register on March 14, 2016. See 81 Fed. Reg. 13530, 13533 (Mar. 14, 2016).
Since the final rule was released, the NAFCU compliance team has received numerous questions regarding revised section 723.4, which mandates federally insured credit unions adopt and implement commercial lending policies and procedures that address topics such as the types of commercial loans offered by the credit union, trade area, qualifications of credit union employees involved in the origination process and commercial loan underwriting standards. The updated Examiner’s Guide finally provides some much-needed guidance for credit unions drafting commercial lending policies. Here is what the guidance has to say about some specific areas of concern.
The guidance notes that a “credit union should analyze its membership and ensure its commercial lending staff has the necessary expertise, gained through experience and training, to understand the needs of the membership and the types of loans offered.” For example, if a credit union predominantly serves fishermen in Gloucester, Massachusetts, the guidance seems to suggest that the credit union should have staff that have the requisite experience and training to understand the needs of commercial fishermen and the types of loans they may need for their businesses to thrive.
Similarly, a “credit union must be certain it is capable of serving its identified trade area.” This means understanding local demographics, economics and industries as well as being familiar with what influences those aspects of the trade area. Returning to our Gloucester example, the economy on the North Shore of Massachusetts is largely based on commercial fishing and tourism. The guidance seems to suggest that a credit union serving this area may want to have an understanding of what factors influence the local economy (e.g., overfishing or lack of tourism). Furthermore, such a credit union may want to make sure that it has the capacity to serve businesses that may have infrequent payment streams since both commercial fishing and tourism are largely seasonal and highly depend on the weather.
When it comes to policies addressing the qualifications and experience of commercial lending staff, the guidance recommends that credit unions “consider relevant factors specific to the credit union and to the needs of its commercial borrowing members” such as “loan volume, projected loan growth, trade area, complexity of the borrowing relationships, types of loans permitted” and any other unique factors that could influence the commercial loan portfolio of the credit union. This seems to indicate that NCUA expects credit unions with higher loan volumes, higher projected loan growth or with greater complexity in borrowing relationships to have more experienced staff but that is not explicitly stated in the guidance or preamble.
In addition, the guidance notes that when determining staffing levels “a credit union should consider appropriate levels of management, relationship managers, and support staff as may be required to ensure member’s [sic] needs are responsibly serviced in a safe and sound manner.” Likewise, a “credit union should also consider an appropriate separation of duties to prevent potential conflicts of interest and other problems in loan underwriting, collection, and portfolio monitoring functions.” In other words, the guidance suggests that credit unions developing policies regarding staffing levels in commercial lending departments consider what staffing level is sufficient to ensure adequate separation of duties and how many additional resources, in the form of managers or support staff, are needed to maintain that staffing level.
The guidance also addresses additional aspects of a credit union commercial underwriting policy including the use of tax returns or financial statements, the types of collateral allowed, LTV ratio limits, personal guarantees, and valuation methods.
These are just some areas where credit unions have expressed concerns or sought additional clarification regarding the requirements of section 723.4. Other aspects of the commercial lending policy requirement are also discussed in the guidance. The Examiner’s Guide also addresses other aspects of the revised member business lending rule including commercial loan workouts and construction and development lending. As we continue to digest the guidance, we may provide periodic updates either on the NAFCU Compliance Blog or in other publications. As always, members are encouraged to reach out to the Compliance Team with any questions.
NAFCU’s Regulatory Compliance Seminar was held last month in New Orleans, Louisiana. Credit union volunteers, staff and compliance personnel from all over the country attended and it was a pleasure to meet so many of you in person.
One presentation I was especially looking forward to was by Vin Vieten, Senior Credit Specialist for NCUA who presented Principles Based Commercial Loan Risk Management. Following that presentation, NAFCU asked when NCUA expected to release the promised guidance regarding the new MBL rule and updates to the Call Report to accommodate the rule change. The guidance had been expected to be released in September. As of that moment, NCUA did not have an estimated release date for us. However, Mr. Vieten did say he expected it before January. Apparently, NCUA may be saving the guidance as a Christmas present. Mr. Vieten did also say that he didn’t expect that anyone will be shocked or surprised by the guidance, as it will focus on risk management. This echoes previous indications from NCUA that existing guidance on managing loan risk may significantly inform this new guidance.
Mr. Vieten’s presentation outlined 4 elements of commercial loan risk management: people, policies, process, and governance and control.
The “people” risk element includes the Board of Directors who are ultimately accountable for commercial lending by virtue of their approval of the policy and oversight of loans and staff. It also includes senior management, who must have a comprehensive understanding of commercial lending and be able to manage the risk appropriately, and lending staff who must underwrite, process and evaluate commercial loans.
Other risk management processes, including periodic review, risk rating and monitoring.
The “process” element describes the risk management process. This includes performing and documenting an initial risk assessment on a commercial loan, monitoring and perhaps reevaluating that risk, and establishing a credit risk rating process.
The “governance and control” element addresses the responsibility of the board for overall supervision, and internal controls, such as the loan review area.
On Wednesday, the FFIEC announced a webinar on the Military Lending Act being offered through the FFIEC’s Industry Outreach Program. The webinar will be held December 1, 2016 at 3:00 pm eastern. Credit unions can register for the webinar here.
If you were able to attend NAFCU’s Annual Conference and Solutions Expo in Nashville two weeks ago, I hope you caught Friday morning’s presentation by NCUA’s Myra Toeppe, Regional Director for Region III. She spoke about the MBL final rule and its impact on examinations.
During that presentation, she gave attendees a peek into NCUA’s upcoming supervisory guidance regarding MBLs made without personal guarantees. As most of you know, the strict requirement for a personal guarantee was eliminated on May 13th as part of the new MBL final rule. As we mentioned previously, NCUA has promised further guidance on implementing the new, risk-based commercial lending requirements. Guidance is generally expected in September. However, as the personal guarantee was implemented before the rest of the final rule, it appears guidance has already been issued internally at NCUA in Bulletin 4650B, Supervisory Expectations for Credit Unions When Loans Are Granted Without the Personal Guarantee of the Principal.
Under the transitional provision in current section 723.7(f), credit unions can write MBLs without a personal guarantee where they determine and document that mitigating factors sufficiently offset the relevant risk posed by not obtaining the personal guarantee. On January 1, 2017, new section 723.5(b) will require this determination and documentation of the loan file for any commercial loan where a personal guarantee is not required.
NCUA expects federally insured credit unions that write MBLs (or certain commercial loans in 2017 and beyond) without a personal guarantee from the principal to have sufficient protections in three areas: risk management practices, underwriting and assessment of the borrower’s financial condition, and ongoing monitoring.
Risk Management Practices. NCUA expects that a federally insured credit union would only grant an MBL/commercial loan without requiring a full, unconditional personal guarantee from the principals when the borrower is in strong condition financially. This strength, and the credit union’s decision to forego the guarantee, should be supported by a comprehensive risk assessment.
Underwriting and Assessment of the Borrower’s Financial Condition. In order to establish the borrower’s financial strength, a federally insured credit union should have the processes and practices in place to accurately determine the borrower’s financial condition. The quality of the financial information used in the financial analysis should be commensurate with the level of risk and complexity of the borrower and the principals' operations.
Documentation evidencing sufficient due diligence to verify the borrower’s creditworthiness.
Ongoing Monitoring. NCUA requires that federally insured credit unions be diligent in ongoing monitoring and detection of any changes in the risk associated with the borrower’s operations. The credit union should have risk monitoring practices in place for early detection of deteriorating creditworthiness. The credit union should not only be risk grading the loan at origination, but also throughout the life of the loan.
Ms. Toeppe also discussed that examinations will focus on portfolio controls and management. NCUA field staff will evaluate the credit union’s portfolio management processes for sufficiency. This will include assessing the reasonableness of the credit union’s internal limits, the adequacy of its internal tracking and monitoring, and compliance with the credit union’s internal policies and NCUA’s guidance.
For more details, we will have to wait until September for the promised guidance. In the meantime, credit unions looking for more help can look to NCUA’s Letter to Credit Unions 13-CU-02 and the attached Supervisory Letter 13-01. These letters were issued in February, 2013 regarding expectations for MBL waivers, and they served as the basis for NCUA’s guidance.
See, 81 Fed. Reg. 13529, 13554. It then excludes from this definition seven different kinds of loans: (1) Loans made by a corporate credit union; (2) Loans made by a federally insured credit union (FICU) to another FICU; (3) Loans made by an FICU to a CUSO; (4) Loans secured by a 1- to 4- family residential property; (5) Loans secured by a vehicle manufactured for household use; (6) Loans fully secured by shares in the credit union or deposits at another financial institution; and (7) Loans, which equal less than $50,000, when the aggregated outstanding balances of a borrower or an associated borrower are added to any unfunded commitments to them, less any portion secured by shares in the credit union.
The upswing is that there are two types of loans that have normally been considered MBLs, subject to the prescriptive MBL rules, that are not going to be “commercial loans” - loans secured by a 1- to 4- family residential property and loans secured by a vehicle manufactured for household use. It’s important to note that a “loan secured by a vehicle manufactured for household use” includes loans secured by a passenger vehicles, including minivans, SUVs, pick-up trucks, etc., but not vehicles that are part of a fleet or vehicles used to carry fare-paying passengers, possibly including part-time Uber or Lyft use. The preamble offers more details regarding this analysis.
(2) Any non-member commercial loan or non-member participation interest in a commercial loan made by another lender, provided the federally insured credit union acquired the non-member loans and participation interests in compliance with all relevant laws and regulations and it is not, in conjunction with one or more other credit unions, trading member business loans to circumvent the aggregate limit.
See, 81 Fed. Reg. 13558. The new definition for an MBL incorporates the new definition of commercial loans. In subparagraph (c), it references certain loans that were removed from the commercial loan definition, and pulls them back into the definition of an MBL, including those loans secured by vehicles manufactured for household use and 1- to 4- family residential properties (if not the member’s primary residence). The only significant difference between the new and current MBL definitions is that the new definition specifically excludes non-member commercial loans or non-member participation interests in commercial loans made by other lenders, whereas the current definition includes them as member business loans, except with regard to the statutory cap, where special provisions apply. See, 12 C.F.R. §§ 723.1(e), 723.16(b).
See, 80 Fed. Reg. 37898. As referenced by NCUA, the definition of “member business loan” is not only in NCUA’s rules and regulations; it was established by Congress and is stated in the Federal Credit Union (FCU) Act. See, 12 U.S.C. § 1757a(c)(1). While the scope of what is considered a “member business loan” is set out in the FCU Act, as is the statutory cap on MBLs, the FCU Act does not contain safety and soundness standards for business-purpose loans made by federally insured credit unions - NCUA must establish those. NCUA has drawn the distinction between commercial loans and MBLs so that the risk-based commercial lending policies required by the new final rule could be applied to loans that present a commercial risk from a safety and soundness perspective as determined by NCUA, rather than all loans defined as MBLs by Congress and the FCU Act (which was written for the purposes of the statutory cap). See, 80 Fed. Reg. 37900.
Creating procedures to distinguish between these may be a challenge for credit unions. We are waiting with bated breath for the further guidance NCUA has promised, and will let you know once we hear more.
As many of you know, on Thursday the NCUA Board finalized broad changes to its member business loan (MBL) rules. Most of these provisions will not become effective until January 1, 2017 and we will address some of those changes in future blogs. Today I want to highlight a change that will become effective in late April, 2016 relating to the personal guarantee.
As a reminder, for MBLs, section 723.7 currently requires the personal guarantee of the principals of the organization, with an exception carved out for non-profit organizations. A credit union’s regional director can waive the personal guarantee requirement, but this process can take time that a credit union may not always have when a member is seeking a loan.
The Board clarifies that the rule allows credit unions to grant loans without the personal guarantee of the principal(s) only when there are strong mitigating factors to offset the additional risk created when the loan is not guaranteed by the primary beneficiary of the transaction, which is generally the principal(s) of the borrower…The credit union’s decision to forego the use of a guarantee should only be approved when it meets the needs of a financially strong member and other credit-risk mitigations exist.
The Board reiterates that having the principal(s) of the borrower commit their personal liability to the repayment obligation is, in many cases, very important for commercial lending. Accordingly, the rule makes clear that excusing principals from providing their personal guarantee for the repayment of the loan may only be done with appropriate corresponding underwriting parameters and portfolio safeguards. The credit union should set prudent portfolio limits for these types of loans, measured in terms of a reasonable percentage of the credit union’s net worth. Commercial loans without a personal guarantee should be tracked and periodically reported to senior management and the board.
The final rule is located here, and NCUA created this summary of the changes. NAFCU’s Regulatory Affairs team is working on a Final Regulation for our members which will be available in the coming weeks.
MBL: A New Look at Commercial Lending, pt 4.
Welcome back to the fourth and final installment of our Compliance Blog series on the NCUA’s MBL proposal, where we have highlighted the key issues that we are looking for your feedback on. Last week, we discussed what would have to be included in a credit union’s board approved commercial lending policy.
This week, instead of seeking feedback from you about the proposal, I want to clarify the answer to a question that we have received from several of our members: How will this proposal treat nonmember MBL loan participations for the purposes of the statutory cap?
The short answer is that currently, and under the proposal, nonmember MBLs do not count towards the statutory cap. NCUA, however, under its current regulation, requires a credit union to apply for a waiver if its non-member loan participation balance in MBLs is going to exceed the lesser of 1.75 times the credit union's net worth or 12.25 percent of the credit union's total assets. Essentially, even though non-member loan participations don't count towards the MBL cap, NCUA's current rule requires a credit union to apply for a waiver if its non-member loan participation balance is going to exceed the cap. The proposal will eliminate the need to apply for that waiver. As a result, credit unions will be able to purchase non-member business loans without seeking NCUA approval when their commercial lending portfolio gets to a certain concentration. Credit unions will still need to comply with NCUA's general loan participation rule regarding non-member MBLs.
While this may have been the final installment of NAFCU’s MBL blog series, please continue to reach out to me directly (anealon@nafcu.org, 703-842-2266) with your thoughts as you and your credit unions review and digest NCUA’s proposal in advance of the August 31, 2015.
Happy Monday! And welcome back to the third installment of our Compliance Blog series on the NCUA’s MBL proposal, where NAFCU highlights the key issues that we are looking for your feedback on. Last week, we discussed the scope of NCUA’s proposed exemption for small credit unions. Today, we will focus on what will be required of credit unions that are covered by this proposed rule, specifically what must be included in a credit union’s board approved commercial lending policy.
Currently, NCUA’s MBL Rule (Part 723) contains prescriptive requirements that are not nearly as flexible as NCUA’s general lending rule (12 CFR 701.21) in terms of policy or underwriting standards. NCUA’s proposal will eliminate Part 723’s prescriptive underwriting standards and instead allow a credit union’s Board of Directors to establish its commercial lending standards with general safety and soundness requirements in mind.
While the proposal, on its face, eliminates the existing prescriptive requirements for LTV ratios, minimum equity investments, portfolio concentration limits for types of loans, and personal guarantees, it will now require these risk management considerations to be adopted in the credit union’s internal commercial loan policy. In essence, the proposal would require a credit union's commercial lending policy to be much more robust than currently mandated by Part 723, and it would require that the policy address broader commercial lending activities.
(a) Type(s) of commercial loans permitted to ensure that the credit union staff has appropriate expertise.
(b) The credit union must identify the trade area it wishes to serve, so that the credit union can make periodic site visits to monitory the borrower’s operations.
(c) Establish a maximum amount of assets, in relation to net worth, allowed in secured, unsecured, and unguaranteed commercial loans.
(d) Create qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting commercial loans.
(e) Loan approval processes, including establishing levels of loan approval authority commensurate with the individual’s proficiency in evaluating commercial loan risk.
(f) Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and borrowing relationships contemplated by the credit union.
(g) Risk management processes commensurate with the size, scope and complexity of the federally insured credit union’s commercial lending activities and borrowing relationships. This process must include a credit risk rating system and it must be subject to periodic review by the board of directors.
While the proposal will provide a credit union the flexibility to adopt commercial lending standards that are appropriate for its institution and membership, it is important to keep in mind that NCUA will be focusing its examinations on the accuracy and effectivities of the credit union’s risk management methodologies, underwriting standards, and loan approval process. In the preamble to the proposed rule, the NCUA Board explains that “the proposed rule contemplates risk management processes that include procedures for achieving a comprehensive understanding of the borrower’s operations, financial condition, and the industry and market in which the business operates.” See 80 FR 37898, 37905 (July 1, 2015). The NCUA Board also notes an expectation that a credit union manage its commercial lending risk by submitting reports on the performance of the commercial portfolio “on a regular basis to senior management and the board of directors.” Id.
What does everyone think? NCUA estimates each credit union will need to spend 16 hours updating its commercial lending policy to comply with the proposal. Additionally, NCUA estimates each credit union will spend 160 hours adopting a credit risk rating system, if it does not already have one in place. How much time does your credit union think it will need to cohere your existing polices to those dictated by the proposal? Also, how much time will you need to develop and implement a credit risk rating system if you don’t already utilize one? Overall, after reviewing these provisions, do you agree with NCUA’s estimated compliance burden? If not, how much time do you think your credit union will need to spend to update its current commercial lending policy to bring it in compliance with the proposed rule?
As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly (anealon@nafcu.org, 703-842-2266) with your thoughts.
MBL: A New Look at Commercial Lending, pt 2.
Welcome back to the second installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s MBL proposal and highlight the key issues that we are looking for your feedback on. Last week, we discussed the scope of the proposal and NCUA’s new definition of “commercial loan.” Today, we are going to address the scope and applicability of NCUA’s proposed exemption for small credit unions from this rulemaking.
Total commercial loans less than 15% of net worth.
To qualify for the exemption, a credit union must also not regularly originate, sell or participate out commercial loans.
It is important to note that even if a credit union qualifies for this exemption, it would still need to have a board-approved policy covering is general lending activity, as mandated by Section 701.21. The proposed exemption would merely allow qualifying credit unions to make sure their existing loan policy provides for the types of commercial loans granted, rather than having to develop a full commercial loan policy and commercial lending infrastructure.
In developing this exemption, the NCUA Board explains that it wants to “avoid inclu[ding] credit unions that infrequently originate minimal amounts of loans that technically meet the proposed commercial loan definition, or that infrequently reduce their risk profile by selling or participating part of their loan portfolio.” See 80 FR 37898, 37900 (July 1, 2015).
Does this exemption capture the credit union that deserve relief from the proposed risk management policies and infrastructure requirement? Should the exemption be asset-driven? If so, do you think that the asset size of $250 million is appropriate? If not, what would be a more appropriate measure? Perhaps the exemption should only consider a credit union’s commercial lending portfolio, rather than its asset size?
In case you didn’t see, NCUA’s MBL proposal was published in Federal Register last week, and the comment deadline has been set for August 31st. With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the proposal and highlight the key issues that we are looking for your feedback on. Today’s topic is the scope of the proposal. Specifically, how the proposal would define and treat “commercial loans” versus “MBLs” – and how the distinction between the two would trigger different regulatory requirements.
Loans falling under this definition would trigger the proposal’s safety and soundness risk management provisions, which would require a credit union to develop a full commercial loan, Board-approved policy, and commercial lending organizational infrastructure. But would loans falling under this definition count towards the cap? As is always the case in our world of regulatory compliance, it depends….
The proposal includes several distinctions between commercial loans and a statutorily defined MBL. All commercial loans are subject to the proposal’s safe and soundness requirements, whether MBLs or not, but only MBLs, as defined by the FCU Act, are subject to the cap.
So how do these distinctions interplay? Well, we end up with some loans that are subject to the proposed safety and soundness provisions, but are not MBLs and therefore do not count towards the cap. Specifically, any commercial, industrial, agricultural, or professional loan in which a federal or state agency (or its political subdivision) has committed to fully insure repayment, fully guarantee payment, or provide an advance commitment to purchase the loan in full is a commercial loan but not an MBL. Also, any non-member loan or non-member participation interest in a commercial, industrial, agricultural, or professional loan is a commercial loan but generally not an MBL.
On the other hand, there are two types of loans that are not commercial loans subject to the proposed safety and soundness provisions but they are MBLs and thus, must be counted against the credit union’s net member business loan balance. Specifically, loans secured by a 1- to 4- family residential property that is not the borrower’s primary residence, and loans secured by a vehicle manufactured for household use that will be used for a commercial purpose are generally not commercial loans, but they are MBLs.
* If the outstanding aggregate loan balance is greater than $50,000.
Over the next few weeks, NAFCU’s Compliance blog will be breaking down more specific aspects of the proposal, and posing questions for the industry to consider. In the meantime,be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly (anealon@nafcu.org, 703-842-2266) with your questions or thoughts.
During its Thursday, June 18th meeting, the NCUA Board issued a proposal to amend the Member Business Loan (MBL) rule which aims to provide regulatory relief from some of the more prescriptive underwriting requirements in the rule. This marks the first time in twelve years that NCUA is considering comprehensive changes to this rule, and could have a significant impact on credit unions’ ability to make MBLs. Today I’ll just provide a high-level overview of the proposal, and NAFCU’s Regulatory Affairs team will blog on some of the finer details of this proposal in a series of blogs once the proposal is formally published in the Federal Register.
NCUA does have a waiver process for the prescriptive regulatory underwriting requirements, although many of the provisions in the MBL rule are statutory, such as the aggregate cap, and are thus not part of the waiver process or this proposed rulemaking.
Proposed section 723.5—Collateral and security—while the proposal would remove the current requirement to obtain the personal guarantee of the business’ principals, credit unions’ MBL programs would still need to “require collateral commensurate with the level of risk associated with the size and type of any commercial loan.” Unsecured loans and loans without the personal guarantee of the person with “controlling interest” in the business would require documentation of “mitigating factors” which offset “relevant risk.” See p. 91 of the draft proposal.
Proposed section 723.6—Construction and development loans—this provision is quite detailed, but generally the proposal would require careful consideration of the construction project’s costs versus the projected value. For more information, see p. 92-95 of the draft proposal.
Again this blog is just a summary, there are many more technicalities to this proposal that we will delve into in the near future. NCUA also issued a table summarizing the proposed changes which may be another helpful starting point. NAFCU’s Regulatory Affairs team will also prepare a Regulatory Alert for our members in the coming weeks.
Last week, the National Credit Union Administration (NCUA) released an FAQ document that provides additional guidance on taxi medallion lending. This guidance comes about a year after NCUA’s issuance of Letter to Credit Unions 14-CU-06 and Supervisory Letter 14-04 which we blogged about here. The FAQs do not impose new requirements, but rather are intended to clarify the guidance provided in the 2014 supervisory letter.
Credit unions that either make taxi medallion secured loans, participate in these loans, or that are contemplating doing so, may find this additional guidance helpful. The FAQs contain nine questions related to taxi medallion lending and address, among other things, financial reporting of taxi medallion loans, methods for valuing taxi medallions and influences on the value of the medallions as collateral.
“What is the “speculative” (or market) premium that is mentioned in the guidance?
A taxi medallion is an income-producing asset. Income-producing assets are generally valued by determining the asset’s net operating income (NOI), which is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest. The NOI is the basis for determining the economic value of the asset, that is, the value of the asset based on its ability to generate income.
However, the value of a taxi medallion is also influenced by the number of medallions made available by the local taxi authority. A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand. Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.
Examiners should understand that the portion of the value that is identified as the speculative premium is less stable than the economic value supported by the ability of the medallion to generate income. Any change in the market (e.g., increased competition, reduced supply of drivers or other market changes) will have a more pronounced impact on medallion values.
In addition, because the speculative portion of the price is not supported by the taxi medallion’s NOI, repayment of the speculative portion will have to be from another source (such as, the borrower’s liquidity or other earnings of the principal).
To view the rest of the FAQs, click here.
Little Big Man. I just had to share this photo . . . my little man is getting big way too quickly.
"The Credit Union Small Business Job Creation Act of 2013 (H.R. 688) introduced in the House Representatives in February, and the Small Business Lending Enhancement Act of 2013 (S. 968) introduced in the Senate in May, would provide the much needed increase in the member business lending cap. In addition, the proposed legislation spells out strong criteria that credit unions, who are aggressive member business lending participants, must meet. With the passage of this legislation in its current form and with proper regulations in place, credit unions will be able to provide the much needed funding for small business expansion and improved economic growth. It’s time for Congress to act.
There is also proposed legislation on alternative capital sources. The Capital Access for Small Business and Jobs Act (H.R. 719), introduced in February, would permit credit unions to utilize uninsured, non-share accounts to supplement capital. In addition, the bill would stop an unfortunate practice that has become all too common—credit unions turning away deposits to protect their net worth ratios."
NAFCU supports H.R. 688 and S. 968, as well as H.R. 719. Check out NAFCU's issue brief on member business lending (scroll down to see NAFCU's numerous comment letters on the issue), and our issue brief on supplemental capital (including this support letter for H.R. 719). We hope that Congress heeds Board Member Fryzel's call to action!
NCUA Report: What Makes a Sound Member Business Lending Program?
I wanted to highlight an article from the December NCUA Report (the CFPB threw a wrench (or forest) into my reading pile) from Region IV on What Makes a Sound Member Business Lending Program?
If your credit union does member business lending, this is a great article to read and pass along to others at your credit union. The article discusses four critical elements to a MBL program: (1) capital adequacy and planning, (2) policies and procedures, (3) staffing, and (4) systems.
"Comprehensive policies and procedures tailored to the types of MBL products targeted in the strategic plan should drive MBL programs. This includes underwriting guidelines consistent with the desired risk profile. Policies and procedures should provide loan officers and underwriters flexibility while holding them to the standard dictated by the board's tolerance for risk."
"MBL personnel should have experience specific to the loan and collateral types booked to the portfolio. In addition, an MBL department should have the appropriate mix between business development and loan underwriting personnel. The proper balance ensures adequate controls between loan sales, underwriting and administration." (emphasis in original).
"Credit unions are proven small business lenders. When building an effective MBL program, a credit union needs to acquire the systems necessary to service a portfolio, prepare marketing and strategic plans prior to implementation, and develop policies and procedures commensurate with the size and complexity of the program. Putting in place the infrastructure necessary for a successful and safe and sound MBL program takes commitment and can be expensive, but credit unions have shown a ready willingness to provide the critical resources their members need to start and grow a small business."
Again - if your credit union offers member business loans (or is thinking of doing so in the future), be sure to read the article.
On Friday evening, NCUA issued Letter to Credit Unions 13-CU-02 and Supervisory Letter 13-01 on Member Business Loan Waivers. NAFCU has requested clarification and guidance in this area for the past couple of years. We'd heard from credit unions regarding the confusing MBL waiver process - including which areas could obtain waivers, the scope of the waivers and the fulfillment of requested waivers by NCUA. In other words, this guidance has been asked for by NAFCU and credit unions for a long time and should help credit unions understand and navigate the waiver process. And, just as importantly, the guidance explains the process to both credit unions and NCUA examiners to ensure everyone is on the same page.
Below is information from the Letter to Credit Unions and the Supervisory Letter. We'll get into additional details in future blog posts. The full Supervisory Letter sent to NCUA examiners is here.
"I am providing you with a copy of this Supervisory Letter so you can understand how NCUA approaches waivers of the various regulatory requirements for MBLs.
What types of waivers are available under Part 723 of NCUA's Rules and Regulations.
When and how you can obtain a "blanket " waiver applicable to a broader range of member business lending conducted by your credit union.
Under what circumstance waivers are not needed for actions related to managing existing loans. In particular, the letter clarifies waivers are not needed for activities not meeting the generally accepted accounting principles (GAAP) definition of a "new loan."
Which of the borrower's principals are required to provide a personal guarantee and the type of guarantee required based on different ownership structures for the business. The letter also clarifies what constitutes an associated borrower.
The documentation you will need to submit and standards you will need to meet to request and qualify for a waiver.
New NCUA procedures intended to streamline the process for obtaining waivers for credit unions buying a participation interest in an MBL.
If your credit union makes or plans to make MBLs, I encourage you to review the attached supervisory guidance. It will not only help you understand the MBL waiver process, it also contains guidance on sound risk management practices that will aid you in maintaining a safe and sound MBL portfolio."
"The risks associated with each business borrower are unique; therefore the rule allows for waivers of certain regulatory provisions in order to give credit unions the necessary flexibility to meet the needs of the members they serve.
Defines the two general types of MBL waivers; an individual loan waiver and a blanket waiver.
Establishes the specific financial attributes a credit union should exhibit along with the risk management processes a credit union needs to have to qualify for a waiver.
Streamlines the procedure for processing a waiver request for participated loans.
Addresses specific issues associated with waiver requests for LTV, personal guarantees and associated borrower.
Adds clarity to determining the principals and associated borrowers in an MBL relationship.
Reinforces expectations and best practices related to business lending."
If your credit union makes MBLs, be sure to review the full 15-page Enclosed Supervisory Letter.
Yesterday, NCUA issued Legal Opinion Letter 12-0764 which amends the definition of "fleet" for purposes of NCUA's Member Business Lending regulation - specifically the LTV ratio requirement under 12 CFR 723.7(e). This is a welcomed change and one that NAFCU has advocated for in the past - including our 2011 Regulatory Review comment letter.
"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. 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."
"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."
As always, the full legal opinion letter is the best source for a full discussion and analysis.
Piles of Outdated Guidance. We've blogged in the past about the regulatory burden caused by outdated guidance from regulators - including NCUA. Yesterday's announcement gives NCUA a great opportunity to change their existing practice and further reduce the regulatory burden for credit unions. How? By going back to their 2005 legal opinion letter and clearly indicating it has been superseded by the 2012 legal opinion letter.
Two years from now, if a credit union searches for "fleet" on NCUA's website - which legal opinion letter will come up first? If it is the 2005 letter, will that letter clearly indicate that it has been superseded? If not, a credit union may stop their research after finding the 2005 letter. After all, the 2005 letter directly addresses the issue of what is considered a "fleet."
Look to Other Regulators. As we mentioned in our prior blog post, the OCC and the Federal Reserve already have procedures in place to clarify superseded guidance documents. Or, check out this example from a past OTS guidance document.
Hopefully NCUA takes these simple steps to prevent unnecessary regulatory burden in the future. Credit union compliance officers work very, very hard to analyze and interpret current NCUA's regulations and guidance. NCUA should work just as hard to help clarify which guidance and rules are applicable (the 2012 letter) and which are outdated (the 2005 letter).
A couple of items for Monday morning.
Ask CFPB. The CFPB announced a new initiative - Ask CFPB - which includes answers to over 350 common questions from consumers (mostly on credit cards and mortgages for now). The CFPB's blog post is here and the press release is here.
For a split second I thought the CFPB might have taken a step to help regulated entities understand the confusing regulatory requirements. Alas, we'll keep plowing through piles of cross-references and staff commentary to find the actual requirements.
Regulatory Compliance School. We had a great crowd at Reg School with over 150 attendees and 90 of those taking their NAFCU Certified Compliance Officer (NCCO) exams. Here are a couple of NAFCU Today stories on School: March 20 (with photo) and March 26.
For those who took the NCCO exams, we hope to have the results to you by the end of this week.
MBL in Senate. The Small Business Lending Enhancement Act was reintroduced in the Senate last week as S. 2331. The new bill is identical to S. 509 but was reintroduced due to procedural reasons which might allow a vote in a shorter period of time. The NAFCU Today has news stories from last Thursday and Today.
Last Friday marked 5 months since our wedding. I wanted to put together a "Top 5 Things I've Learned" list but it really just comes down to one thing: Happy Wife, Happy Life.
Below are just a couple of items for your Friday.
NAFCU Today has a detailed recap of Wednesday's testimony on H.R. 1418 - a bill to increase the credit union member business lending cap.
On Wednesday, Rep. Jason Chaffetz (R-UT) and Rep. Owens (D-NY) introduced H.R. 3156 which would repeal the Durbin Amendment. NAFCU Today has additional information on this first step of an uphill climb.
"While overall loan growth remains relatively flat, historically low-rate first mortgage real estate loans continue to grow. This trend could impact credit unions’ future earnings potential. Accordingly, NCUA is focusing supervisory efforts on credit unions with elevated levels of credit, interest rate, concentration, and strategic risk."
NCUA follows this language with additional details on each of these risks that is worth taking a look at.
Try not to move within 30 days of the wedding - especially when your move date coincides with the RSVP response date. The USPS might be pushing their mail service reliability - but it can take a while for that RSVP from Aunt Edna to finally hit your new mailbox.
No matter how much you want to say it, please do not mention the fact that if your favorite team continues on in the playoffs they will have a championship game during the wedding. If you fail this, please do not compound the mistake by indicating the cocktail reception room - with the large TVs - would make a great viewing area.
And on a serious note - remember that it is not possible to say Thank You enough to your significant other.
Have a great weekend - and Go Blue!
This afternoon the House Financial Institutions Subcommittee will hear testimony on H.R. 1418 - the Small Business Lending Enhancement Act. In September, we blogged on the details of H.R. 1418. The increase in each credit union's Member Business Lending cap would not be automatic if this legislation passed and was signed by President Obama.
Gary Grinnell, CEO of Corning CU, will testify on behalf of NAFCU. NAFCU Today has additional details on today's hearing.
The Senate Banking Committee voted last Thursday on Richard Cordray's nomination to be Director of the Consumer Financial Protection Bureau. The Committee voted along party lines (12 Democrats for, 10 Republicans against). It is unclear when and if the full Senate will take up Cordray's nomination.
Without changes to the CFPB's structure, it may continue to be a waiting game for a CFPB Director.
Even without a Senate-confirmed Director, the CFPB can amend existing regulations impacting credit unions (such as Truth in Savings). For a more detailed discussion of the CFPB's powers without a Director, check out this June 2011 blog post.
NAFCU Members. The October issue of the BSA Blast is now available.
The Federal Reserve recently finalized a regulation regarding Section 1071 of Dodd-Frank. Section 1071 will require creditors to collect and report data on women-owned and minority-owned businesses and by small businesses.
Importantly, the CFPB will have authority for Section 1071 for credit unions. The Federal Reserve's authority extends only to motor vehicle dealers. Back in April, the General Counsel for the CFPB issued guidance indicating Section 1071 will not become effective until the CFPB proposes and finalizes regulations to implement the data and collection requirements.
The recent final rule on Reg B indicates the Fed will follow the CFPB's lead and delay the collecting and reporting requirements until detailed regulations are written.
Thus, while the new requirements of Section 1071 are not currently effective - it is something to keep on your radar if your credit union offers business loans.
In June, a NAFCU witness testified about the increased burden of Dodd-Frank - including Section 1071.
Apparently, there were some baseball games on last night. I'm not sure there is any way to describe what happened. If the playoffs were sneaking up on you (like they did me) - last night was a wake-up call.
Yesterday, NAFCU sent a letter to Speaker Boehner and Minority Leader Pelosi on H.R. 1418 - urging their action to increase the member business lending cap for credit unions. This bill, The Small Business Lending Enhancement Act of 2011, would increase the member business lending cap to 27.5% of total assets if certain conditions are met. The legislation is H.R. 1418 in the House, and S.509 in the Senate.
Must be able to demonstrate sound underwriting and servicing based on historical performance and strong leadership management.
Additional information on NAFCU's attempts to increase the MBL cap can be found here.
Last Thursday was a busy day on the Hill with NAFCU testimony in both houses of Congress. Mike Lussier, President/CEO of Webster First FCU and NAFCU Board Chair, testified before the Senate Banking Committee on raising the member business lending cap. The hearing focused on S. 509 which would raise the member business lending cap from the current 12.25% up to 27.5% if certain conditions are met. Additional information on this bill and a similar version in the House can be found here.
In the House, Mark Sekula, Executive Vice President and Chief Lending Officer of Randolph-Brooks FCU, testified on NAFCU's behalf before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access. One of the points raised by Sekula was the impact Dodd-Frank would have on member business lending. Specifically, Section 1071 of Dodd-Frank includes a new collection and reporting requirement for business lending.
As I've mentioned before, the CFPB has issued one piece of regulatory guidance - which is on the effective date of Section 1071. A letter from the CFPB's General Counsel indicates these requirements will not take effect until regulations are finalized by the CFPB.
The Federal Reserve maintains oversight of Section 1071 requirements for certain motor vehicle dealers and followed the CFPB's lead - issuing a proposal that delays the effective date of Section 1071 for these entities as well.
Earlier this week, NCUA announced a few retirements and a couple of promotions. Bob Fenner, the longtime NCUA General Counsel, will retire August 1st and be replaced by current Deputy General Counsel Mike McKenna. In the Office of Examination & Insurance, Larry Fazio will be taking over as Director. Current Director Melinda Love will move to Fazio's current position as Deputy Executive Director until her retirement at the end of the year. The changes take place August 1st.
Here's a short one today.
Two blog posts? You may have seen two posts, one of which was a "Welcome" post for the blog. That post will be featured on the top of the NAFCU Compliance Blog, so that folks who come to the blog will see an overview of what it offers and how they can sign up to receive regular updates. I'm sorry for any confusion!
MBLs. Sen. Mark Udall (D-Colo.) introduced S. 509 to ease MBL restrictions for credit unions.
Udall introduced S. 509, the Small Business Lending Enhancement Act, late Tuesday with 13 original cosponsors. It would allow a gradual increase in eligible credit unions’ MBL cap from 12.25 percent assets to 27.5 percent, in accordance with strict safety-and-soundness measures. It awaits action of the Senate Banking Committee.
Here's a link to the legislation.
Interchange. A "delay" bill is expected soon regarding debit interchange.
Loan Originator Compensation. The Fed will offer a webinar via its Outlook Live portal on the Fed's recent rule regarding Loan Originator Compensation. It is free, and will be held on St. Patrick's Day.
I try to monitor a number of different websites related to credit union operations. You never know where a compliance nugget or two will surface. One of the websites I monitor is that of NACUSO. Recently, NACUSO published a series of communications to and from NCUA regarding Letter to Federal Credit Unions 10-FCU-03. As you may recall, that guidance document discussed NCUA expectations for federal credit unions who establish and operate third party brokerage arrangements for sales of nondeposit investment products.
Read the NACUSO posting here. For credit unions that offer nondeposit investment products, be sure to read the post, including NCUA's response. But I will highlight one paragraph that caught my eye. And it was written by NCUA's General Counsel, Robert Fenner.
As a preliminary matter, you should note that 10-FCU-03 is guidance recommending best practices for FCUs involved with third party brokerage arrangements; it does not carry the weight or force of formal regulation. Indeed, the first sentence of 10-FCU-03 expressly states that "[t]he purpose of this letter is to provide guidance to federal credit unions on the establishment and operation of third party brokerage arrangements for the sale of of nondeposit investment products." (Emphasis added.) The letter does not impose regulatory requirements on FCUs.
This distinction is so very important, and I'm glad that Mr. Fenner raised it in his response to NACUSO. I also would recommend that NCUA make such letters publicly available for the entire credit union industry. Had NACUSO not taken the proactive step to publish NCUA's response, we would not have seen the useful information.
The issue of debit interchange is front and center this week, as Congress will hold a hearing looking into the economic impact of the Durbin amendment. NAFCU has been pushing our message out to anyone and everyone who will listen. What is our message? Well, take a look and a listen for yourself.
This ad will run in a number of publications this Wednesday.
What a week. NAFCU's offices are closed, today. The Fed shut down its Washington, D.C. offices following yesterday's blizzard. As you now probably know, we follow the Fed's lead. NAFCU members - if you need us, please email us at compliance@nafcu.org. We'll do our best to respond remotely.
Oh, no photo today. If you want to know what yesterday looked like, just stare at a blank sheet of white paper. Yes, it was that bad.
Recently, NCUA issued Letter to Credit Union 10-CU-02. The letter was used to share a Supervisory Letter that NCUA sent to its field staff to provide them an overview of current risks in member business lending. The letter also shares what NCUA considers to be sound risk management strategies. The letter provides a good overview of member business lending, and the risk management ideas could work for general lending as well,in my humble opinion. Add this letter to the library of member business lending guidance documents. If your credit union does MBLs or is thinking about it, you should read and understand this letter.
Proposed § 226.7(b)(12)(iv)(A) provides that a card issuer must provide through the toll-free telephone number disclosed pursuant to proposed § 226.7(b)(12)(i)(E) or (ii)(E) the name, street address, telephone number, and Web site address for at least three organizations that have been approved by the United States Trustee or a bankruptcy administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit counseling services in the state in which the billing address for the account is located or the state specified by the consumer.
Wouldn't it be great if a web site existed that organized all of these approved organizations by state? It does, right here.
Remember that member business lending webinar hosted by NCUA? It is now available on NCUA's website. As much as I love the webinar, I really love the fact that NCUA has posted a series of 49 Questions and Answers to go with it. All of the Q and A's deal with MBL issues. You know I love me some FAQs.

References: §723
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