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Proposed Member Business Loan Rule Gives Credit Unions Flexibility, Opportunity

June 2015
Proposed Member Business Loan Rule Gives Credit Unions Flexibility, Opportunity

Board Action Bulletin

ALEXANDRIA, Va. (June 18, 2015) – The National Credit Union Administration Board convened its sixth open meeting of 2015 at the agency’s headquarters here today and unanimously approved five items:

  • A proposed rule giving federally insured credit unions greater flexibility and autonomy in safely and soundly offering member business loans;
  • A recommendation to extend the current interest-rate ceiling on most federal credit union loans through March 10, 2017 to help federal credit unions remain competitive;
  • A notice under the Economic Growth and Regulatory Paperwork Reduction Act of 1996—part of the agency’s ongoing regulatory review process—to identify rules for possible modification, simplification or repeal covering corporate credit unions; directors, officers and employees; and money laundering;
  • A final policy statement creating a Minority Depository Institution Preservation Program to support minority credit unions; and
  • A final interagency rule amending regulations on loans in areas with special flood hazards.

The Office of Minority and Women Inclusion also briefed the Board on the final interagency policy statement on assessing diversity policies and practices among federally regulated financial services institutions.

NCUA Proposes Modernized Member Business Lending Rule
Credit unions would have greater freedom in making decisions about commercial lending under a proposed member business lending rule (Part 723) approved by the Board. The proposed rule is the latest effort to cut regulatory burdens under NCUA’s Regulatory Modernization Initiative.

“This is the right approach at the right time,” NCUA Board Chairman Debbie Matz said. “It’s appropriate to move away from prescriptive regulatory limits to general principles providing credit unions with greater flexibility to serve their member businesses. Commercial lending may not be appropriate for every credit union, but that’s a strategic decision for each board of directors to make. Credit unions know their members better than we do, and this modernized business lending rule reflects that reality.”
The credit union system’s total member business lending portfolio has grown from $4 billion in 2000 to $51 billion in 2015, a twelve-fold increase. Yet, delinquencies and charge-offs for commercial loans at credit unions overall indicate solid performance.

Member business lending, Matz said, also offers important benefits by diversifying loan portfolios to improve the ability of credit unions to withstand economic downturns and by making important investments in local economies to create jobs and expand access to local goods and services.

“As I’ve traveled the country to hold Listening Sessions and speak at credit union conferences, I’ve heard directly from credit union officials about specific operational challenges they face with NCUA’s current member business lending rule,” Matz said. “This new proposed rule completely rewrites the current rule to address those challenges and remove unnecessary burdens.”

Among other improvements, the proposed rule would replace the current rule’s requirements and limitations on collateral and security requirements, equity requirements and loan limits. Key changes include:

  • Giving credit union loan officers the ability to waive a personal guarantee;
  • Removing explicit loan-to-value limits and eliminating the need for a waiver process;
  • Lifting limits on construction and development loans; and
  • Clarifying that non-member loan participations will not count against the statutory member business lending cap.

The proposed rule would empower credit unions to write their own policies and limits. Nearly 700 credit unions that currently engage in a small level of commercial lending would be exempt from the requirement to establish a policy.

If the proposed rule is adopted, NCUA would conduct specialized training for examiners at a one-time cost of about $1.9 million before implementing the rule. NCUA also would provide supervisory guidance for credit unions.

Comments on the proposed rule, available here, must be received within 60 days of publication in the Federal Register.

Loan Rate Ceiling Extended through March 2017
After reviewing trends in money-market rates, current conditions among federal credit unions and consumers’ needs, the NCUA Board voted to extend the current interest-rate cap of 18 percent on most federal credit union loans through March 10, 2017.

Nearly two-thirds of federal credit unions offer loan products that would be affected by a reduction in the interest-rate ceiling. A reduction in the loan rate cap could reduce loan volume at those credit unions, impair earnings and place additional pressure on net interest income.

“In my view, the most important reason to prevent the current rate ceiling from falling is to allow federal credit unions to continue serving borrowers with low credit scores and providing needed access to short-term credit,” Matz said. “Reducing the rate to the statutory 15 percent, for example, would remove the affordable alternative to payday loans offered by 536 federal credit unions. If the rate ceiling was reduced to 15 percent, I know, from first-hand experience working in a federal credit union, it would be difficult to cover the costs of such short-term loans.”

The Federal Credit Union Act caps the interest rate on federal credit union loans at 15 percent, but the law also gives the NCUA Board discretion to raise that limit for 18-month periods. The current 18-percent ceiling has remained in place since May 1987. The 18-percent cap applies to all federal credit union lending, except originations made under NCUA’s consumer-friendly Payday Alternative Loan program, which are capped at 28 percent.

Using prudent risk-based lending standards, higher interest rates account for lower credit scores and higher default rates.

The Board will continue to monitor market rates and credit union financial conditions to determine whether a change should be made to the maximum loan rate. The Board may take action sooner than 18 months if circumstances warrant.

Board Seeks Comments on Modifying and Repealing Regulations
Credit union stakeholders and the general public will have an opportunity to comment on three categories of NCUA regulations after the Board approved a notice and request for comment.

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires the Federal Financial Institutions Examination Council and its federal banking agency members to review their regulations every 10 years to identify regulations that might be outdated, ineffective, unnecessary or unduly burdensome. NCUA is exempt from this requirement, but voluntarily participates in the interagency process.

The three categories of rules covered in this latest review will be corporate credit unions; directors, officers and employees; and money laundering. In all, stakeholders may comment on 10 existing rules.

“NCUA’s voluntary participation in this process, which complements our own rolling three-year rules review and my Regulatory Modernization Initiative, has helped the agency take action to ease regulatory burdens on credit unions,” Matz said. “We look forward to the ideas we anticipate receiving during this new comment period, and we will consider every recommendation to improve regulations.”

Comments under this notice, available here, must be received within 90 days of publication in the Federal Register.

Board Approves Minority Depository Institution Preservation Program
Minority credit unions will be eligible for technical assistance and educational opportunities under NCUA’s Minority Depository Institution Preservation Program approved by the Board.

“With the adoption of this policy statement, NCUA has put in place a robust program to preserve minority credit unions,” Matz said. “These institutions play a vital role in their communities, and they are often the only insured financial institutions within the community. We need to support them and ensure their long-term success.”

Seventy-one percent of minority credit unions also carry the low-income credit union designation, reflecting their importance to underserved populations and making them eligible for grants and low-cost loans from NCUA’s Office of Small Credit Union Initiatives.

The goals of the preservation program include:

  • Preserving existing Minority Depository Institutions and encouraging new ones;
  • Maintaining the minority character of these institutions that are voluntarily merged or acquired; and
  • Providing technical assistance, training and educational programs.

Minority credit unions are eligible for no-cost consulting services from NCUA’s Office of Small Credit Union Initiatives. Currently, 45 minority credit unions are receiving this free assistance to address strategic planning, new product development and marketing needs.

Minority credit unions seeking to partner with other minority credit unions also can sign up for NCUA’s National Merger Partner Registry.

A federally chartered credit union will qualify as a Minority Depository Institution eligible to participate in the preservation program if a majority of members, board members and members of the community fall within one or more of five categories: African American, Native American, Hispanic American, Asian American or Multi-Racial American.

The preservation program, designed to achieve goals set under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, will be administered by NCUA’s Office of Minority and Women Inclusion. The establishment of a Minority Depository Institution Preservation Program is required by Section 367 of the Dodd-Frank Act.

The final Interpretive Ruling and Policy Statement, available here, will become effective 60 days after publication in the Federal Register.

Voluntary Standards Will Help Credit Unions Assess Diversity
Credit unions have a new tool to voluntarily review and evaluate their policies and practices on diversity under a final Interagency Policy Statement outlined by the Office of Minority and Women Inclusion. Section 342 of the Dodd-Frank Act requires federal financial services regulators to develop diversity assessment standards for their regulated entities.

“These standards are not one-size-fits-all,” Matz said. “They have been designed to be flexible, to assist credit unions of all sizes and locations that want to enhance diversity.”

Credit union officials were consulted during the development of the diversity standards.

“They provided valuable insights into their existing diversity programs, successes and challenges,” Matz said. “Many credit unions demonstrate that diversity best practices are also good business practices. Hiring qualified staff and vendors that reflect the diversity of each credit union’s field of membership enriches the employee experience, enhances output, and extends member outreach.”

The voluntary assessment standards will not be part of the examination or supervisory process and do not create any new legal obligations.

Later this week, NCUA will provide credit unions with a guidance letter on the new standards and a sample self-assessment checklist to help them gauge their diversity policies and efforts. The agency cannot begin accepting voluntarily submitted diversity self-assessments until receiving approval from the U.S. Office of Management and Budget later this year. NCUA will then compile the diversity data and report the aggregate information to Congress.

The standards address four key areas:

  • Organizational commitment to diversity and inclusion;
  • Workforce profile and employment practices;
  • Procurement and business practices to promote supplier diversity; and
  • Practices to promote transparency of organizational diversity and inclusion.

In developing these standards, the six responsible agencies focused primarily on institutions with at least 100 employees. Federal law already requires those institutions to file annual diversity reports to the Equal Employment Opportunity Commission.

The Board unanimously approved the policy statement on May 26. The policy statement, available here, became effective upon publication in the Federal Register June 10.

The Federal Register notice also asks for public comments on the information collection aspects of the final joint standards as required by the Paperwork Reduction Act. Comments are due by Aug. 10, 2015. The effective date of the collection of information will be announced in the Federal Register following Office of Management and Budget approval.

Final Interagency Flood Insurance Rule Approved
The Board approved a final interagency rule (Part 760) to amend regulations covering loans in areas with special flood hazards.

NCUA and four other federal financial services regulatory agencies jointly prepared the rule to amend federal flood insurance regulations and implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014. The rule requires the escrow of flood insurance payments on residential improved real estate securing a loan, incorporates an exemption for certain detached structures and clarifies provisions relating to the forced placement of flood insurance when homeowners’ policies lapse or are insufficient.

The rule’s flood insurance escrow provisions would only apply to credit unions with more than $1 billion in assets. Thus, more than 96 percent of credit unions would be exempt from the flood insurance escrow requirements.

Parts of the final rule, available here, become effective Oct. 1, 2015, and others have an effective date of Jan. 1, 2016.

NCUA tweets all open Board meetings live. Follow @TheNCUA on Twitter, and access Board Action Memorandums and NCUA rule changes at NCUA also live streams, archives and posts videos of open Board meetings online.

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