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NCUA Board Modernizes Member-Business Lending Rule to Provide Flexibility

February 2016
NCUA Board Modernizes Member-Business Lending Rule to Provide Flexibility

Board Action Bulletin

Share Insurance Fund Continues Positive Trends in 2015

ALEXANDRIA, Va. (Feb. 18, 2016) – The National Credit Union Administration Board held its second open meeting of 2016 at the agency’s headquarters here today and approved a final rule giving federally insured credit unions greater flexibility and autonomy to offer member-business loans in a safe and sound manner.

The Chief Financial Officer also briefed the Board on the performance of the National Credit Union Share Insurance Fund, which had a net income of $61.3 million for 2015.

Final Member-Business Lending Rule Ushers in a “New Era”

Credit unions will have greater latitude to make commercial lending decisions under a new member-business lending rule (Part 723) unanimously approved by the Board.

“With this final rule, we begin a new era,” NCUA Board Chairman Debbie Matz said. “Today, the vast majority of credit unions making these loans have well-established member-business lending infrastructures and risk management in place.  So, it is time to transition from prescriptive limits to over-arching principles that will provide greater flexibility for credit unions to serve more member businesses.”

Part of the agency’s Regulatory Modernization Initiative, the final rule moves from prescriptive limits on credit unions—such as collateral and security requirements, equity requirements and loan limits—to principles-based regulation. As such, the rule eliminates the current member-business loan waiver process.

The increased flexibility provided by the final rule will give federally insured credit unions greater autonomy to develop and maintain member-business lending programs that best fit their members’ needs and strategic goals. Credit unions making member-business loans will need to have the people, processes and policies in place to ensure safety and soundness.

Key changes in the final rule include:

  • Giving credit union loan officers the ability, under certain circumstances, to not require a personal guarantee;
  • Replacing explicit loan-to-value limits with the principle of appropriate collateral and eliminating the need for a waiver;
  • Lifting limits on construction and development loans;
  • Exempting credit unions with assets under $250 million and small commercial loan portfolios from certain requirements; and
  • Affirming that non-member loan participations do not count against the statutory member-business lending cap.

The changes finalized today are fully consistent with the requirements of the Federal Credit Union Act. The final rule does not expand credit unions’ business loan authority or modify the statutory limit on member-business lending.

Speaking about the benefits of the rule, Matz said, “Safely expanding business lending will diversify portfolios and revenue sources, improving the ability of credit unions to withstand economic downturns. It will also grow small businesses, which may not be able to obtain capital from other sources, and strengthen communities by creating jobs and fostering economic development.”

The credit union system’s total member-business lending portfolio has grown 14-fold, to $56 billion, from only $4 billion in 2000. Federally insured credit unions have generally conducted business lending safely, and the vast majority of credit unions making these loans today have well-established business lending infrastructures and solid risk management in place. Declining delinquencies and charge-offs for credit unions’ commercial loans overall indicate the solid performance of these loans.

The rule empowers credit unions to write their own policies and limits appropriate to servicing members and within their capacity. Approximately 660 smaller credit unions that currently engage in a small level of commercial lending would be exempt from the requirement to establish a commercial loan policy and hire commercial lending staff.

Additionally, the new member-business lending rule establishes a baseline minimum safety and soundness standard to protect the Share Insurance Fund. States may choose to impose higher standards, but not lower. The seven states with pre-approved member-business lending rules are grandfathered, and any state may submit a new rule for NCUA review.

No additional funds will be budgeted to implement the final rule. An incremental one-time cost of $960,000 in 2016 for staff training is already included in the Board-approved 2016 Operating Budget. NCUA also will train state examiners and provide supervisory guidance for examiners and credit unions before the full implementation date.

Most provisions of the final rule, available online here, become effective Jan. 1, 2017. Removal of the personal guarantee requirement is effective 60 days after publication in the Federal Register.

Share Insurance Fund Continues Strong Positive Trends

The Share Insurance Fund ended 2015 in a strong position due to continued improvement in the performance of federally insured credit unions, a strengthening economy and a decline in insurance and guarantee program liabilities.

The Share Insurance Fund ended 2015 with a 1.26 percent equity ratio. NCUA calculated the ratio on an insured share base of $961.3 billion, a 6.5 percent increase from the previous year’s insured base of $903 billion. When the Share Insurance Fund bills for the one percent capital deposit adjustment in March, the equity ratio is projected to increase to 1.29 percent.

The net position of the Share Insurance Fund was $12.2 billion at the end of 2015.

“The staff overseeing the Share Insurance Fund has an important responsibility, and the fund’s solid financial performance, backed by seven consecutive clean audits, clearly demonstrates how well they assume that responsibility,” Matz said. “NCUA’s first priority is to protect the fund and the deposits of more than 102 million credit union member accounts, and we take that job very seriously.”

Backed by the full faith and credit of the U.S. Government, the Share Insurance Fund insures member accounts up to $250,000. No member of a federally insured credit union has ever lost a penny of shares insured by NCUA.

Overall, the amount of assets in CAMEL codes 3, 4 and 5 credit unions has decreased 52.2 percent since peaking at $205.6 billion in September 2010. The continuation of these positive trends and other factors contributed to a net decrease of $13.4 million, or 7.5 percent, in the Share Insurance Fund’s reserve for insurance losses during 2015.

Year over year, the Chief Financial Officer reported:

  • The number of CAMEL codes 4 and 5 credit unions fell 20.3 percent to 220 at the end of 2015, down from 276 at the end of 2014.
  • Assets in CAMEL codes 4 and 5 credit unions fell 25.2 percent to $8.6 billion at the end of 2015, down from $11.5 billion at the end of 2014.
  • The number of CAMEL code 3 credit unions declined 10.6 percent to 1,261 at the end of 2015, down from 1,411 at the end of 2014.
  • Assets in CAMEL code 3 credit unions declined 6.0 percent to $89.7 billion at the end of 2015, down from $95.4 billion at the end of 2014.

There were 16 involuntary liquidations and assisted mergers during 2015, compared to 15 credit union failures in 2014. The total amount of losses associated with failures in 2015 was $14.8 million, a decrease of 63.4 percent from $40.4 million the previous year. Fraud was a contributing factor in 11 of these failures, at a cost of $12.3 million during 2015, compared to 7 of 15 failures in 2014 at a cost of $36.5 million.

The Chief Financial Officer also reported the Share Insurance Fund and the agency’s three other permanent funds—the Operating Fund, the Central Liquidity Facility and the Community Development Revolving Loan Fund—each received an unmodified, or “clean,” audit opinion with no reportable conditions for 2015 from the agency’s independent auditor, KPMG LLP.

Because of the positive performance, NCUA did not assess a Share Insurance Fund premium in 2015. At the Board’s open meeting in November 2015, the Board received a briefing on the proposed premium range for 2016. Staff recommended a range of zero to six basis points.

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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