NASCUS: Review of state biz loan rule highlights need for dialogue

(Sept. 24, 2021) In yet more action at its Thursday meeting, the NCUA Board approved a state member business lending rule in Oregon for exemption from NCUA’s revised member business lending rule. However, NASCUS noted that the approval highlights concerns for the state system about the 2016 rule that the approval was based on, and the need for future dialogue with the agency about that federal rule.

Under NCUA rules, state-chartered credit unions do not face NCUA examination of compliance with the agency’s member business (commercial lending) rule if the state rule is “no less restrictive” than the NCUA regulation. Oregon had presented its state business rule for consideration and approval by the NCUA Board that the rule complied with the federal regulation.

NASCUS’ Lucy Ito praised Oregon regulators for taking the time and effort to develop a rule that complied with the federal requirements. She also said the state system acknowledges the NCUA Board’s approval of the Oregon rule.

However, Ito said NASCUS has continuing concerns with the NCUA regulation adopted five years ago.

“From the modern inception of NCUA’s MBL (now commercial lending) rule, Part 723 has provided a path for states to implement a divergent, yet sound, rule governing commercial lending,” Ito said. “In the intervening years between 1998 and 2016, several states took advantage of that power—to the betterment of the entire credit union system. And those states did so without detrimental effect on the National Credit Union Share Insurance Fund. Indeed, in finalizing the 2016 rule, NCUA cited no shortcomings or enhanced risk in states that had adopted state-specific MBL rules.”

She noted that, under the previous rule, states both with and without state-specific rules led the way in removing the MBL personal guarantee requirement as a regulatory mandate, permitting loan-to-value (LTV) flexibility, and introducing the concept of viewing MBL through the prism of commercial lending terminology. She asserted that the federal agency emulated states on all these fronts several years after states had evolved these changes.

“In a rule meant to be principles-based, NCUA chose an unnecessarily prescriptive approach to managing the dual-chartering strength of the credit union system,” Ito said. “Rather than focusing on whether a state-specific rule increased risk to the NCUSIF in an unacceptable manner, the ‘no less restrictive’ limitation on state rules instead foreclosed, for practical purposes, the historical avenue by which the regulatory framework for commercial lending was advanced. This was and remains unfortunate,” she said.

The NASCUS leader added that, at a time when the agency is appropriately considering innovative approaches to accommodate digital assets and fintechs, “revisiting innovation in the regulation and supervision of commercial lending would be congruent with NCUA’s laudable future focused posture.”

She said the association looks forward to conferring with NCUA on reconsidering the MBL rule and other regulations “to assure the future vibrancy and health of the credit union system by fostering regulatory diversity and competition between charters and regulators while maintaining safety and soundness.”


Oregon Member Business Lending Rule