Summary of Key Changes to NCUA s Member Business Loan Final Rule

Transcription

1 Summary of Key Changes to NCUA s Member Business Loan Final Rule Federally insured credit unions generally have conducted business lending safely, and NCUA s supervision of business lending has largely been successful. As part of NCUA s ongoing Regulatory Modernization Initiative, in June 2015 the NCUA Board proposed changes to the member business lending rule for comment. Overall the comments received indicated the credit union industry was in general agreement with the proposed changes. The final rule approved by the NCUA Board at its February 18, 2016, meeting incorporates various suggestions received on the proposed rule. The final MBL rule will provide federally insured credit unions making business loans with greater flexibility and more autonomy, shifting the rule s focus from the current prescriptive approach to a more principles-based methodology that emphasizes sound risk management practices for business lending. Specifically, the final rule eliminates most prescriptive lending limits and the corresponding waiver provisions. The rule also distinguishes the policy and program responsibilities for commercial loans from the statutory limit on MBLs and complies with the Federal Credit Union Act in all respects. This document is a brief summary of key changes. It should not be solely relied upon as a comprehensive discussion for each section or item. Please consult the final rule s preamble and rule text for comprehensive detail about all the changes to the MBL rule. NCUA remains committed to rigorous and prudential supervision of credit union commercial lending activities to ensure they remain safe and sound. Table 1 List of Waivers That Are No Longer Required, Effective January 1, Aggregate Construction & Development Loan Limit 2. Minimum Borrower s Equity for C&D Loans 3. LTV Requirement 4. Personal Guarantee Requirement (Effective 60 days after publication in the Federal Register) 5. Maximum Unsecured MBL to One Member or Group of Associated Members 6. Maximum Aggregate Unsecured MBL Loan Limit 7. Maximum Aggregate Net MBL to One Member or Group of Associated Members Summary of Key Final Changes to NCUA s Member Business Loan Rule 1

2 Table 2 - Comparison of Member Business Loan and Commercial Loan Definitions Type of Loan MBL Commercial Loan Loan fully secured by a 1- to 4-family residential property (a member s primary residence) No No Member business loan fully secured by a 1- to 4-family residential property (not a member s Yes 1 No primary residence) Member business loan secured by a vehicle manufactured for household use Yes 2 No Business loan with aggregate net member business loan balance less than $50,000 No No Commercial loan fully secured by shares in the credit union making the extension of credit or No No deposits in other financial institutions Commercial loan in which a federal or state agency (or its political subdivision) fully insures No Yes 3 repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full Non-member commercial loan or non-member participation interest in a commercial loan made by another lender No Yes 4 1 If the outstanding aggregate net member business loan balance is greater than $50, If the outstanding aggregate net member business loan balance is greater than $50, If the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is greater than $50, If the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is greater than $50,000. Summary of Key Changes to NCUA s Final Member Business Loan Rule 2

3 Table 3 Summary of Final Rule Changes to Current Rule Final MBL Rule Section Summary of Final MBL Rule Change Reason for Change and Effect 723 The final rule becomes effective January 1, However, 723.5(b) - Personal Guarantees becomes effective 60 days after publication in the Federal Register PURPOSE AND SCOPE 723.1(b) Allows smaller credit unions with limited commercial loan exposures and that infrequently originate and sell commercial loan participations more flexibility in complying with the regulation. A credit union is exempt from the commercial loan policy and the board and management requirements sections of the final rule if the credit union: has less than $250 million in assets, has a commercial loan portfolio plus commercial loans sold but serviced less than 15 percent of its total net worth, and in any given calendar year has originated and sold and no longer services commercial loans that in aggregate are less than 15 percent of its net worth. Section provides explicit regulatory relief to qualifying credit unions with small commercial loan exposures that are not regularly originating and selling or participating commercial loans. This exempts an estimated 660 smaller credit unions (30 percent of all credit unions with MBLs), based on 9/30/15 Call Report data. The final rule would still cover over 99 percent of total outstanding commercial loans. The final rule adds specificity to the exemption criteria compared to the proposed rule for clarity (c)(2) Government business lending programs. The final rule broadens the provision that allows loans made under SBA-guaranteed loan programs to follow those provisions if less restrictive than the MBL rule for any federal or state guaranteed loan programs. Allows for parallel treatment and greater flexibility to include other federal or state-guaranteed business lending programs available to credit unions. Summary of Key Changes to NCUA s Final Member Business Loan Rule 3

4 Final MBL Summary of Final MBL Rule Change Rule Section DEFINITIONS 723.2, Associated borrower. The final rule revises the definition of associated borrower to generally encompass only associated persons or entities with common control or substantial financial interdependence. This definition also utilizes the new definitions included in the rule of common enterprise, control, and direct benefit to achieve this. As suggested by the commenters, the final rule addresses specific treatment for partnerships Commercial loan. Added a definition to distinguish between loans that by law are defined as MBLs for purposes of the statutory MBL cap and commercial loans that invoke the safety-and-soundness provisions of the rule. This definition utilizes the new definitions for loans secured by a 1- to 4-family residential property, residential property, and vehicle manufactured for household use to achieve this Commercial loan. The definition also encompasses business loans fully guaranteed by a federal or state agency. Reason for Change and Effect Suggested by credit union business lenders, this change generally reduces how far the associated borrower definition extends and more closely aligns the definition with the other banking agency standards. Change also benefits all loan participations, not just MBLs. The commercial loan definition excludes loans secured by non-owner-occupied, 1- to 4-family residential properties and those secured by vehicles manufactured for household use from triggering the requirements in sections through of the final rule. The definition is generally consistent with the related riskbased capital definition and provides relief to credit unions making loans secured by non-owner-occupied, 1- to 4-family residential properties and vehicles manufactured for household use. Business loans fully guaranteed by a federal or state agency are not defined as MBLs in the current rule but are considered commercial loans in the final rule for purposes of the safety-and-soundness provisions. The guarantees for these programs are customarily contingent on the credit union meeting prudent underwriting and servicing standards. Summary of Key Changes to NCUA s Final Member Business Loan Rule 4

5 Final MBL Rule Section 723.2, 723.4(g)(3) Summary of Final MBL Rule Change Credit-risk rating system. The new definition addresses the requirement for a credit union s use of a credit-risk rating system if it makes commercial loans. The credit union s commercial loan policy must provide for use of a credit-risk rating system Loan-to-value ratio. Revises the current definition to exclude junior debt from other lenders in calculating loan-to-value ratios and clarify the valuation basis for the collateral , 723.4(c) Readily marketable collateral. The rule adds a definition to support flexibility for credit unions in exceeding the 15 percent of net worth single obligor limit BOARD OF DIRECTORS AND MANAGEMENT RESPONSIBILITIES 723.3(a)(1) Board of director s oversight. The rule clarifies the credit union s board needs to review and update the commercial loan policy if there is a material change in circumstances. It clarifies the board must have qualified personnel to manage the commercial risk and adequate reporting to understand the level of commercial loan risk. Reason for Change and Effect This definition, and related provision to incorporate a risk rating system into the credit union s commercial loan policy, was added to reinforce existing supervisory guidance and accounting standards. 5 More than 90 percent of credit unions that would be subject to this provision are estimated to have credit-risk rating systems for their commercial loans. Change and clarification was suggested by credit union MBL lenders. It better reflects how loan-to-value ratios are customarily calculated for commercial loans. Term added to support the flexibility to exceed the single obligor limit. In response to the comments made on the proposed rule, the preamble for the final rule adds additional explanation to determine readily marketable collateral. Clarification aligns with current supervisory expectations and customary risk management practices. 5 See NCUA Letter to Credit Unions 10-CU-02, Current Risks in Business Lending and Sound Risk Management Practices, January 2010, citing The Office of Comptroller of the Currency, Comptroller s Handbook, Rating Credit Risk, April Also see NCUA Accounting Bulletin 06-01, Attachment 1, December Summary of Key Changes to NCUA s Final Member Business Loan Rule 5

6 Final MBL Rule Section 723.3(a)(2), 723.3(a)(3), 723.3(b) Summary of Final MBL Rule Change MBL program management oversight responsibilities and required MBL experience. The rule adds more discrete provisions for the roles and responsibilities of the board of directors, senior management, and commercial lending staff. It also clarifies that the credit union must provide oversight for third parties used to conduct the credit union s commercial lending related work COMMERCIAL LOAN POLICY 723.4(c) Limit on single obligor loans. The final rule moves the current rule s single obligor limit of 15 percent of net worth into the policy requirement, and removes the related waiver provision. The proposal provides for the limit to be as high as 25 percent of net worth if supported by readily marketable collateral. In response to the comments received, the final rule also excludes the government-guaranteed portions of loans from the limit (e) NCUA expectations for commercial loan policy underwriting. The final rule specifies the policy must address delegated lending authority and the loan approval process (f) The final rule adds additional details on how the policy needs to address underwriting standards. Reason for Change and Effect Replaces the explicit two-year experience requirement in favor of a more flexible principles-based approach that considers the overall experience of the staff involved in the credit union s commercial lending program. These provisions align with current supervisory expectations and customary governance roles for institutions involved in commercial lending. Supports the elimination of regulatory waivers in the commercial lending process, but maintains a critical prudential limit on concentrations of credit to a single borrower. Without the need for a waiver, credit unions could choose to go up to 25 percent of net worth for a single obligor if the amount above 15 percent of net worth is collateralized by readily marketable collateral. The change parallels how the regulatory limit is applied by the other banking agencies. Minor clarification that aligns with current supervisory expectations and customary risk management practices. Provides clarification on how credit unions must address underwriting standards. It is consistent with current supervisory expectations and customary risk management practices. Summary of Key Changes to NCUA s Final Member Business Loan Rule 6

7 Final MBL Rule Section 723.4(g) Summary of Final MBL Rule Change The final rule adds additional details on how the policy needs to address risk management processes for commercial lending COLLATERAL AND SECURITY 723.5(a) Loan-to-value requirements. The final rule replaces the current rules prescriptive loan-to-value requirements, and unsecured lending limit, with the principle that sufficient collateral is obtained when warranted and in relation to the risk (b) Personal loan guarantees. The final rule replaces the requirement for a personal guarantee or waiver with the requirement the credit union document for commercial loans without a personal guarantee that mitigating factors offset the additional risk of not having the personal guarantee. This provision will go into effect 60 days after the final rule is published in the Federal Register CONSTRUCTION AND DEVELOPMENT (C&D) LOANS Removes C&D limit. The final rule eliminates the prescriptive portfolio limit of 15 percent of net worth for construction and development loans in the current rule (a), 723.6(b) Definition of C&D loan, and determination of collateral values. The final rule clarifies the definition of a C&D loan. It also clarifies how collateral values for C&D loans are determined. Reason for Change and Effect Provides clarification on how credit unions must address commercial lending risk management processes. It is consistent with current supervisory expectations and customary risk management practices. Provides credit unions with flexibility in setting their own unsecured portfolio limits and loan-to-value requirements. It also eliminates the need for regulatory waivers under the current rule. Provides credit unions with flexibility in setting their own underwriting criteria related to personal guarantees. It also eliminates the need for regulatory waivers under the current rule. Provides credit unions with flexibility in setting their own prudent limit for their C&D portfolio. It also eliminates the need for regulatory waivers, and the related waiver provisions in the current rule. Definition was changed for clarification. It also addresses questions received from credit unions and examination staff and better reflects how collateral values are customarily calculated for C&D loans. Summary of Key Changes to NCUA s Final Member Business Loan Rule 7

8 Final MBL Rule Section 723.6(c) Summary of Final MBL Rule Change C&D Loan Disbursement Process. The final rule provides more detail to the current rule s requirement related to loan administration and the disbursal of funds for C&D loans. Reason for Change and Effect Provides more specificity on the minimum requirement for disbursement of funds for construction and development loans, consistent with current supervisory expectations and customary construction and development lending practices PROHIBITED ACTIVITIES The final rule reorganizes existing prohibitions into one Reorganization imposes no substantive change. section (a)(1) The final rule provides greater flexibility and allows senior managers not involved in or having influence over the commercial loan process the ability to obtain commercial loans from the credit union. Less restrictive than the current rule and allows employees that cannot influence the loan approval, servicing, and collection processes to receive a commercial loan from the credit union AGGREGATE MEMBER BUSINESS LENDING LIMIT; EXCLUSIONS AND EXCEPTIONS 723.8(a) 723.8(b), 723.8(c) MBL cap expressed as multiple of net worth, not percentage of assets. The final rule modifies the regulation to better conform to the statutory language for the MBL cap. Defines a MBL for purposes of the statutory cap. Credit unions with a higher net worth requirement under the risk-based standard than the net worth ratio requirement would have a higher MBL cap. The change is consistent with the Federal Credit Union Act. Eliminates the need for non-member business loans and participations in non-member business loans made by another lender to get a waiver of such loans from the regulatory MBL cap. The change preserves the statutory cap on loans meeting the Federal Credit Union Act s definition of a member business loan. Summary of Key Changes to NCUA s Final Member Business Loan Rule 8

9 Final MBL Rule Section 723.8(d) Summary of Final MBL Rule Change Statutory MBL cap exemptions. The final rule deletes from the current rule obsolete provisions related to the evidentiary documentation necessary to demonstrate qualification for the exemption for credit unions that had a history of primarily making member business loans TRANSITIONAL PROVISIONS Existing enforcement constraints or waivers. The final rule specifies how any outstanding commercial lending waivers or supervisory enforcement actions would be affected upon implementation of the final rule STATE REGULATION OF BUSINESS LENDING (a) The final rule allows federally insured, state-chartered credit unions to be exempt from NCUA s rule if their state has a MBL rule that is at least as stringent as Part 723 and complies with the requirements of the Federal Credit Union Act, as determined by NCUA (b) The final rule grandfathers the seven state rules NCUA has previously approved. Reason for Change and Effect Eliminates an obsolete provision. Provides added clarification on how the final rule will affect existing enforcement constraints and waivers. Preserves a state s ability to exempt federally-insured state chartered credit unions from Part 723 by putting in place a state rule that complies with the requirements of the Federal Credit Union Act and ensures business lending is conducting safely and soundly by the statechartered credit unions it regulates. Summary of Key Changes to NCUA s Final Member Business Loan Rule 9

10 Table 4 - Sections Deleted from Current Rule Current Rule Section Requirement What waivers are available? How do you obtain a waiver? What will NCUA do with my waiver request? What options are available if the NCUA Regional Director denies my waiver request, or a portion of it? Reason for Deletion Change to a principles-based rule eliminates the need for waiver provisions What are the recordkeeping requirements? Policy and recordkeeping requirements are consolidated into new sections under the final rule. Table 5 - Changes Incorporated into Final Rule based on Comments on Proposed Rule Final MBL Rule Section Description of the Change 723.1(b)(1) - Credit Unions Qualifying Clarifies the qualifying criteria. for Exemptions Associated Borrower Definition Includes exceptions for certain partnerships, joint ventures and associations Commercial Loan Definition Clarifies how less than $50,000 is determined Loan-to-value Definition Replaces the lesser of purchase price or market value for collateral held 12 months or less, and market value for collateral held longer than 12 months with current collateral value (c) - Single Obligor Limit Excludes the government guaranteed portion of a commercial loan from the limit (b)(1) - Transitional Provision for Personal guarantee provision effective 60 days after publication in the Federal Personal Guarantees Register (a) Ineligible Borrowers Allows employees that cannot influence the loan approval, servicing, and collection processes to receive a commercial loan from the credit union State Regulation of Business Preserves option for state rules to supersede Part 723 and grandfathers the seven Lending existing NCUA-approved state rules. Summary of Key Changes to NCUA s Final Member Business Loan Rule 10

11 National Credit Union Administration Proposed Rule: Part 723 Member Business Loans Larry Fazio, Director Office of Examination and Insurance July 1, 2015

12 The role of prudent business lending in credit unions CUs are well suited to serve small businesses, a vital and growing segment of their membership Improving access to financial services for small businesses helps create jobs Properly structured & priced, MBLs can have a positive impact on earnings and net worth MBLs can enhance portfolio diversification MBLs potentially offset IRR of long-term, fixed-rate residential real estate loans The key beneficiary of prudent business lending is the member who will receive financing that meet their needs and within their ability to repay 2

13 Member business loans have grown significantly over the last ten years Member Business Loan Balance (in billions) MBL as % of Total Loans $60 MBL Balance* and as % of Total Loans 16% $50 $ % 12% $40 10% $30 6.8% 8% $20 $12.3 6% $10 1.2% $ % 4% 2% $ Year 0% MBL Balance MBL as % of Total Loans Member Business Loan balance includes both member and nonmember business loans. Does not include unfunded commitments. Total MBLs including unfunded commitments is $51.7B. 3

14 A growing percentage of credit unions have MBLs % of Credit Unions with MBLs 100% 90% 80% 70% 77% 72% 93% 60% 50% 53% 40% 36% 30% 20% 10% 13% 21% 19% 0% Total Assets Less than 100MM Total Assets 100MM - 500MM Total Assets Greater than 500MM All

15 Number of credit unions by MBL as % of total assets All FICUs 4,500 4, # of Credit Unions (Dec. 2014) 3,500 3,000 2,500 2,000 1,500 1, MBL as % of Total Assets 5

16 Credit unions tend to make relatively small business loans Credit Union MBL Activity (Dec. 2014) Average MBL Size (Dec. 2014) Metrics Credit Unions with MBLs Additional Info # of CUs With MBLs 2,238 36% of Total CUs Total Assets (in billions) Median Asset Size (in millions) MBLs as % of Total Loans $975 $117 87% of Total CU Assets $24 All CUs 8.1% - Total Asset Size Total MBL Balance (in billions) Average Loan Size (in thousands) <100MM $1.9 $93 100MM 250MM $4.4 $ MM 500MM $6.2 $ MM 1B $9.6 $205 # of CUs Originating MBLs in 2014 Total # of MBLs ( in thousands) 1, >1B $29.7 $281 Total $51.7 $217 6

17 % of Total MBLs Over 80% of MBLs are secured by real estate MBL Composition by Collateral Type (Dec. 2014) MBL Composition by Loan Type (Dec. 2014) 100% 80% 1% 1% 1% 1% 15% 16% 16% 16% Unsecured Secured by Non- Real Estate C&D Loan, 4% Ag Loan, 4% Unsecured and other, 1% 60% 40% 20% 84% 83% 83% 83% Secured by Real Estate Commerical and Industrial, 14% Owner-occupied Nonfarm and Non-residential, 23% Non owneroccupied Nonfarm and Non-residential, 30% Nonfarm Residential*, 21% 0% Year % of Total MBLs * Nonfarm, residential includes investor 1-4 family residential real estates. 7

18 Most credit unions with MBLs offer several business loan products # of Credit Unions with MBLs (Dec. 2014) With 1 MBL Product, 722 With 3 or more MBL Products, 1,119 (50% of Total) (32% of Total) (18% of Total) With 2 MBL Products, 397 8

19 Credit union MBL delinquency rates were much higher than other loan types during the recession 4.5% 4.0% Delinquency Rate (60+) by Loan Type* (Dec. 2014) 4.1% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1.3% 0.4% 0.3% 0.2% 2.1% 1.6% 2.3% Year 1.2% 0.9% 0.9% 0.9% 0.8% 0.7% MBL 1st Lien RE loans Other RE loans Auto Loans Credit Cards Student Loans * Please note that 1 st lien real estate loans, other real estate loans, and auto loans may also include MBLs. 9

20 Credit union MBL net charge-off rates were manageable during the recession 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2.2% 0.1% 0.0% 0.1% Net Charge-off Rate by Loan Type* (Dec. 2014) 4.3% 1.3% 1.0% 0.4% Year 1.9% 0.5% 0.3% 0.3% 0.2% 0.1% MBL 1st Lien RE loans Other RE loans Auto Loans Credit Cards Student Loans * Please note that 1 st lien real estate loans, other real estate loans, and auto loans also include MBLs. 10

21 Credit union MBL delinquency compared to banks 7.0% 30+ Delinquency Rate Comparison Credit Unions vs. Banks 6.0% 5.7% 5.0% 4.0% 5.1% 3.0% 2.0% 1.0% 1.8% 1.2% 0.0% Year Credit Unions Banks with Total Assets <$50B * Data Source: Bank data from SNL 11

22 Credit union MBL net charge-offs compared to banks Net Charge-off Rate Comparison Credit Unions vs. Banks 1.6% 1.4% 1.5% 1.2% 1.0% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% % 0.1% Credit Unions Year Banks with Total Assets <$50B * Data Source: Bank data from SNL 12

23 Banking data shows that C&D loans have the most volatility 18% 16% 30+ Delinquency Rate (Banks with Assets <= $50B) 14% 12% 10% 8% 6% 4% C&D Ag Loans Multifamily Nonfarm, Nonresidential C&I Total 2% 0% Year * Data Source: Bank data from SNL 13

24 Total MBL related share insurance fund losses over the last five years are roughly $141MM, representing 25% of total losses Total Losses to Share Insurance Fund ($ in millions) Losses due to MBLs as contributing factor* ($ in millions) 2010 $233.9 $6.0 * 2.6% 2011 $46.7 $0 0% % of Total 2012 $187.2 $135.4 * 72.3% 2013 $65.5 $4.0 * 6.1% 2014 $40.4 $0 0% Total $573.7 $ % * First American, losses to insurance fund: $6.0MM * Eastern New York: $2.6MM; Telesis: $50.4MM; Chetco: $82.4MM * Greater Oregon: $4.0MM 14

25 81% of credit unions with MBLs have a CAMEL rating of 1 or 2, compared to 69% for credit unions that do not offer MBLs CAMEL Distribution for Credit Unions with MBLs (Dec. 2014) CAMEL Distribution for Credit Unions without MBLs (Dec. 2014) 0% 0% 17% 3% 17% 5% 11% 27% 64% 58% CAMEL CAMEL

26 Important fundamental questions about business lending Question Answer Can business lending be done safely? Is business lending more complex than consumer lending? Is business lending more risky than other types of lending? Should only institutions with the requisite expertise, policies, and procedures engage in business lending? Yes Yes It depends Yes Are violations of the current prescriptive regulatory requirements the primary cause(s) for the credit unions that have gotten in trouble with business lending? No 16

27 NCUA s goals in modernizing Part 723 Replace overly prescriptive requirements with principles-based standards Reinforce risk management requirements needed to safely conduct commercial lending activities Improve the expertise and policy provisions of the regulation Change supervisory focus to sound commercial risk management practices from compliance with prescriptive regulatory requirements Eliminate NCUA involvement in day-to-day operations of CUs, in particular loan level waivers Distinguish between commercial loans and the statutory definition of MBLs 17

28 Comparison of MBL and Commercial Loan Definitions Type of Loan Loan fully secured by a 1- to 4- family residential property (borrower s primary residence) Member business loan secured by a 1- to 4- family residential property (not the borrower s primary residence) Member business loan secured by a vehicle manufactured for household use Business loan with aggregate net member business loan balance less than $50,000 Commercial loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions Commercial loan in which a federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full Non-member commercial loan or non-member participation interest in a commercial loan made by another lender * If the outstanding aggregate loan balance is greater than $50,000. MBL No Yes* Yes* No No No No Commercial Loan No No No No No Yes* Yes* 18

29 Other Key Changes Provided exemption from separate policy and personnel requirements for smaller credit unions with limited commercial loan exposure Adjusted the associated borrower definition to narrow its scope (parallel change proposed to loan participation rule) Replaced two-year experience requirement with more flexible governance and experience standards Removed requirement for personal guarantees Removed LTV and portfolio concentration limits (except for the statutory cap) Clarified non-member business loan participations do not count toward the statutory cap no waiver needed Clarified policy requirements, LTV calculations, and C&D collateral value determination and disbursement process 19

30 List of waivers no longer required Aggregate C&D Loan Limit Minimum Borrower s Equity for C&D Loans LTV Requirement Personal Guarantee Requirement Maximum Unsecured MBL to One Member or Group of Associated Members Maximum Aggregate Unsecured MBL Loan Limit Maximum Aggregate Net MBL to One Member or Group of Associated Members 20

31 Next Steps NCUA will: Compile and analyze comments on proposed rule (comments due federal register posting + 60 days) Engage industry practitioners as work progresses on final rule Develop guidance to accompany final rule Modify training for examiners and specialists Redesign and enhance MBL data gathering, risk monitoring and examination processes 21

32 Questions? 22

33 Appendix - Summary of Proposed MBL Rule Change (page 1 of 7) Proposed MBL Rule Section PURPOSE AND SCOPE 723.1(b) Summary of Proposed MBL Rule Change Allows smaller credit unions with limited commercial loan exposures more flexibility in complying with the regulation. A credit union is exempt from the commercial loan policy and the board and management requirements sections of the proposed rule if the credit union: is less than $250 million in assets, has a commercial loan portfolio less than 15 percent of its total net worth, and is not regularly making and selling or participating commercial loans. Reason for Proposed Change and Effect The section provides explicit regulatory relief to qualifying credit unions with small commercial loan exposures that are not regularly originating and selling or participating commercial loans. An estimated 685 credit unions (31 percent of all credit unions with MBLs) would receive this exemption, based on 12/31/14 Call Report data. However, the proposed rule s requirements would still cover over 99 percent of total outstanding commercial loans (c)(2) Government business lending programs. The proposed rule broadens the provision that allows loans made under SBAguaranteed loan programs to follow those provisions if less restrictive than the MBL rule for any federal or state guaranteed loan programs DEFINITIONS 723.2, Associated borrower. The proposed rule revises the definition of associated borrower to generally encompass only associated persons or entities with common control or substantial financial interdependence. This definition also utilizes the new definitions included in the rule of common enterprise, control, and direct benefit to achieve this. This change allows for parallel treatment and greater flexibility to include other federal or state-guaranteed business lending programs available to credit unions. Suggested by credit union business lenders, this change generally reduces how far the associated borrower definition extends and more closely aligns the definition with the other banking agency standards. This change also benefits all loan participations (not just MBLs) with the proposed conforming change to

34 Appendix - Summary of Proposed MBL Rule Change (page 2 of 7) Proposed MBL Rule Summary of Proposed MBL Rule Change Section DEFINITIONS (cont.) Commercial loan. Added a definition to distinguish between loans that by law are defined as MBLs for purposes of the statutory MBL cap and commercial loans that invoke the safety and soundness provisions of the proposed rule. This definition utilizes the new definitions for loans secured by a 1- to 4-family residential property, residential property, and vehicle manufactured for household use to achieve this Commercial loan. The definition also encompasses business loans fully guaranteed by a federal or state agency , 723.4(g)(3) Credit-risk rating system. The new definition addresses the requirement for a credit union s use of a credit-risk rating system if it makes commercial loans. The credit union s commercial loan policy must provide for use of a credit-risk rating system. Reason for Proposed Change and Effect The commercial loan definition excludes loans secured by non-owner-occupied, 1- to 4-family residential properties and those secured by vehicles manufactured for household use from triggering the requirements in sections through of the proposed rule. The definition is generally consistent with the related proposed risk riskbased capital definition and provides relief to credit unions making loans secured by non-owner-occupied, 1- to 4-family residential properties and vehicles manufactured for household use. Business loans fully guaranteed by a federal or state agency are not defined as MBLs in the current rule, but are considered commercial loans in the proposed rule for purposes of the safety and soundness provisions. The guarantees for these programs are customarily contingent on the credit union meeting prudent underwriting and servicing standards. This definition, and related provision to incorporate a risk rating system into the credit union s commercial loan policy, was added to reinforce existing supervisory guidance and accounting standards. 5 Over 90 percent of credit unions that would be subject to this provision already have creditrisk rating systems for their commercial loans. 5 See NCUA Letter to Credit Unions 10-CU-02, Current Risks in Business Lending and Sound Risk Management Practices, January 2010, citing The Office of Comptroller of the Currency, Comptroller s Handbook, Rating Credit Risk, April Also see NCUA Accounting Bulletin 06-01, Attachment 1, Dec

35 Appendix - Summary of Proposed MBL Rule Change (page 3 of 7) Proposed MBL Rule Summary of Proposed MBL Rule Change Section DEFINITIONS (cont.) Loan-to-value ratio. Revises the current definition to exclude junior debt from other lenders in calculating loan-to-value 723.2, 723.4(c) ratios and clarify the valuation basis for the collateral. Readily marketable collateral. The proposed rule adds a definition to support flexibility for credit unions in exceeding the 15 percent of net worth single obligor limit BOARD OF DIRECTORS AND MANAGEMENT RESPONSIBILITIES 723.3(a)(1) Board of director s oversight. The proposed rule clarifies the credit union s board needs to review and update the commercial loan policy if there is a material change in circumstances (a)(2), 723.3(a)(3), 723.3(b) MBL program management oversight responsibilities and required MBL experience. The proposed rule adds more discrete provisions for the roles and responsibilities of the board of directors, senior management, and commercial lending staff. It also clarifies that the credit union must provide oversight for third parties used to conduct the credit union s commercial lending related work. Reason for Proposed Change and Effect This change and clarification was suggested by credit union MBL lenders. It better reflects how loan-to-value ratios are customarily calculated for commercial loans. The term was added to support the flexibility to exceed the single obligor limit. The clarification aligns with current supervisory expectations and customary risk management practices. Replaces the explicit two-year experience requirement in favor of a more flexible principles-based approach that considers the overall experience of the staff involved in the credit union s commercial lending program. These proposed provisions align with current supervisory expectations and customary governance roles for institutions involved in commercial lending. 25

36 Appendix - Summary of Proposed MBL Rule Change (page 4 of 7) Proposed MBL Rule Section Summary of Proposed MBL Rule Change COMMERCIAL LOAN POLICY 723.4(c) Limit on single obligor loans. The proposed rule moves the current rule s single obligor limit of 15 percent of net worth into the policy requirement, and removes the related waiver provision. The proposal provides for the limit to be as high as 25 percent of net worth if supported by readily marketable collateral (e) 723.4(f) 723.4(g) NCUA expectations for commercial loan policy underwriting. The proposed rule specifies the policy must address delegated lending authority and the loan approval process. The proposed rule adds additional details on how the policy needs to address underwriting standards. The proposed rule adds additional details on how the policy needs to address risk management processes for commercial lending. Reason for Proposed Change and Effect The change supports the elimination of regulatory waivers in the commercial lending process, but maintains a critical prudential limit on concentrations of credit to a single borrower. Without the need for a waiver, credit unions could choose to go up to 25 percent of net worth for a single obligor if the amount above 15 percent of net worth is collateralized by readily marketable collateral. This change parallels how the regulatory limit is applied by the other banking agencies. This minor clarification aligns with current supervisory expectations and customary risk management practices. The change provides clarification on how credit unions must address underwriting standards. It is consistent with current supervisory expectations and customary risk management practices. The change provides clarification on how credit unions must address commercial lending risk management processes. It is consistent with current supervisory expectations and customary risk management practices. 26

37 Appendix - Summary of Proposed MBL Rule Change (page 5 of 7) Proposed MBL Rule Section COLLATERAL AND SECURITY 723.5(a) 723.5(b) Summary of Proposed MBL Rule Change Loan-to-value requirements. The proposed rule replaces the current rules prescriptive loan-to-value requirements, and unsecured lending limit, with the principle that sufficient collateral is obtained when warranted and in relation to the risk. Personal loan guarantees. The proposed rule replaces the requirement for a personal guarantee or waiver with the requirement the credit union document for commercial loans without a personal guarantee that mitigating factors offset the risk of not having the personal guarantee CONSTRUCTION AND DEVELOPMENT (C&D) LOANS Removes C&D limit. The proposed rule eliminates the prescriptive portfolio limit of 15 percent of net worth for construction and development loans in the current rule. Reason for Proposed Change and Effect The change provides credit unions with flexibility in setting their own unsecured portfolio limits and loan-to-value requirements. It also eliminates the need for regulatory waivers under the current rule. The change provides credit unions with flexibility in setting their own underwriting criteria related to personal guarantees. It also eliminates the need for regulatory waivers under the current rule. The change provides credit unions with flexibility in setting their own prudent limit for their C&D portfolio. It also eliminates the need for regulatory waivers, and the related waiver provisions in the current rule. 27

38 Appendix - Summary of Proposed MBL Rule Change (page 6 of 7) Proposed MBL Rule Summary of Proposed MBL Rule Change Section CONSTRUCTION AND DEVELOPMENT (C&D) LOANS (Cont.) 723.6(a) and (b) 723.6(c) Definition of C&D loan, and determination of collateral values. The proposed rule clarifies the definition of a C&D loan. It also clarifies how collateral values for C&D loans are determined. C&D Loan Disbursement Process. The proposed rule provides more detail to the current rule s requirement related to the disbursal of funds for C&D loans PROHIBITED ACTIVITIES Reason for Proposed Change and Effect The definition was changed for clarification. It also addresses questions received from credit unions and examination staff and better reflects how collateral values are customarily calculated for C&D loans. The change provides more specificity on the minimum requirement for disbursement of funds for construction and development loans, consistent with current supervisory expectations and customary construction and development lending practices The proposed rule reorganizes existing prohibitions into one section. The reorganization imposes no substantive change AGGREGATE MEMBER BUSINESS LENDING LIMIT; EXCLUSIONS AND EXCEPTIONS 723.8(a) MBL cap expressed as multiple of net worth, not percentage of assets. The proposed rule modifies the regulation to better conform to the statutory language for the MBL cap. Credit unions with a higher net worth requirement under the risk-based standard than the net worth ratio requirement would have a higher MBL cap. The change is consistent with the Federal Credit Union Act. 28

39 Appendix - Summary of Proposed MBL Rule Change (page 7 of 7) Proposed MBL Rule Section Summary of Proposed MBL Rule Change Reason for Proposed Change and Effect AGGREGATE MEMBER BUSINESS LENDING LIMIT; EXCLUSIONS AND EXCEPTIONS (cont.) 723.8(b), 723.8(c) Defines a MBL for purposes of the statutory cap (d) Statutory MBL cap exemptions. The proposed rule deletes from the current rule obsolete provisions related to the evidentiary documentation necessary to demonstrate qualification for the exemption for credit unions that had a history of primarily making member business loans TRANSITIONAL PROVISIONS Existing enforcement constraints or waivers. The proposed rule specifies how any outstanding commercial lending waivers or supervisory enforcement actions would be affected upon implementation of the proposed rule. The change clarifies non-member business loans and participations in non-member business loans made by another lender would not be subject to the MBL cap. It also eliminates the need for a regulatory waiver of such loans from the MBL cap. The change eliminates an obsolete provision. The change provides added clarification on how the proposal would affect existing enforcement constraints and waivers. 29