Source: https://nascus.org/regulatory-resources/Summary%20MBL%20final%20rule%2003.17.16.php
Timestamp: 2019-04-23 00:10:38+00:00

Document:
NCUA published a final rule intended to modernize its member business loans (MBL) rule to provide federally insured credit unions with greater flexibility and autonomy to provide commercial and business loans to their members. The final rule amends the current regulatory requirements pertaining to credit union commercial lending activities by replacing the current “prescriptive requirements” (such as collateral and security requirements, equity requirements, and loan limits) with a broad “principles-based” regulatory approach. As detailed in the proposal, the final rule eliminates most of the regulatory thresholds and limits in Part 723 and replaces those provisions with expanded requirements pertaining to policies, procedures and oversight by credit union management and credit union directors.
Provisions 701.22, 723.1, 723.2, 723.4, 723.5(a), 723.8, 723.9 and 741.203 of the rule become effective on January 1, 2017. Section 723.5(b) (“Personal Guarantees”) becomes effective 60 days after the final rule’s publication in the Federal Register.
You can access the final rule here.
According to NCUA, the final rule represents a shift in the agency’s regulatory approach and supervisory expectations. Under the final rule, the previous prescriptive requirements (collateral and security requirements, equity requirements, loans limits and MBL waiver process) have been replaced with broad principles intended to permit credit unions to “govern safe and sound commercial lending.” Under the new principles, NCUA expects credit union will maintain prudent risk management practices and sufficient capital commensurate with the risk associated with their commercial lending activities.
NCUA’s oversight will focus on the effectiveness of the credit union’s risk management process and the aggregate risk profile of the credit union’s loan portfolio as opposed to the credit union’s compliance with prescriptive measures.
NCUA will issue Supervisory guidance before the final rule takes effect.
The final rule retains the small credit union exemption that permits credit unions (i) with assets less than $250 million and (ii) total commercial loans less than 15% of net worth that are not regularly originating and selling or participating out commercial loans to be exempted from § 723.3 and § 723.4.
This section sets out policy and program responsibilities that a FICU must adopt and implement as part of a safe and sound commercial lending program, and incorporates the statutory limit on the aggregate amount of member business loans that a FICU may make pursuant to Section 107A of the Federal Credit Union Act.
FISCUs must comply with § 701.21(c)(8) concerning prohibited fees and § 701.21(d)(5) concerning non-preferential loans.
If a FCU makes a commercial loan through a program in which a federal or state agency (or its political subdivision) insures repayment, guarantees repayment, or provides an advance commitment to purchase the loan in full, and that program has requirements that are less restrictive than those required by this rule, then the FCU may follow the loan requirements of the relevant guaranteed loan program. A FISCU that is subject to this part and that makes a commercial loan as part of a loan program in which a federal or state agency (or its political subdivision) insures repayment, guarantees repayment or provides an advance commitment to purchase the loan in full, and that program has requirements that are less restrictive than those required by this rule, then the FISCU may follow the loan requirements of the relevant guaranteed loan program, provided that its state supervisory authority has determined that it has authority to do so under the law.
The requirements of § 701.23 applies to a FCU’s purchase, sale or pledge of commercial loan as eligible obligation.
The requirements of § 701.22 applies to a FICU’s purchase of a participation interest in a commercial loan.
Associated borrower means any other person or entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower. This means any person or entity named as a borrower or debtor in a loan or extension of credit, or any other person or entity, such as a drawer, endorser, or guarantor, engaged in a common enterprise with the borrower, or deriving a direct benefit from the loan to the borrower. Note: the term “associated borrower” has replaced the term “associated member.” The associated borrower definition in NCUA’s loan participation rule would also be amended in a parallel manner.
If the borrower is a partnership, joint venture or association, and the other person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is a member or partner of the borrower, and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower.
If the borrower is a member or partner of a partnership, joint venture or association and the other entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is the partnership, joint venture, or association and the borrower is a limited partner of that other entity, and by the terms of a partnership or membership agreement valid under applicable law, the borrower is not held generally liable for the debts or actions of that other entity, such other entity is not an associated borrower.
If the borrower is a member or partner of a partnership, joint venture, or association and the other person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is another member or partner of the partnership, joint venture or association and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower.
any loan(s) that would otherwise meet the definition of commercial loan and which, when the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union to a borrower or an associated borrower, are equal to less than $50,000.
Note: loans for the purchase of fleet vehicles or to purchase a vehicle to carry fare-paying passengers are commercial loans, as are loans to a vehicle dealership or seller to replenish its regular inventory of vehicles for sale.
Credit risk rating system means a formal process that identifies and assigns a relative credit risk score to each commercial loan in a FICU’s portfolio, using ordinal ratings to represent the degree of risk. The credit risk score is determined through an evaluation of quantitative factors based on financial performance and qualitative factors based on management, operational, market, and business environmental factors.
Direct benefit means the proceeds of a loan or extension of credit to a borrower, or assets purchased with those proceeds, that are transferred to another person or entity, other than in a bona fide arm’s length transaction where the proceeds are used to acquire property, goods, or services.
Loan secured by a 1-4 family residential property means any loan secured (at origination) wholly or substantively by a lien on a 1- 4 family residential property for which the lien is central to the extension of credit. A loan is wholly or substantially secured by a lien on a 1-to-4 family residential property if the estimated value of the real estate collateral at origination (after deducting any senior liens held by others) is greater than 50 %of the principal amount of the loan.
Loan secured by a vehicle manufactured for household use means a loan that (at origination) is secured wholly or substantially by a lien on a new and used passenger cars and other vehicles such as minivans, sport-utility vehicles, pickup trucks, and similar light trucks or heavy duty trucks generally manufactured for personal, family, or household use and not used as fleet vehicles or to carry fare-paying passengers. A loan is wholly or substantially secured by a lien on a vehicle manufactured for household use if the estimated value of the collateral at origination (after deducting any senior liens held by others) is greater than 50% of the principal amount of the loan.
Loan-to-value ratio (LTV) means, with respect to any item of collateral, the aggregate amount of all sums borrowed and secured by that collateral, including outstanding balances plus any unfunded commitment or line of credit from another lender that is senior to the FICU’s lien position, divided by the current collateral value. The current collateral value must be established by prudent and accepted commercial lending practices and comply with all regulatory requirements. For a construction and development loan, the collateral value is the lesser of cost to complete or prospective market value, as determined in accordance with § 723.6.
Net worth means a FICU’s net worth as defined in NCUA’s part 702.
Readily marketable collateral means a financial instrument or bullion that is salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.
Residential property means a house, condominium, cooperative unit, manufactured home, and unimproved land zoned for 1- to 4- family residential use. A boat or motor home, even if used as a primary residence or timeshare property is not residential property.
The FICU’s senior executive officers overseeing the commercial lending function must understand the FICU’s commercial lending activities. At a minimum, senior executive officers must have a comprehensive understanding of the role of commercial lending in the FICU’s overall business model and establish risk management processes and controls necessary to safely conduct commercial lending.
The FICU must employ qualified lending staff with expertise in underwriting and processing for the type(s) of commercial lending in which the FICU is engaged; overseeing and evaluating the performance of a commercial loan portfolio, including rating and quantifying risk through a credit risk rating system; and conducting collection and loss mitigation activities for the type(s) of commercial lending in which the FICU is engaged.
An FICU may meet the experience requirements by conducting internal training and development, hiring qualified individuals, or using a third-party, such as an independent contractor or credit union service organization.
The third party arrangement must comply with Section 723.7.
A construction and development loan is defined as any financing arrangement to enable the borrower to acquire property or rights to property, including land or structures, with the intent to construct or renovate an income producing property, such as residential housing for rental or sale, or a commercial building, such as may be used for commercial, agricultural, industrial, or other similar purposes. It also means a financing arrangement for the construction, major expansion or renovation of the preceding property types. A loan to finance the maintenance, repairs, or improvements to an existing income producing property that does not change its use or materially impact the property is not a construction or development loan. An FICU that elects to make a construction or development loan must ensure that its commercial loan policy includes adequate provisions by which the collateral value associated with the project is properly determined and established.
The final rule establishes the collateral value of a construction or development loan as the lesser of the project’s cost to complete or its prospective market value.
Cost to complete means the cost to complete as the sum of all qualifying costs necessary to complete a construction project and documented in an approved construction budget. The “qualifying costs” would include on/off-site improvements, building construction, and other reasonable and customary costs such as general contractor's fees, bonding, and contractor insurance. Qualifying costs also include the value of the land (determined as the lesser of appraised market value or purchase price for land held less than 12 months, or the appraised market value for land held longer than 12 months). Qualifying costs also include interest, a contingency account to fund unanticipated overruns, and other development costs such as fees and related pre-development expenses. Interest expense is a qualifying costs only to the extent it is included in the construction budget and is calculated based on the projected changes in the loan balance up to the expected “as complete” date for owner-occupied non-income producing commercial real estate or the “as stabilized” date for income producing real estate. Project costs for related parties, such as developer fees, leasing expenses, brokerage commissions, and management fees, may be included only if reasonable in comparison to the cost of similar services from a third party. Qualifying costs do not include interest or preferred returns payable to equity partners or subordinated debt holders, the developer's general corporate overhead, and selling costs to be funded out of sales proceeds such as brokerage commissions and other closing costs.
Prospective market value means the market value opinion determined by an independent appraiser in compliance with the Uniform Standards of Professional Appraisal Practice (Statement 4). Depending on whether the property is held for commercial use or for income producing use, one of two valuation methods may be sued. The prospective market value “as-completed” reflects the property's market value as of the time that development is to be completed and begin commercial use. The prospective market value “as-stabilized” reflects the property's market value as of the time an income producing property is projected to achieve stabilized occupancy.
Any senior management employee directly or indirectly involved in the CU’s commercial loan underwriting, servicing, and collection process, and any of their immediate family members or associated borrowers of those senior staff and family, or any compensated director, unless the FICU’s board approves the loan (with the compensated director recused).
When any additional income received by the FICU or its senior management employees is tied to the profit or sale of any business or commercial endeavor that benefits from the proceeds of the loan.
In addition, the conflict of interest provision prohibits any third party used to satisfy the expertise requirements from having a participation interest in the loan or any interest in collateral securing a loan being evaluated by the third party. Third parties are also prohibited from receiving compensation contingent on the closing of a loan, with the following exceptions: the third party may 1) provide services related to the loan such as loan servicing; 2) purchase a participation interest in a loan it evaluates for a credit union; and 3) a CUSO need not be independent from the transaction provided the credit union has a controlling financial interest in the CUSO.
The final rule incorporates the statutory limits on the aggregate amount of member business loans that may be held by an FICU of the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth by the PCA to be well capitalized. The final rule omits the reference to 12.25% of assets.
Any loan secured by a vehicle manufactured for household use that will be used for commercial, corporate or other business investment property or venture, or agricultural purpose.
Under the final rule, calculation of net member business loan balance is the same as existing Part 723. For the purposes of NCUA form 5300 reporting, an FICU’s net member business loan balance is determined by calculating the outstanding loan balance plus any unfunded commitments, reduced by any portion of the loan that is secured by shares in the credit union, or by shares or deposits in other financial institutions, or by a lien on the member’s primary residence, or insured or guaranteed by any agency of the federal government, a state or any political subdivision of such state, or subject to an advance commitment to purchase by any agency of the federal government, a state or any political subdivision of such state, or sold as a participation interest without recourse and qualifying for true sales accounting under generally accepted accounting principles.
Under the final rule, any waiver previously issued by NCUA concerning any aspect of the current rule becomes moot upon the final rule’s effective date, except waivers that were granted for borrowing relationships to exceed the limits set forth in existing §723.8. Borrowing relationships granted a waiver from that provision will be grandfathered, however, the debt associated with those relationships may not be increased.
Any enforcement actions or other constraints imposed on an FICU (in connection with its commercial lending program) remain in effect.
The final rule states that FICUs in a given state are exempted from compliance with this part if the state supervisory authority administers a state commercial and member business loan rule for use by FISCU in that state, provided the state rule at least covers all the provisions in this part and is no less restrictive (based on NCUA’s determination).
States that currently have exemptions from NCUA’s MBL rule are grandfathered in under the final rule. Any modification to those t rules must be consistent with NCUA’s MBL rule. However, modification of one part of an existing NCUA approved state rule will not cause other parts of the rule to lose their grandfathered status.
Associated Borrower: any other person or entity with a shared ownership investment, or other pecuniary interest in a business or commercial endeavor with the borrower. This means any person or entity named as a borrower or debtor in a loan or extension of credit, or any other person or entity, such as a drawer, endorser, or guarantor, engaged in a common enterprise with the borrower, or deriving a direct benefit from the loan borrower.
the expected source of repayment for each loan or extension of credit is the same for each borrower and no individual borrower has another source of income from which the loan (together with the borrower’s other obligations) may be fully repaid.
the loans are extensions of credit made to borrowers who are related directly or indirectly through common control (including where one borrower is directly or indirectly controlled by another borrower) and substantial financial interdependence exists between or among the borrowers.
Requires FISCUs to comply with requirements under Part 723 concerning commercial and member business loans; § 701.21(c)(8) concerning prohibited fees and § 701.21(d)(5) concerning non-preferential loans.
Provides for FISCUs to be exempt from these requirements if the state supervisory authority adopts substantially equivalent regulations as determined by the NCUA Board or, in the case of the commercial lending and member business loan requirements, if the state supervisory authority administers a state commercial and member business loan rule for use by FISCUs chartered in that state that at least covers all the provisions of Part 723 and is no less restrictive (based on NCUA’s determination). In nonexempt states, all required NCUA reviews and approvals will be handled in coordination with the state credit union supervisory authority.

References: § 723
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