By Ray Birch
NEW YORK—NCUA’s decision to re-issue the RBC proposal and open a new comment period has CUs more comfortable about their future—especially those whose lending is almost exclusively comprised of MBLs.
A limited number of CUs don’t have a member business lending cap and therefore aren’t at risk with high MBL concentrations, as they were grandfathered in when the MBL cap was established in the late 1990s. They faced issues with the original RBC proposal’s heavy risk weighting to member business loans—100% below 15% of the loan portfolio, 150% from 15% to 25% and 200% for any higher concentration.
At Montauk Credit Union, MBL makes up 95% of the $147-million CU’s loan portfolio, most of it in taxi medallion loans that average about $200,000 each.
CEO Louis Jimenez said his credit union is breathing easier now that it appears that NCUA will make substantive changes to the original proposal. Jimenez said his credit union had placed every option on the table—including a charter change—to find ways to continue to serve members after the 11.94% net worth CU fell to 6.79% on the risk-based calculation, well below the proposed 10.5% well-capitalized floor.
“This new proposal and another comment period certainly bode well for credit unions like Montauk,” Jimenez told CUToday.info. “I think NCUA heard credit unions loud and clear. I am not surprised, as Chairman Matz stated at the (summer) Listening Sessions that the agency was listening and that significant changes were coming.”
High Net Worth Allays Concerns
Taxi Medallion loans make up 85% of the loan portfolio Progressive CU in New York City. But due to the credit union’s sky-high 38.29% net worth, the potential impact of the original proposal was not as concerning as it was at Montauk.
Nonetheless, CEO Robert Familant said is it settling to know that NCUA is paying attention to credit unions.
“Things get easier when you feel your regulator is being responsive to your concerns,” he said. “There was certainly overwhelming outcry from the credit union movement that the original proposal had flaws. Now NCUA has decided to look at it again. So we are all happy this is the outcome. It did not come easy, and I don’t think this was NCUA’s first choice, as it is unusual for them to give credit unions a second bite at the apple.”
Familant expects to see many changes will the new proposal.
“In looking at the comment letters, and at our own situation, I hope NCUA reworks MBLs being rated with same risk rating as delinquent residential real estate mortgages.”
Like many other CEOs, the ability or examiners to arbitrarily set minimum capital standards is an issue with Familant. “Removing that aspect of the proposal will give many credit unions peace of mind,” continued Familant. “That is not something examiners are supposed to do. They are supposed to come in and make sure you are conforming to the rules and regulations, and are safe and sound.”
No Examiner Arbitrary Powers
NCUA Chairman Debbie Matz, during an interview with CUToday.info, explained examiners will not have such power. She stated that the ability to set the individual minimum capital requirements is part of the current rule, not the proposed rule.
“And it is set by the board. It has never been used,” said Matz. “We intend to put on new procedural safeguards to further protect credit unions—and we will make it abundantly clear in the revised rule that only the NCUA board may set this revised capital level.”
MBL risk weights, are the primary concern with Jimenez, as well, along with a longer implementation period, which Matz said will be coming.
“NCUA has heard from all of us who rely on business loans to serve our members—from the east to Midwest to the west coast,” said Jimenez. “What we are seeing from NCUA now is positive. Now it’s a waiting game to see what they come out with.”
Richard Garabedian, partner with the Washington firm of Luse Gorman Pomerenk & Schick, pointed out the original RBC proposal, and moves by the agency to open up CU MBL lending, created a dilemma for credit unions.
“On the one hand, NCUA designates credit unions as low income on a wholesale basis, which releases them from the MBL limits and then imposes higher capital requirements,” said Garabedian. “That nullifies the attempt to encourage MBL lending. I think the NCUA needs to be more granular with MBLs and to impose higher requirements on MBLs that really impose greater risk, as the bank regulators have done with high-volatility commercial real estate loans.”
Special Treatment For MBL CUs?
Garabedian, too, added that credit unions historically devoted to MBL lending, like taxi medallion CUs, should be afforded special treatment. “Otherwise their lending capacity may be severely limited in the long run, potentially driving borrowers to other lenders who do not face such treatment.”
Jimenez agreed.
“It is in the statute that we are entitled to unlimited business lending as a result of our membership makeup and who we lend to.”
Steven Van Beek, attorney at Howard & Howard, Royal Oak, Mich., recognized that all CUs can do now is wait and take NCUA at its word that significant changes are coming.
“Obviously, the new comment period is a huge win for credit unions as it provides an opportunity to reanalyze how the rule would impact their operations,” said Van Beek. “With the first proposal, there were many headline issues that received attention and I’m sure some smaller details—including unintended consequences—were missed because of the need to push for changes on the big issues. Now, the new comment period provides an opportunity for credit unions to analyze the nitty-gritty details and review the proposal against their current operations and see the impact.”
Van Beek reiterated that NCUA appears to be open to change in the rule, but wonders how much change the agency will accept in this next round.
“How firm will NCUA be on this new proposal?,” asked Van Beek. “Will NCUA be willing to make additional changes if, after the comments, they are deemed necessary? My hope is that NCUA will continue to listen to credit unions.”