While it's valid for the NCUA to make risk management a prioritywhen it comes to business lending, recent guidance from theregulator could hinder and discourage credit unions and CUSOsrunning solid programs.

NACUSO expressed those concerns in a recent letter to LarryFazio, NCUA director of examination and insurance, regarding theagency's letters to credit unions that deal with the safety andsoundness of business lending programs.

“While we recognize that the NCUA must prioritize all areas ofrisk management in order to be an effective safety and soundnessregulator and that business lending carries with it–if not managedproperly–a significant risk that the agency must monitor,” NACUSOwrote. “The reality is that all business lending CUSOs and creditunions should not be subjected to unnecessary regulatory andcompliance burden because a couple of high profile credit unionsand CUSOs generated losses in the business lending field.”

NACUSO said the NCUA's Letter to Credit Unions 13-CU-02 andSupervisory Letter 13-01 “are in danger of hindering and evendiscouraging those credit unions and CUSOs that are running solidbusiness lending programs and, in doing so, providing neededdiversification to loan portfolios and a vital loan income sourceduring a challenging period of tighter margins and enhancedcompetition.”

The association said it is most concerned about what appears tobe a checklist approach to granting personal guarantee waivers. A personal guarantee is the ruleand a waiver is an exception to the general rule of requiring apersonal guarantee that a lender would grant only in certaincircumstances of an individual loan, its collateral and the provencreditworthiness of the borrower, NACUSO noted.

As a result, a personal guarantee provides additional securityfor repayment of the loan and is often necessary to mitigate therisk of making a loan. It is not the primary source of repayment asa personal guarantee is only enforced if the borrower defaults onthe loan and the collateral, upon liquidation, is insufficient torepay the borrower's obligations. 

However, the personal guarantee has value in the cases of such adeficiency and carries with it what is viewed by the borrowingprincipals that the individuals intend to repay the loan and havean equity stake in doing so, the group added.

“While we believe the previous RegFlex system of an automaticwaiver authority being granted to credit unions with solid CAMELratings and strong net worth worked much more efficiently and putcredit unions on equal footing with community banks, the regionaldirectors have worked hard to manage their difficult positionsmoothly and to approve a significant number of appropriate waiverrequests,” NACUSO wrote.

Guy Messick, general counsel for NACUSO, reiterated the point bysaying credit unions could be at a competitive disadvantage.

“It just removes the ability of credit unions to serve segmentsof the marketplace that is going to be extremely beneficial tothem,” Messick said.

NACUSO said the regional directors appropriately deferred to thecredit union experts on the loan details knowing that each loan isunique and circumstances certainly justify at times that the lenderwill make an exception to the personal guarantee.

“Again, while less than ideal, this system at least held inplace the notion that commercial lending is not one-size-fits-alland that there is no cookie cutter approach that can be taken onindividual business loans,” NACUSO wrote.

“If regional directors took into consideration the pastrelationship of a business member with the credit union whenconsidering granting a personal guarantee waiver rather thanprohibit personal guarantees if there is not a five yearrelationship,” NACUSO wrote, “credit unions would have theflexibility to add members who have investment-grade credit,providing valuable diversification and not losing them to banks whoare not restricted by the personal guarantee requirement.”

NACUSO President/CEO Jack Antonini said he continues to hearabout the number of former bankers that are hired in the businessand commercial lending space within the credit union industry.

“They bring their relationships with them. They have the abilityto make loans,” Antonini said. “We just feel that [the NCUA] isbeing overly cautious. Why do we want to impose a new regulation?You don't have to apply a cookie cutter approach. Allow for someexceptions for those that have strong programs.