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In 2015 the National Credit Union Administration (NCUA) proposed significant changes to the regulations regarding member business lending (Part 723). With the recent final approval from the NCUA Board, the new rules, effective January 1, 2017, will replace the current prescriptive regulations with a more principal-based regulation approach providing credit unions with more flexibility and freedom in granting commercial loans. The exception to this is the updated rules governing personal guarantees, which will go into effect 60 days after the new rules are published in the Federal Register.
Below are some of the highlights of changes made in the new rules that will impact credit unions’ member business lending operations.
Although the new rules will give credit unions greater latitude in making commercial loans, they also impose greater responsibilities. Credit unions will be required to demonstrate sound judgement in originating commercial loans, and control systems will need to be appropriate for the risk inherent in the business loan portfolio.
Additionally, waiving the personal guarantees on business credits or increasing loan-to-value ratios can significantly raise the risk profiles within those credits. Having policies in place to specify when these practices are permitted, as well as loan presentations should help justify the practice to regulators during an exam. Loans with limited or no guarantees, and high loan-to-value ratios must now be tracked and monitored. Not to mention, pricing policies should also factor in the increased risk inherent in the structure of each loan.
With these new changes, if your credit union is not already in the commercial lending business, there is no better time than now to capitalize on the momentum it has gained in the industry. Having a full understanding of all the rules and their effects on your lending governance and risk profile is important. Rely on Doeren Mayhew’s credentialed team of lending specialists to help you navigate the complexities of today’s lending regulations and environment.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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