With the NCUA beating the drum even louder lately to increase the member business lending cap, the regulator is still aware of the troubled loan portfolios that have plagued some credit unions.
John McKechnie, NCUA director of public and congressional affairs, said the agency supports efforts currently underway in Congress to increase the MBL cap statutorily, in tandem with the gradual, incremental approach that includes additional regulatory safeguards. However, weaknesses in the commercial real estate market have led to increased supervision of business loans.
"Credit risk has been an area of emphasis for the past few years at NCUA and remains so. This includes all forms of loan products, including MBLs," McKechnie said. "We are not specifically targeting MBLs. Instead, any credit union showing signs of stress is receiving additional oversight from NCUA."
McKechnie said there isn't a specific number of credit union MBL programs currently on the NCUA's radar but "each credit union with advanced levels of supervision are aware of the situation." The regulator will move forward with stepped-up scrutiny based on resources allocation, quarterly analysis and exam results.
"As Chairman Matz frequently notes, member business lending can be a valuable service offering for consumers if properly supervised by NCUA and prudently managed by the credit union," McKechnie said.
Meanwhile, as industry trade groups and legislators keep the heat on in Washington to increase the MBL cap from 12.25% of assets to 27.5%, the agency remains watchful for red flags such as rapid MBL growth or expansion, McKechnie said. The ability to properly underwrite and monitor loans is also critical as is having experienced staff in place to carry out those duties.
"Several of the most troubled credit unions receiving additional degrees of supervision offer member business loans. Each case presents a unique set of facts and circumstances that require a customized supervision approach, so there isn't anything specific structured or developed to focus exclusively on MBLs," McKechnie said.
The NCUA still has specially trained staff at both the regional and national office level that focus on MBLs and other more complex credit risk issues, McKechnie reminded. Like with any area of risk, the NCUA performs custom analysis of quarterly Call Report data and couples it with the qualitative examination information available to identify those credit unions presenting the greatest risk to the NCUSIF.
The NCUA has also partnered with the Federal Financial Institutions Examination Council agencies to develop commercial real estate workout guidance in an effort to improve standards used by lenders when they are faced with business loans that are not performing as anticipated, McKechnie noted.
To the argument that credit unions may not have the experience and long-term analysis to prevent MBL losses, McKechnie said elevated credit risk in a credit union is often attributable to a combination of factors, including broader financial and economic issues that lead to stress on the borrower to meet repayment terms.