Compliance Blog

 Written by Alicia Nealon, Director of Regulatory Affairs

In case you didn’t see, NCUA’s MBL proposal was published in Federal Register last week, and the comment deadline has been set for August 31^st.  With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the proposal and highlight the key issues that we are looking for your feedback on.  Today’s topic is the scope of the proposal.  Specifically, how the proposal would define and treat “commercial loans” versus “MBLs” – and how the distinction between the two would trigger different regulatory requirements.

NCUA’s MBL proposal would comprehensively overhaul the way that the agency approaches commercial lending, from both a regulatory and supervisory perspective. Currently, Part 723 considers commercial lending as synonymous with the member business lending definition under the Federal Credit Union Act (FCU Act). This proposal, however, would expand Part 723’s scope to apply to commercial loans as newly defined under the proposal. So what is that definition? Well, its pretty broad and would generally include any credit extended for commercial, industrial, agricultural or professional purposes…..But this wouldn’t be the Compliance Blog if NAFCU didn’t give you the direct citation

“Commercial loan means any loan, line of credit, or letter of credit (including any unfunded commitments), and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for investment or personal expenditure purposes. Excluded from this definition are loans made by a corporate credit union; loans made by a federally insured credit union to another federally insured credit union; loans made by a federally insured credit union to a credit union service organization; loans secured by a 1- to 4- family residential property (whether or not it is the borrower’s primary residence); any loan(s) to a borrower or an associated borrower, the aggregate balance of which is equal to less than $50,000; any loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions; and loans secured by a vehicle manufactured for household use.” 

Loans falling under this definition would trigger the proposal’s safety and soundness risk management provisions, which would require a credit union to develop a full commercial loan, Board-approved policy, and commercial lending organizational infrastructure.  But would loans falling under this definition count towards the cap? As is always the case in our world of regulatory compliance, it depends….

The proposal includes several distinctions between commercial loans and a statutorily defined MBL.  All commercial loans are subject to the proposal’s safe and soundness requirements, whether MBLs or not, but only MBLs, as defined by the FCU Act, are subject to the cap. 

So how do these distinctions interplay? Well, we end up with some loans that are subject to the proposed safety and soundness provisions, but are not MBLs and therefore do not count towards the cap. Specifically, any commercial, industrial, agricultural, or professional loan in which a federal or state agency (or its political subdivision) has committed to fully insure repayment, fully guarantee payment, or provide an advance commitment to purchase the loan in full is a commercial loan but not an MBL.  Also, any non-member loan or non-member participation interest in a commercial, industrial, agricultural, or professional loan is a commercial loan but generally not an MBL.

On the other hand, there are two types of loans that are not commercial loans subject to the proposed safety and soundness provisions but they are MBLs and thus, must be counted against the credit union’s net member business loan balance. Specifically, loans secured by a 1- to 4- family residential property that is not the borrower’s primary residence, and loans secured by a vehicle manufactured for household use that will be used for a commercial purpose are generally not commercial loans, but they are MBLs.

Is your head spinning yet? Mine sure is, so hopefully this chart will help you and me both keep it straight:

* If the outstanding aggregate loan balance is greater than $50,000.

Over the next few weeks, NAFCU’s Compliance blog will be breaking down more specific aspects of the proposal, and posing questions for the industry to consider.  In the meantime,be sure to take a look at NAFCU’s Regulatory Alert 15-EA-16, our Member Business Lending Issue Page, or reach out to me directly (anealon@nafcu.org, 703-842-2266) with your questions or thoughts.