Several important changes to the National Credit Union Administration’s (NCUA) Business Member Loan Rule will become effective January 1, 2017. These changes reflect the first comprehensive rewrite of the Rule since 2003.
As a whole, the changes will provide federally insured credit unions greater flexibility and autonomy in making business loans. For instance, the Final Rule will eliminate most prescriptive lending limits and their corresponding waiver provisions. Essentially, the changes aim to transition commercial lending from a system of prescription to a system of overarching principles to work within.
Other key changes effective January 1, 2017 include:
Exempting small commercial loan portfolios and credit unions with less than $250 million in assets from certain requirements;
Removing limits on construction and development loans;
Replacing loan-to-value limits with the principle of appropriate collateral; and
Affirming that non-member loan participants do not count against the statutory member-business lending cap.
Another key provision of the Final Rule becomes effective 60 days after publication in the Federal Register, and provides credit union loan officers with the ability, in some instances, to not require a personal guarantee.
Taken together, these changes empower credit unions to write their own policies and limits appropriate for their respective members and capacities. For instance, under the Final Rule, approximately 660 smaller credit unions that currently engage in limited commercial lending (an estimated 30% of all credit unions with Member Business Loans) will be exempt from the requirement to hire commercial lending staff and to establish a commercial loan policy.
Moreover, many credit unions currently refrain from commercial lending due to the rigid restrictions and the cumbersome waiver process required to exceed those restrictions. The new changes will eliminate the waiver process, and instead will require the credit unions to have a written business lending policy and to develop a risk rating system tailored to evaluate individual business loans.
Even with the current restrictions in place, business lending by credit unions has grown significantly compared to what it was a decade ago. With the new changes under the Final Rule, NCUA board members expect to further improve business lending prospects for credit unions. Specifically, they anticipate that the changes will diversify portfolios and revenue sources, improve the ability of credit unions to withstand economic downturns, and grow small businesses.
As with anything, only time will tell how effective the Final Rule will be in achieving its purpose. For now, credit unions should take steps to fully maximize the benefits provided by these changes, starting with a written business lending policy.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
For additional information on this topic, please reach out to Carlson Dash directly.