Summary: Letter to Credit Unions 20-CU-11 Regulatory Treatment for Paycheck Protection Program Loans

Letter to Credit Unions 20-CU-11 Regulatory Treatment for Paycheck Protection Program Loans

April 2020

 NCUA issued LTCU 20-CU-11 to discuss the agency’s recently published interim final rule related to the SBA’s Paycheck Protection Program (PPP) loans and the Federal Reserve’s PPP Lending Facility (PPPLF) advances. The regulatory changes in NCUA’s interim final rule became effective on April 27, 2020. NCUA has also provided information on the PPP in LTCU 20-CU-06.

 PPP Loan Related Regulatory Changes

NCUA has made changes to its rules related how PPP loans are classified for regulatory capital and commercial underwriting purposes:

  • Part 702.104 was amended to include PPP loans as low-risk assets for purposes of calculating a credit union’s risk based net worth ratio. PPP loans will receive a zero-percent risk weight.
  • PPP loans have been excluded from the definition of commercial loans per 723.2 and therefore will not be subject to the enhanced underwriting and monitoring requirements for commercial loans and will not count toward the MLB cap.

 PPP Loans to Officials

Although SBA regulations generally prohibit lenders from making an SBA loan to an affiliate or an owner, the PPP loans are uniform for all borrowers, and the standard underwriting process does not apply. The SBA’s most recent interim final rule on the PPP loan program  appears to allow for loans to a business owned by a Director as long as the Director is not an employee or officer of the credit union. Federally insured state credit unions(FISCUs) must still comply with § 701.21(d)(5) concerning non-preferential treatment for loans and lines of credit to officials (applicable by reference in § 741.203).

  • PPP Loans to Non-Members

The Federal Credit Union Act prohibits FCUs from originating loans to non-members. FISCUs should look to state law.

 Background: Federal Reserve System’s PPP Lending Facility

 Complete information on the PPPLF is available on the Federal Reserve’s PPPLF website. The Federal Reserve will supply liquidity to participating financial institutions through term financing backed by PPP loans. Only SBA-guaranteed PPP loans that are originated by an eligible institution may be pledged as collateral for this special lensing facility.

  • Treatment PPP Loans Pledged to the PPPLF as Collateral for Calculating Net Worth

NCUA has amended § 702.2 to allow credit unions to exclude PPP loans pledged as collateral for a non-recourse loan that is provided as part of the PPPLF from the calculation of total assets for the purpose of calculating its net worth ratio.

Only PPP loans pledged to the PPPLF will be excluded from the net worth ratio calculation. Unpledged PPP loans will still be included in total assets for purposes of calculating the net worth ratio with a zero-percent risk weight for purposes of risk based net worth.

 Call Reports

Future NCUA Call Report instructions will include guidance on how to categorize PPP loans and advances obtained through the PPPLF on the Call Report.

NCUA will continue to update its own FAQs on its COVID-19 Information webpage.