In what would be the first comprehensive rewrite of its member business lending regulation since 2003, NCUA unanimously approved a series of proposed rule changes that would make it markedly easier for credit unions to lend to businesses.
Unveiled Thursday at a regular meeting of the regulator's Board, the proposed revision eliminates a requirement that borrowers personally guarantee loans, as well as a provision that imposes an 80 percent loan-to-value cap on collateral used to secure a loan.
It would also abolish conditions limiting both construction and development lending and loans to one borrower to 15 percent of a credit union's net worth.
Under the proposed rule, loans to a single borrower could total as much as 25 percent of a lender's net worth, as long as the portion of the loan above the 15 percent net-worth —threshold is secured by readily marketable collateral.
Credit unions that seek to exceed the restrictions in place in the current rule must seek a waiver, and NCUA said there are more than 1,000 waivers currently in place. NCUA Vice-Chairman Rick Metsger said the waiver process is cumbersome, adding he has been told by credit union executives that they have lost business to other lenders as a result.
"Many credit unions have given up on serving their members' commercial lending needs because existing limits and the waiver process prevent them being competitive," Metsger said.
In the new scheme, the waiver process is eliminated. In its place, credit unions will be required to have a written business lending policy and to develop a credit risk rating system to evaluate individual business loans.
Even with the restrictions in place, business lending by credit unions has grown significantly over the past decade. According to NCUA, member business lending saw a nearly fourfold increase between 2004 and 2014, from $13.4 billion to $51.7 billion.
NCUA said that since 2010 poorly managed business lending played a part in at least five failures, costing the agency's share insurance fund about $141 million.
The proposed rule changes should result in better overall asset quality, said Larry Fazio, director of the agency's office of examination and insurance. "They will change the conversation so examinations can focus on the people, policies and systems needed to do business lending safely," Fazio said.
The proposal is a draft and NCUA will accept comments for 60 days before preparing a final version.
NCUA chairman Debbie Matz called the revised rule "the right approach at the right time," but the response from other quarters was more muted.
"A goal of streamlining rules and providing flexibility to credit unions is generally good. But, of course, the details of the proposal will have to be scrutinized for a complete picture," Lucy Ito, president and chief executive of the National Association of State Credit Union Supervisors, said in a statement. "We will carefully consider NCUA's proposal, which is the next step in a long, thoughtful process that has included an ongoing dialogue between NCUA and state regulators."
Alicia Nealon, director of regulatory affairs at NAFCU expressed concerns about the cost of implementing the proposed changes, which NCUA officials estimated would top $800,000. Nealon also argued that NCUA should also look for changes that would permit more credit unions to exceed the statutory cap that limits a credit union's member business lending to approximately 12.25% of its total assets.
Like Nealon, Jim Nussle, president and CEO of CUNA, said the issue of the statutory cap had to be addressed. He said more than 1,000 credit unions are currently at or near their statutory lending limit.
"We appreciate NCUA's interest in making changes to MBL and we know that more can be done — which is why we'll be seeking further action," Nussle said in a statement. Without the cap, credit unions could boost business lending by $14 billion annual Nussle said.
Of course, banking groups, which view any efforts to improve credit unions' business lending prospects with extreme skepticism, are likely to strongly oppose any attempt by NCUA that could be seen as weakening the statutory restriction, which Congress included in the landmark 1998 Credit Union Membership Access Act.
A number of bills aimed at loosening the statutory cap have been introduced in Congress and bank trade groups have declared their strong opposition to all of them.
In a joint letter addressed to the ranking members of the House Appropriations Committee earlier this month, the American Bankers Association and the Independent Community Bankers of America released a joint letter blasting a proposal that would exclude loans secured by homes that aren't a borrower's primary residence from counting against the cap. "Banks are taxed while credit unions are tax subsidized," they wrote. "This critical distinction should guide all consideration of credit union powers expansion initiatives."
In other actions, the board voted to extend the current interest-rate cap of 18% on most federal credit union loans through March 10, 2017. Payday alternative loans will continue to be capped at 28%.
The board also adopted a set of standards prepared in concert with other financial system regulatory agencies designed to increase diversity. NCUA also updated its definition of a minority depository institution as one where the majority of directors, current members and the community served are African-American, Hispanic, Asian-American or Native-American.
