ALEXANDRIA, Va.-In its official comment letter, the Treasury Department expressed concerns with key provisions in NCUA's proposed member business lending rule. "Credit unions have demonstrated a great commitment to their members through member business loan (MBL) programs," the letter from Treasury Assistant Secretary for Financial Institutions Wayne Abernathy stated. "Such efforts have benefited the individual members and their communities, and we would like to see credit unions' MBL programs continue to prosper." Still, the letter raised concerns regarding the exclusion of purchased participation interests from the purchaser's MBL limit. "Allowing both the seller and purchaser of a participation interest to exclude the participation balance from counting toward the MBL cap would create a loophole for credit union business loans to escape the aggregate limit set by Congress," Abernathy's letter read. He pointed out that NCUA came to a similar conclusion when considering the current member business lending rule. Abernathy also wrote that Treasury did not object to CUSOs originating MBLs but did not agree with credit unions purchasing those loans without counting them toward their cap. NAFCU argued in its comment letter, "Loan participations are used as a risk management tool, giving credit unions the ability to invest excess funds and obtain additional liquidity; therefore, NAFCU agrees with NCUA's decision to exclude loan participations from the aggregate limit." CUNA's comment letter noted that the Supplementary Information states, "the sale and purchase of participation interests in MBLs among credit unions cannot be used as a means to circumvent the regulation's aggregate loan limit. For example, credit unions may not enter into participation agreements that in effect, permit them to swap portions or all of their MBL portfolios and thereby, claims that the participation interests are excluded form the aggregate loan limit." According to CUNA, credit unions have said that more guidance is needed on what participation agreements are acceptable. Bankers Say NCUA Trying to Get Around Congressional Intent However, the banking groups-American Bankers Association, America's Community Bankers, and the Independent Community Bankers of America-all took the position in their respective letters that NCUA's proposal attempts to circumvent congressional intent and exceed the 12.25% of assets statutory cap. In contrast, a letter signed by Congressmen Steven LaTourette (R-Ohio) and Paul Kanjorski (D-Pa.), the authors of the Credit Union Membership Access Act that set the member business lending limit, expressed support in a letter to NCUA. "As you analyze public comments in readying the proposed revisions to the credit union member business loan rule, we urge you to fully utilize the discretionary authority conferred on you by Congress to facilitate credit union lending in this important and oftentimes undeserved area, and to refrain from imposing limitations upon credit union member business lending not explicitly called for by Congress when it enacted Public Law 105-219," the letter read. CUNA's letter also cited section 203 of CUMAA, which states, "no insured credit union may make (CUNA's emphasis) any member business loan that would result in a total amount of such loans outstanding at the credit union at any one time equal to" 12.25% of a credit union's assets. The purchase and sale of loan participations does not fall in this category, according to CUNA. Treasury also objected to the removal of the personal guarantee requirement on MBLs. Abernathy pointed out that credit unions are fond of pointing to the department's study of member business lending, which found credit union business loans to be less risky than bank and thrift loans because of the personal guarantee. "By removing the personal guarantee requirement and expanding the ability to make unsecured MBLs, the proposed rule would remove the core reasons why MBLs have been less risky than bank and thrift commercial loans," he reasoned. The banking groups all said they generally felt that NCUA's proposal would increase credit union risk and was contrary to safety and soundness rationale. "Instead of making credit unions safer as the NCUA Board asserts, these changes will subject credit unions to greater lending risks and divert them from their central mission of serving the credit needs of consumers, contrary to Congressional intent," ICBA Chairman Rusty Cloutier, president and CEO of MidSouth Bank, N.A. in Lafayette, La., wrote. Courting Treasury Support Prior to submitting Treasury's letter, Abernathy met with NCUA Vice Chair JoAnn Johnson and other NCUA officials to express these concerns, according to NCUA Director of Public and Congressional Affairs Cliff Northup, who attended the meeting. He said that Johnson also made her case in favor of the proposed rule. "We take [Treasury's] comment seriously, like all other comments," he added. NAFCU had also recently met with Treasury on various subjects, including this one. NAFCU Director of Regulatory Affairs Gwen Baker said she could not go into much detail about what was discussed during the meeting about member business lending, except to say that Treasury raised its concerns and that NAFCU did not see the regulation as an avenue for "rampant abuse." Baker pointed to NAFCU's comment letter, which outlines the organization's general support of providing credit unions greater flexibility in the member business lending arena. She said that loan participations were risk management tools and not technically loans. Additionally, in NAFCU's letter, the group indicated a few items that need some work before the final regulation is promulgated. NAFCU recommended that NCUA revise its definition of "credit union organization" to include all credit union service organizations that originate member business loans. The group's letter said this change was necessary to clarify that credit unions are permitted to participate in CUSO loan participations. NAFCU expressed concern over the consistent application of the direct experience requirement and urged the agency to be as flexible as possible in its interpretation. Additionally, NAFCU suggested that NCUA emphasized the need for due diligence with selecting a third-party provider with member business lending experience to handle the loans. CUNA raised this issue too, saying it could restrict CUSOs and other service providers that offer other services as well to credit unions, including loan review, underwriting, servicing, and other items. NAFCU also supported the removal of the personal liability requirement for the loan principals, but allowing for them if the credit union feels it is necessary. CUNA supported the elimination of the signatures but argued that the restrictions are too high. "We believe a more reasonable approach, which more accurately reflects risk, would be to eliminate the dollar ceiling on unsecured member business loans to one borrower and only retain the limit of 2.5% of the credit union's net worth for unsecured member business loans. Likewise, the Board should consider eliminating the limits on aggregate unsecured MBLs, which would then be subject to the general limits on member business lending," the group's letter read. In addition, CUNA suggested NCUA eliminate the dollar ceiling on unsecured loans to one borrower; impose risk weighting factors to member business loans of 6% for the lowest risk loans and no more than 8% for loans in other tiers; remove inconsistencies between the requirements of the Small Business Administration and the requirements for SBA loans made by a credit union; and permit states to continue to allow states to seek individual waivers. In an unusual move, though, CUNA lashed out at the bankers', particularly the ABA's, comment letters on the subject. "The ABA's letter is offensive for both its tone and insinuations regarding NCUA. For example, the ABA accuses NCUA of proposing `to permit credit unions to engage in a shell game to circumvent Congressional intent that credit union resources be focused on serving consumer lending, not commercial lending, by evading the aggregate business loan cap,' " CUNA wrote. The group then proceeded to refute the ABA's comments at great length. " Their charges are as unoriginal as they are unfounded and appear to be motivated not by genuine public policy considerations but by a singular desire to limit the growth of credit unions in order to increase the domination of the banking industry in the financial services market," CUNA added. ACB also attacked NCUA in its comment letter, stating, "ACB strongly opposes the proposed lowering of risk weighting of member business loans as being contrary to the basic principles of safety and soundness. The reduced capital requirements are alarming, particularly in light of the proposed expansion of member business lending and relaxed regulatory standards. We would hope that the NCUA, as a regulator and as the steward of the National Credit Union Share Insurance Fund ("NCUSIF"), would recognize the danger to the NCUSIF and would not adopt the proposed capital requirements. To do otherwise would be irresponsible and would be a disservice to the credit unions the NCUA regulates." -

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