Compliance Blog

Attention all credit union commercial lenders: NCUA has released its September 2017 Call Report Information, including the 3Q17 5300 Formand 5300 Form Instructions.  The new 5300 Form and Instructions, effective September 30, 2017, include revisions to reflect the amendments to NCUA's commercial lending and member business loan (MBL) rule that became fully effective on January 1, 2017. 

Hopefully, credit unions engaging in commercial lending activities are already implementing the new changes and are prepared to identify and start reporting on MBLs and commercial loans this fall.  However, if you are still orienting yourself to the new changes, the 3Q17 5300 Call Report Instructions provide additional guidance that may help to clarify what qualifies as a commercial loan under the new rule.

By way of brief background, a key aspect of the new principles-based rule is its expanded scope to apply to commercial loans as newly defined by the rule.  In the past, Part 723 did not distinguish between commercial loans and MBLs—which are expressly defined in the FCU Act. As a result, the safety and soundness risk management requirements contained in the former MBL rule were not consistently applied to commercial loans that did not qualify as MBLs. See, 80 Fed. Reg. 37898.  Thus, the amended rule has two separate and distinct objectives.  First, the rule establishes safety and soundness requirements for credit unions that engage in commercial lending to their members.  Second, the rule incorporates the statutory cap on the aggregate amount of MBLs that a federally-insured credit union may make.  In furtherance of these two objectives, the rule relies upon two separate definitions: "commercial loans" and "member business loans."  The MBL definition is narrowly limited to its statutory definition and for the specific purpose of applying the statutory MBL cap. See, 12 C.F.R. §723.8.

While the new commercial loan definition is fundamental to the scope and application of the risk management provisions of the revised rule, it is somewhat confusing to apply.  The 3Q17 Instructions to Schedule A – Specialized Lending (NCUA Form 5300 - Page 16) provides a helpful table to illustrate the distinction between MBLs and commercial loans for purposes of Part 723:

Still confused?  The 3Q17 Instructions also provide some examples to illustrate the commercial loan definition:

"A member has $35,000 in commercial purpose loans and the credit union grants this member an additional $40,000 in a commercial purpose line of credit, the credit union should report both loans as commercial loans as of the date of the second loan is granted regardless of whether the line is drawn on.

In this example, the same member subsequently paid down the $35,000 commercial purpose loan to $15,000 and has a $34,000 balance on the business line of credit, making the total outstanding balance $49,000.The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is still $55,000. The credit union is required to list both of these loans as commercial loans.

If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and the credit union reduces the line of credit to $34,000. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans.

If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and makes no change to the $40,000 business line of credit, but adds $6,000 to a secured share account at the credit union. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans."

Additionally, the 3Q17 Instructions give some examples of how MBLs should be reported:

"If a member has $35,000 in business purpose loans and the credit union grants this member an additional $40,000 in business purpose loans, the credit union should report the additional $40,000 as a Member Business Loan.

If, in the case above, the member subsequently pays down the $35,000 business purpose loan to $15,000 and the $40,000 business loan to $34,000, making the aggregate total business purpose loans $49,000, the credit union is not required to list any of these loans as Member Business Loans since the new aggregate loan total is $49,000 and is now below the $50,000 threshold in §723.8(c) of NCUA’s Rules and Regulations."

It is worth noting that the commercial loan and MBL reporting examples in the 3Q17 Instructions are generally consistent with previous agency guidance addressing a credit union's MBL reporting requirements once the aggregate of the total business purpose loans to a member are paid down below $50,000, as well as a 2016 NCUA legal opinion indicating that when a single closed-end MBL falls below the $50,000 threshold, the loan is no longer classified as an MBL for purposes of the MBL cap.  See, NCUA Legal Opinion Letter 16-0604.  The 3Q17 Instructions clarify that a similar analysis applies in the reporting of commercial loans that are paid down below the regulatory dollar threshold.