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Regulatory Update: NCUA Lifts Several Restrictions on Member Business Loans (MBL)

Regulatory Update: NCUA Lifts Several Restrictions on Member Business Loans (MBL)
Posted: Mar 4, 2016
Categories: Regulations
Comments: 0
Author: Lou Grilli

Compared to banks, credit unions have not been a big player in the small business loan segment with $56 billion in Member Business Loans (MBL) compared to $585 billion as tracked by SBA.gov. But that is about to change, now that the NCUA voted to strip a number of restrictions on MBL.

Credit union commercial loan growth has been steady during the 15 years examined here. More importantly, it has been resilient during the last two recessions according to Filene Research, suggesting that credit unions can buoy both lending growth and, as a consequence, overall business activity. To hammer this point home, at the 2016 CUNA GAC, Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) stated, “Credit unions did not underwrite the bad loans that sank the housing market. On the contrary, you upheld sound underwriting standards to protect consumers, even as it cost you customers and market share went to financial predators that circled those troubled waters”.

Credit unions can become a force to help small businesses get off the ground

Some of the restrictions that were lifted have some far reaching and positive long-term implications.  For example, a requirement existed that an MBL have a personal guarantee unless the credit union applied for a waiver. This meant that a small business owner purchasing a delivery van had to put up a personal guarantee for the vehicle loan. And if business was really good and the small business wanted to expand to a fleet of delivery vans, then putting up a personal guarantee for several vehicles would be prohibitive. This restriction is now gone.

Another modification to MBL rules relates to the cap on the total member business loan relative to assets. Currently, credit unions have a 12.25% asset cap on their MBL with loans of only $50,000 or less exempt from this cap. This number was set into law in 1998, and never adjusted for inflation or changing times. It is now raised to 27.5% of total assets.

What counts against that 27.5% has also changed dramatically. Mortgages on second homes or vacation homes, since they are not the member’s primary residence, counted as MBL loans. This is no longer the case. Business-purpose loans that are secured by a 1-to-4 family residential property are specifically defined as MBLs and still count towards the regulatory cap, as they should.

There are other prescriptive limits and definitions that were modified or removed:

  • The 80 percent limit on business Loan-to-Value ratios

  • The limit on unsecured MBLs

  • The requirement that staff have 2 years of direct experience

  • Detailed limits on construction and development loans

  • The restrictive definition of "associated borrower" loans

 New policies and procedures now required

With the modifications and loosening on restrictions under the current MBL framework comes an additional burden – a requirement for active MBL credit unions to demonstrate how their MBL programs are safe and sound. Even though credit unions now have more flexibility to design their own MBL programs, you will need to develop detailed policies and procedures commensurate with the sophistication of a credit union’s lending. The development of policies and procedures are ultimately the responsibility of credit union boards which are explicitly responsible for receiving updates on MBL activity.  Policies and procedures will have to address the hiring of qualified staff, the types of loans the credit union makes, its collateral requirements and the circumstances under which it will make exceptions to these requirements. For many credit unions that only do the occasional loan, the time and effort it would take to develop and implement these MBL policies and procedures wouldn’t be worth it.

 Implications for credit unions

Many credit unions sit on assets which could (and should) be turned into working capital, but restrictions on MBL activity has kept them out of the business of lending to small businesses. Reducing restrictions allows credit unions to extend their reach to small businesses, opening up opportunities to offer other products, including credit, to business owners. And small businesses are exactly the right segment for credit unions to assist.

Adding small businesses loan products brings with it additional members, potential for additional products such as small business credit cards and auto loans, all at potentially higher returns than consumer loans.

With that said, there needs to be fundamental changes in the way credit unions address this segment. While the lending cap did impose a restriction on a handful of credit unions, most were well below their cap, leaving the business of small business loans to banks, and more so, to alternative lenders, who have spent the better part of the last few years streamlining the loan process, eliminating the need for branch visits, simplifying forms, and in general speeding up time from application to funding. It’s time for credit unions to get back into the game by taking a hard look at their small business portfolio, their application process, their staffing and expertise in serving this important segment, make the investments and improvements necessary to help grow this important part of our economic engine.

 

 

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Lou Grilli

Lou GrilliLou Grilli

Lou is the Director of Payments Strategy at Trellance and is responsible for providing leadership to the organization for emerging payments and industry trends, as well as managing the product portfolio.

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