FINAL RULE: Member Business Lending
Parts 723, 702, 704, 712, 742
September 24, 2003
Thank you Bob and Dave for the presentation today, as well as for the assistance you have provided to me on this issue during the past year. I’m sorry Christie Loizos, who was to help with the presentation, could not be with us today, for she put many, many hours of hard work into this regulation.
With President Bush declaring last week as Small Business Week, what better way for NCUA to assist small business owners than with this final rule on member business lending?
As I mentioned when the proposal was brought forth in March, the member business loan rule is a good example of a vibrant dual chartering system because it provides an opportunity for individual states to write rules for their respective credit unions. Through this mechanism for experimentation within the regulatory process, the Board has approved seven state rules over the past five years that minimize risk and accomplish the overall objectives of our rule. Today, we incorporate some of the novel approaches we approved in those state rules into the final rule, and move a step further, by providing additional flexibility for federally insured credit unions subject to our regulation. We do this all while maintaining our commitment to safety and soundness.
Because it had been almost five years since the implementation of the Credit Union Membership Access Act and revision of the MBL regulation, I assembled an internal working group. Together, we thoroughly reviewed the regulation to determine if any substantive changes could be accomplished for all federally insured credit unions, in addition to parity with the previously granted state waivers. After several months at work on this issue, my working group developed and refined many of the rule’s enhancements that are set forth in this final rule. In addition to those presenting today, I would like to thank the other NCUA staff members of my working group, who worked diligently in assisting me in this comprehensive review: Ed Dupcak, representing the Office of Strategic Program Support and Planning; Linda Groth, from Examination and Insurance; Mick Wheeler, representing Region I, and Gayle Peterson, representing Region V. I appreciate the many hours of hard work you have put in to this project.
I believe my resolve in seeing an improved and enhanced member business loan regulation compliments President Bush’s Small Business Agenda because we both share the belief that small businesses are the heart of the American economy. Small businesses represent more than 99 percent of all employers and employ more than half of the private work force. Small business entrepreneurs create more than two out of every three new jobs and generate about 50 percent of the nation’s gross domestic product. Nearly 40 percent of small businesses are owned by women and there are more than 3 million minority owned small businesses across the country. This trend of minority ownership is accelerating and President Bush is committed to creating an environment where they can flourish. Credit unions have a wonderful opportunity to help small businesses as well as those start-ups that may be future dreams of their current members.
The President’s plan for jobs and economic growth will benefit small business owners across the country and the final MBL rule will better position credit unions to serve these members’ needs, playing a role in the President’s strategy to strengthen small businesses. This rule is only one element, albeit a significant one, in preparing credit unions to assist small businesses. For instance, the Small Business Administration’s recent decision authorizing all credit unions to qualify as lenders under SBA’s 7(a) loan program and offer government guaranteed loans to their members is consistent with the Administration’s emphasis on expanding the pool of SBA lenders and focusing more attention on small borrowers. And, while President Bush and the Congress work towards legislative changes that will allow small businesses to earn interest on their checking accounts at all depository institutions, federally insured credit unions already pay dividends on business share draft accounts.
As of June 30th, less than 20% of federally insured credit unions were engaged in business lending, but they provide a much needed service by assisting existing small business owners, as well as start-up businesses, with financing assistance. Credit unions can be a great partner for small businesses today as well as in the future, particularly community chartered credit unions. I realize though, that business lending is not appropriate for every credit union. It is the Board’s desire that credit unions engaged in business lending maintain the high standards of expected business management and safety and soundness. Credit union management must demonstrate a higher standard in planning, policies, monitoring risk, and diversification to safely establish a long-term strategy in member business lending. However, I encourage credit unions’ management and boards of directors to explore this product offering to see if it is right for the credit union’s membership and whether the credit union can offer these loan products in a safe and sound manner.
Credit unions are a perfect ally to assist small businesses with their financing and deposit services needs. Credit unions’ interest and determination in providing these services to members’ businesses is evidenced by the over 300 comment letters NCUA received from credit union interests that were wholly supportive of the agency’s review of the MBL rule. Credit unions indicated strong support for the reduced equity requirement for constructions loans; the simplifying of documentation requirements as appropriate; the granting of authority to make vehicle loans at 100% LTV and unsecured member business loans, under certain conditions; the expansion of the risk-based net worth requirement tiers in the prompt corrective action rule; and the amendment to Part 712 to enable CUSOs to originate business loans. The commenters also offered constructive comments, while raising important issues for NCUA to consider in the future.
An additional sign of the level of interest in this rule is the fact that
NCUA received comment letters from the U.S. Department of the Treasury,
as well as the co-authors of the Credit Union Membership Access Act,
Congressman LaTourette and Congressman Kanjorski. The final rule reflects
reasonable
refinements to address concerns raised by Treasury and other commenters.
However, it maintains the additional flexibility and enhancements contained
in the proposed rule and will allow credit unions to serve their business
members in a competitive way, while assuring that safe and sound lending
practices are maintained.
As staff presenting today noted, the final rule retains the principal personal guarantee requirement for credit unions that do not have a RegFlex designation. This revision allows RegFlex credit unions, those with at least 9% net worth and a CAMEL 1 or 2 rating over the last 2 years, to make a business decision as to whether or not a personal guarantee is required when making an MBL. It also ensures that credit unions that do not have as strong a net worth and CAMEL rating will obtain additional security in their business lending by requiring them to obtain personal guarantees, unless they receive a waiver from their Region.
The final rule also takes a balanced approach in addressing concerns raised about the proposed rule’s treatment of participation interests. The proposal suggested that all participation interests purchased from another lender be excluded from a credit union’s aggregate MBL cap. Treasury and other commenters opposed this standard, suggesting that it would allow credit unions to circumvent Congress’ intent when it set a cap on member business loans, particularly if credit unions could purchase participation interests from their CUSOs.
Taking this point into account, the final rule properly applies two different standards based on the distinction between member business loans and nonmember loans. The result gives credit unions the flexibility to make or purchase member business loans up to the aggregate cap established by Congress while allowing them to purchase nonmember business loans, as they determine appropriate. Credit unions will still benefit from the diversification and additional due diligence that will be provided through the purchase of nonmember business loan participations. Credit unions will not be able to circumvent the aggregate cap by purchasing loans made to their members by their CUSO or any other lender, and individual Regions can monitor their overall business lending activity through an approval process. While less than 5% of the federally insured credit unions engaged in business lending are nearing their aggregate cap, the final rule will allow those credit unions the opportunity to exclude any purchased nonmember business loans or participation interests from their aggregate limit, subject to an approval process that assures the purchase is not part of a “swapping” arrangement or other plan to evade the limit.
Finally, as I discussed in March, I believe the issue of examiner education is an important component for preparing NCUA’s staff in evaluating credit union lending practices and complying with the rule. Dave Marquis and his staff from the Office of Examination and Insurance continue to seek business lending educational opportunities. Qualified lenders require qualified examiners, and it remains our commitment to consumers, to credit unions, as well as to our examiners, to continue to provide appropriate training.
Additionally, we have identified specialized subject-matter experts in the area of member business lending and they are meeting for an NCUA lending conference in a few weeks. While we want to ensure that our examiners are best trained to consider the business lending offerings of credit unions, it does not mean examiners will automatically acquiesce to any credit union interested in providing these services. As I said earlier, member business lending isn’t for every credit union, and if a credit union is interested in becoming involved in this area, there are specific requirements that need to be met. I am requesting our examination staff ensure that those standards remain in place.
I am pleased with this final product because it allows for the substantive changes proposed in March and includes the aforementioned improvements that will benefit federally insured credit unions in their business lending. I would like to take this opportunity to thank the credit union community for reviewing the proposed regulation and submitting thoughtful comments that helped the Board and NCUA staff to craft this final rule. Thank you and I will be supporting this rule.