Change may be ahead for credit union commercial lending as the NCUA has proposed a rule in an effort to allow for more business loan approvals. Business Lending is a growing interest to many credit unions, but it is currently limited by statute and regulation. One type of commercial loan, member business loans, in particular, has strict regulations that may soon change. Let's take a look at NCUA's Proposed Commercial Lending Rules 2015.
Currently, credit union commercial loans are limited to “1.75 times the actual net worth of the credit union,” or “1.75 times the minimum net worth required . . . for a credit union to be well-capitalized.” The CUMAA required a net worth ratio of 7% in order to be well-capitalized, This effectively created an MBL limit of 12.25% of a credit union's total assets (1.75 x 7% = 12.25%). The 12.25% limit was explicitly codified the following year by NCUA regulations, which, among other provisions, also created a waiver application process through which borrowers could petition an NCUA Regional Director for relief from the various MBL requirements.”
In July, the NCUA proposed new rules to MBL requirements. These proposed rules would eliminate “prescriptive risk management by loan-to-value ratios, minimum equity investments, portfolio concentration limits for types of loans, and personal guarantees from the principal of the borrower. The need for credit unions to petition for waivers of these requirements would thus also be abrogated.” Instead, the new rule will require credit unions that offer a member business loan to “create a comprehensive written commercial loan policy and establish procedures for commercial lending.” This rule also states that credit unions who have both “assets less than $250 million and total commercial loans less than 15% of net worth, that are not regularly originating and selling or participating out commercial loans, would not be required to create such a commercial loan policy at all.”
The current limit set to credit unions approving a loan is 15% of the credit union's net worth. With the new proposed rule, a borrower is allowed an additional 10% of a credit union's net worth as long as the “15% general limit is fully secured at all times with a perfected security interest by readily marketable collateral”.
The National Federal Credit Union states that the “end of the prescribed limit on the non-MBL commercial loans would not only provide necessary regulatory relief for the industry but also allow credit unions much-needed flexibility in their diversification strategies.”
If your credit union is currently processing MBL's or is considering adding business loans to the mix, oak tree business systems, inc. is the best solution for your business lending forms. We have the expertise and the programs to put you into this highly profitable lending area. Visit our Business/Commercial Lending forms page or chat with a forms expert today.
Source: Stephenson, H. Grant, and Hoying, Steven D. “NCUA's Proposed Rules Concerning Credit Union Commercial Loans” Porter Wright Morris & Arthur LLP, Lexology, 16 Nov. 2015. Web. 20 Nov 2015.
(note: this is an older blog entry and has been edited since originally posted.)