While it’s valid for the NCUA to make risk management a priority when it comes to business lending, recent guidance from the regulator could hinder and discourage credit unions and CUSOs running solid programs.
NACUSO expressed those concerns in a recent letter to Larry Fazio, NCUA director of examination and insurance, regarding the agency’s letters to credit unions that deal with the safety and soundness of business lending programs.
“While we recognize that the NCUA must prioritize all areas of risk management in order to be an effective safety and soundness regulator and that business lending carries with it–if not managed properly–a significant risk that the agency must monitor,” NACUSO wrote. “The reality is that all business lending CUSOs and credit unions should not be subjected to unnecessary regulatory and compliance burden because a couple of high profile credit unions and CUSOs generated losses in the business lending field.”
NACUSO said the NCUA’s Letter to Credit Unions 13-CU-02 and Supervisory Letter 13-01 “are in danger of hindering and even discouraging those credit unions and CUSOs that are running solid business lending programs and, in doing so, providing needed diversification to loan portfolios and a vital loan income source during a challenging period of tighter margins and enhanced competition.”
The association said it is most concerned about what appears to be a checklist approach to granting personal guarantee waivers. A personal guarantee is the rule and a waiver is an exception to the general rule of requiring a personal guarantee that a lender would grant only in certain circumstances of an individual loan, its collateral and the proven creditworthiness of the borrower, NACUSO noted.
As a result, a personal guarantee provides additional security for repayment of the loan and is often necessary to mitigate the risk of making a loan. It is not the primary source of repayment as a personal guarantee is only enforced if the borrower defaults on the loan and the collateral, upon liquidation, is insufficient to repay the borrower’s obligations.
However, the personal guarantee has value in the cases of such a deficiency and carries with it what is viewed by the borrowing principals that the individuals intend to repay the loan and have an equity stake in doing so, the group added.
“While we believe the previous RegFlex system of an automatic waiver authority being granted to credit unions with solid CAMEL ratings and strong net worth worked much more efficiently and put credit unions on equal footing with community banks, the regional directors have worked hard to manage their difficult position smoothly and to approve a significant number of appropriate waiver requests,” NACUSO wrote.
Guy Messick, general counsel for NACUSO, reiterated the point by saying credit unions could be at a competitive disadvantage.
“It just removes the ability of credit unions to serve segments of the marketplace that is going to be extremely beneficial to them,” Messick said.
NACUSO said the regional directors appropriately deferred to the credit union experts on the loan details knowing that each loan is unique and circumstances certainly justify at times that the lender will make an exception to the personal guarantee.
“Again, while less than ideal, this system at least held in place the notion that commercial lending is not one-size-fits-all and that there is no cookie cutter approach that can be taken on individual business loans,” NACUSO wrote.
“If regional directors took into consideration the past relationship of a business member with the credit union when considering granting a personal guarantee waiver rather than prohibit personal guarantees if there is not a five year relationship,” NACUSO wrote, “credit unions would have the flexibility to add members who have investment-grade credit, providing valuable diversification and not losing them to banks who are not restricted by the personal guarantee requirement.”
NACUSO President/CEO Jack Antonini said he continues to hear about the number of former bankers that are hired in the business and commercial lending space within the credit union industry.
“They bring their relationships with them. They have the ability to make loans,” Antonini said. “We just feel that [the NCUA] is being overly cautious. Why do we want to impose a new regulation? You don’t have to apply a cookie cutter approach. Allow for some exceptions for those that have strong programs.