FORT LAUDERDALE, Fla.–As NCUA ponders adoption of new examination policies around commercial lending, one program officer with the agency outlined reasons for the changes and what credit unions can expect during exams.
Vincent Vieten, program officer-member business lending with NCUA, told the CUNA Lending Council annual meeting that the rules changes the NCUA board is considering will move MBL oversight from prescriptive-based rules to principal-based rules. At the heart of that evolution, said Vieten, are lessons he learned in his 27-year career as a commercial lender at a bank in New Hampshire.
“What we’re trying to do now is take the requirements of the Act and make that the core of our document and require certain safety and soundness to go with it, if this proposed rule is adopted,” said Vieten. “One thing the new rule does is emphasize that risk assessment should be appropriate for the size of the transaction.”
The proposal around commercial lending includes numerous specifics, including around how member business loans differ from commercial loans, around multi-family housing, and more.
In construction and development loans, for instance, there are proposed changes around LTV (the 80% limit has been removed), and personal guarantees (NCUA has removed the explicit requirement, and would require CUs to determine and document mitigating factors when personal guarantee is not required, and also require credit unions to set internal limits).
“I think you should set internal limits for how much risk you’re willing to take,” said Vieten. “If you’re not going to get the personal guarantee you need to be able to explain why you don’t need it and why it won’t affect the risk. One thing I hope we never hear again is ‘Show me where it says that.’ I’ve been to 50 credit unions since starting with NCUA in May 2010. I only fell for that once, and I was sorry I did. You need to be able to show why this is a good loan, what are the risks, and how have you mitigated those risks.”
Other points NCUA will be looking for:
- Loan approval authority should be commensurate with business lending.
- Complexity, risk and overall impact to the CU should be reflected in the authority
- The authority is limited to the aggregate member relationship.
- All approvals and declinations should be reported on a regular basis to senior management and the board.
“It’s about making sure you have policies that make sense,” Vieten continued. “You have to have good initial risk assessment, and then ongoing loan management. How about a regular loan review? If you’re big enough and you can have a separate process away from the loan department, that’s great. But a lot of people use a third party.”
What is the best way to handle an exam moving forward? According to Vieten, “Make sure you know what you are doing and that you are represented correctly. As we move to principles-based exam, it will be a little rocky at first, but I think managing risk is where we are going.”
Vieten said he believes there are no reasons for any CU to fear making commercial loans.
“I think commercial lending is the least risky lending. You can manage your risk during the loan if anything changes and covenants are tripped.”