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.

Highlights of Rule Changes

Below are some of the highlights of changes made in the new rules that will impact credit unions’ member business lending operations.

  • Removes the requirement for full and unlimited guarantee(s) of the principal(s) of a business. This allows credit unions to grant commercial loans that don’t have personal guarantees without obtaining specific waivers from the NCUA.
  • Eliminates explicit loan-to-value limits and replaces them with the principle that commercial loans should be properly secured by appropriate collateral. Credit unions will no longer need to obtain specific waivers for loans exceeding a prescribed loan-to-value.
  • Abolishes the 15 percent of net worth aggregate limits on construction and development loans.
  • Draws a distinction between commercial loans and member business loans (MBLs). Specifically, business loan participations are not considered MBLs and do not count toward the statutory limit of 1.75 times net worth. However, business loan participations are considered commercial loans for the purposes of safety and soundness, which credit unions are required to demonstrate are handled prudently.

Greater Flexibility, Greater Responsibility

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.