Comment letter on MBL proposal

CONTACT: Patrick Keefe, NASCUS Communications/703-528-5974, [email protected]

NASCUS letter on proposal emphasizes varying regulatory approaches, roles of boards, more

ARLINGTON, Va. — While NCUA’s proposed member business lending rule is worthy of support, 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, NASCUS has written in its comment letter on the proposal.

The letter was filed on Aug. 31, the deadline set by NCUA.

Among the key changes: Preserve in the final rule a portion of 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 pointed out 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 wrote. “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 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.

“Not only is it important for NCUA to rely on existing guidance that has been vetted by other regulatory agencies and used by banks and even credit unions actively engaged in commercial lending, it is vital that NCUA release a draft version of its guidance in conjunction with publication of the final rule,” NASCUS wrote. “As previously noted, NCUA is proposing an 18-month delayed implementation to allow credit unions and examiners to adjust to the principle based rule. However, a delayed implementation alone will not suffice to help examiners and credit unions adjust unless they are also provided the guidance that will frame supervisory evaluation of the final rule.”

The complete text of the NASCUS letter is on-line at the link below:

NASCUS comment letter on NCUA MBL/commercial loan proposal

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The National Association of State Credit Union Supervisors (NASCUS) is the primary resource and voice of the state governmental agencies that charter, regulate and examine the nation’s state-chartered credit unions. NASCUS membership is made up of state-chartered credit unions, state regulators and other supporters of the state credit union system. NASCUS is the only organization dedicated to the defense and promotion of the state credit union charter and the autonomy of state credit union regulatory agencies.

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