NCUA Interim Final Rule
Parts 702 & 723
PPP Loans & PCA and MBL
Prepared by NASCUS Legislative & Regulatory Affairs Department
NCUA issued this interim final rule (IFR) to make conforming amendments to Part 702, Prompt Corrective Action (PCA) and Part 723, Commercial Loans, following the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent implementation of the Paycheck Protection Program (PPP).
The IFR makes the following changes to NCUA’s rules:
- Part 702.2 is amended to allow credit unions to exclude from the calculation of total assets when calculating net worth ratio any loans pledged as collateral for a non-recourse loan that is provided as part of the Federal Reserve Board’s Paycheck Protection Program Lending Facility
- Part 702.104 is amended to included PPP loans as low risk assets for the purposes of risk weighting under PCA
- Part 723.2 is amended to excluded PPP loans from accredit unions MBL cap calculation
The Interim Final Rule proposed rule may be read here. The rule became effective upon publication on April 27, 2020.
Comments are due to NCUA May 27, 2020.
Part 702 of the NCUA’s rules implements the risk-based net worth requirement for complex credit unions. Under § 702.103, a complex credit union is a credit union with $50 million in assets and a RBNW requirement exceeding 6%. A credit union’s
RBNW is calculated by weighing 8 risk portfolios:
- long-term real estate loans
- member business loans (MBL) outstanding
- low-risk assets
- average- risk assets
- loans sold with recourse
- unused MBL commitments
The NCUA’s MBL and Commercial Lending Rule limits the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the net worth of the credit union or 1.75 times the minimum net worth required to be well capitalized under the Federal Credit Union Act (FCUA). The rule defines MBLs and commercial loans and distinguishes between the two with only MBLs counting toward the regulatory and statutory cap on loans. Note that while all MBLs are commercial loans, not all commercial loans are MBLs.
As part of the federal government’s response to the COVID-19 impact on the economy, the FRB authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Lending Facility (PPPL Facility). Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund PPP loans with the SBA guaranteed PPP loans pledged as collateral for the PPL Facility loans.
The Interim Final Rule
- PPP loans will risk weighted zero percent – The IFR amends the NCUA’s risk-based net worth rules as discussed above to include the PPP loans in the definition of low-risk assets (#4 above in the RBNW categories). Other low-risk assets include cash on hand, the NCUSIF deposit, and debt instruments guaranteed by the NCUA. Under §702.106(d), low-risk assets receive a 0% risk weight.
- PPP loans excluded from calculation of total assets – In order to participate in the PPPL Facility, credit unions will have to originate and hold PPP loans on the credit union’s balance sheet. This in turn could potentially subject credit unions to increased regulatory capital requirements. To facilitate use of the PPPL Facility, the IFR excludes PPP loans pledged as collateral to the PPPL Facility from the definition of total assets in §702.2 for purposes of calculating a credit union’s net worth ratio.
- PPP loans are not “commercial loans” – The interim final rule excludes PPP loans from the definition of “commercial loans” under § 723. Because the PPL loans would not be defined as “commercial loans” they would not be counted for purposes of calculating a credit union’s aggregate MBL cap.