ARLINGTON, Va.—While it said NCUA’s proposed member business lending rule is worthy of support, the National Association of State Credit Union Supervisors also said the agency should consider a number of changes that would recognize the role of state-chartered credit unions, and promote the health of the credit union system overall.
In a comment letter to NCUA on the MBL proposal, NASCUS recommended changes it would like to see, including preservation in the final rule of a portion of an existing regulation (but left out of the proposal) that would allow states with specific rules regarding business lending to maintain, repeal or amend their rules while also allowing any additional state to come forward in the future with a “state-specific” rule. (Under current rules, a state may seek an exemption from NCUA’s member business lending rule for its federally insured state chartered credit unions if the state promulgates a state specific MBL rule that NCUA determines minimizes the risk and accomplishes the overall objectives of NCUA's MBL rule.)
“By preserving the ability of states to offer varying, and sound, regulatory approaches to supervising commercial lending, the final rule would contribute to the future health of the credit union system by fostering regulatory innovation and competition between charters and regulators,” NASCUS wrote.
Additionally, NASCUS noted that some state-chartered credit unions have developed extensive commercial lending programs pursuant to the previously approved NCUA state specific regulations.
“Regardless of the regulatory approach taken by NCUA in a final commercial lending rule, FISCUs in the states with state specific rules must be grandfathered in their current exemptions,” NASCUS wrote.
In other comments, NASCUS recommended that NCUA:
- Require boards (or committees of boards) of all credit unions engaged in business lending to approve a comprehensive, written commercial loan policy that is reviewed at least annually and updated as needed, and for the board or board committee to receive periodic briefings on the commercial lending program and portfolio. NCUA had proposed creating an exemption from that oversight and review for credit unions that have both 1) less than $250 million in assets, and 2) total commercial loans less than 15% of net worth that are not regularly originating and selling or participating out commercial loans. NASCUS noted that commercial lending presents an elevated level of risk compared with consumer lending, requiring specialized underwriting, monitoring, workout, and collections expertise.
- “Any financial institution engaging in commercial lending must understand the nature of the inherent differences between consumer and commercial credit,” NASCUS said. “Such an understanding should be evident in policies, processes, and staffing utilized by the financial institution to govern and manage its commercial lending portfolio. We believe that the exemption as proposed minimizes the importance of these differences in a manner that may have negative consequences for the safety and soundness of the credit union system.”
- Include “privately insured credit unions” (and not just FISCUs) in the definition of “credit unions” for purposes of exempting credit union loans to other “credit unions” from the definition of MBL and thus not making those loans subject to the rule. "Privately insured credit unions are supervised and examined by state regulators to the same extent as other state chartered credit unions,” NASCUS wrote. “There is no historical data to support a conclusion that loans to privately insured credit unions present a greater risk. NCUA should restore the broader exemption to exclude loans made to any credit union.”
- Eliminate confusion about which rules apply to FCUs and which to FISCUs, specifically stating in the final rule which parts apply to which charter types of credit unions. As currently drafted, NASCUS noted, certain provisions are “unnecessarily confusing, mixing federal credit union (FCU) specific requirements with requirements applicable to FISCUs.
- Alter the prohibition on loans made to senior management employees and their families or other associated borrowers (which NASCUS said it believes are overly, and unnecessarily, prescriptive), adopting instead an approach similar to that applied to banks under Reg O. That approach, NASCUS wrote, “only prohibits the loan if the terms would be more favorable to the insider than generally granted other borrowers or if the loan involves more than the normal risk of repayment or present other unfavorable features. If a prospective loan to an insider satisfies the above requirements, Reg. O establishes additional due diligence, board responsibilities, and aggregate limits, but allows the loan to be made.”
Finally, NASCUS urged NCUA to publish draft guidance for compliance with the new rule when the final rule is published (the final rule, NCUA has already stated, would not become effective until 18 months after approval). In addition, NASCUS wrote, NCUA should draw heavily on existing guidance related to commercial lending as promulgated by the other federal banking agencies – noting, in particular, the FDIC’s guidance.