The Board of the National Credit Union Administration voted unanimously in its June Board Meeting to drastically change the member business loan rules. The overall spirit is to move from a prescriptive approach, as outlined in current regulations, to a tenor that focuses on sound business lending policy and procedures. This new approach will help eliminate the unintended consequences of credit unions managing their lending practices to regulatory restrictions instead of focusing on sound risk management principles.
This new approach will allow credit unions more flexibility in how they serve their business members. Some of the areas the new proposed regulations would impact would be:
· Allowing CUs to decide when to waive a personal guarantee
· Removing LTV limits
· Remove the waiver process altogether
· Lift limits on construction and development loans
· Clarify that participation in loans to non-members do not count against the statutory MBL cap
· Change MBL limits from the standard 12.25% of assets to 1.75xs applicable net worth
· Modify limits on unsecured MBLs
· Change the restrictive definition of the “associated borrower”
· Increase the 15% limit of loans to one borrower to 25%, if the additional 10% is backed by readily marketed collateral
This proposal would allow CUs to write their own loan policies and place their own limits on collateral and security requirements, equity requirements and loan limits.
In many ways, the proposals are a welcome relief and will allow CUs to compete directly in the market place with banks and will eliminate some of the burdensome complexity the current regulations promote.
What the regulation will require is that the business department of CUs now are required to be better. Loan decisions are not to be structured to meet regulations, but sound business lending practices. The responsibility for finding those sound practices and putting them into place falls where it should, with the individual credit union.
The regulation should also encourage the use of experts, such as a business CUSO, to provide some sound support to any CU MBL department that may lack experience in a particular area. I would think the requirement to shift responsible lending back to the CU will encourage CUs to use whatever tools that would be at their disposal to manage risk in an insightful and prudent manner. The new proposals are not an excuse to allow wild lending that ignores all sound credit judgement in order to put deals on the books. That is a recipe for disaster, delinquency, and depressed earnings.