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ALEXANDRIA, Va. – A little over a year since NCUA amended its member business lending rule, a recent final change aims to open the doors even wider for credit unions to offer SBA loans to their members. At its Oct. 21 board meeting, NCUA approved a final rule that aims to align its member business lending rules with SBA’s “less restrictive” collateral requirements. Member business loans previously used collateral requirements according to maximum loan-to-value ratios, which were inconsistent with the collateral requirements of the SBA’s guaranteed loan programs. The amendments exempt SBA-guaranteed loans from the requirement, allowing credit unions to follow the SBA’s “less restrictive” collateral rules. “SBA-guaranteed loans enable credit unions to diversify their memberships as well as their assets, while sharing their risks with SBA,” said NCUA Board Member Debbie Matz, who is also NCUA’s liaison to the SBA. “However, at our Partnering and Leadership Successes workshops on member business lending, we heard that NCUA regulations were preventing many credit unions from making more SBA loans.” To address some of those barriers, NCUA issued a legal opinion letter in May 2004 with new interpretations to make several MBL terms consistent with SBA’s 7(a) program including providing more small businesses with working capital, furniture and fixtures, machinery and equipment, land and buildings, and leasehold improvements; extending MBLs beyond 12 years for small business owners investing in fixed assets; and preparing to sell SBA loans to the secondary market. In April, 2004, one month after the PALS workshop, directors of NCUA’s five regional offices were encouraged to consider waivers for credit unions to make SBA 504 loans, which are guaranteed by community-based non-profit organizations. Waivers from loan-to-value limits will allow credit unions to fully fund 504 loans; reduce loan turnaround time; and better serve small business owners who need to buy real estate, machinery or equipment to expand or modernize their businesses. “There’s different ways to approach member business lending and our focus is aimed at members who own small businesses and cash flow lending,” said Kevin Dion, president of The Cypress Group, LLC, a MBL CUSO owned by seven Florida credit unions. “The NCUA rule allows for more flexibility and any kind of flexibility we can get that accounts for prudent underwriting is a good thing.” The momentum for this goes back to February 2003, when the SBA opened its eligibility rules to allow all credit unions to partner with the agency. Since then, credit union partnerships with SBA have more than doubled.The $775 million Orange County’s Credit Union is among those that have recently become SBA-approved lenders and the final rule could not have come sooner. It became an SBA lender on Sept. 15. “This will give us more opportunities to offer commercial real estate loans up to 25 years as opposed to 12 years,” said Monica Lopez, OCCU chief operating officer. “We’re very excited.” The NCUA rule has its critics, chiefly among them the banking groups. Camden Fine, president/CEO of the Independent Community Bankers of America, called the initial proposal a diversion from credit unions’ “central mission of serving the credit needs of low-and moderate-income consumers.” “These changes will shift more SBA Section 7(a) lending to tax-exempt credit unions, increasing the enormous tax advantage that credit unions already have over commercial banks and thrifts,” Fine said in August, 2004. In its August 25 comment letter to NCUA, America’s Community Bankers blasted the proposed rule saying it “blatantly ignores the statute and the intent of Congress” which specifically limited credit union business lending to 12.25% of assets” and allows credit unions to make more loans that do not count toward the aggregate business loan limit and result in fewer assets being devoted to consumer lending. Addressing the one bank and four bank trade groups that submitted comment letters, NCUA said the (rule) does not increase any congressional limits on the kind or amount of MBLs a credit union may make. NCUA received more than 20 comment letters on its proposal. “Moreover, the legal authority allowing credit unions to make MBLs under the terms of an SBA guaranteed loan program is in the (Federal Credit Union Act) and, therefore, directly reflecting congressional intent,” NCUA wrote. NCUA also reminded the bank groups that “congressional representatives have urged NCUA to use its authority, conferred by Congress, to facilitate MBL lending and to refrain from imposing any limitations on credit unions in this context not explicitly called for by Congress in (the Credit Union Membership Access Act). The rule applies to all FCUs and most federally-insured state credit unions but the latter is exempt from the MBL rule only if its state supervisory authority had adopted its own business loan rule with NCUA approval after the enactment of CUMAA on Aug. 7, 1998. There are circumstances when a business loan made under an SBA loan program would not be subject to the rule. For example, a $40,000 business loan with an SBA guarantee to a member who has no other loans with the originating credit union would be too small to meet the definition of an MBL and it can then be deemed an SBA loan. The California CU League praised NCUA for enabling more credit unions to take part in the SBA’s guaranteed loan programs. “The SBA has noticed that one of the results of consolidation in the banking industry has been that small businesses are finding it harder to get reasonably priced loans,” said California CU League CEO David Chatfield. “The final rules on SBA lending will expand the pool of capital that is available to small business entrepreneurs who drive job growth and community development in our economy.” NCUA acknowledged that that SBA loan programs can potentially create safety and soundness concerns because the loans are often riskier that others made by credit unions. It reminded credit unions that they must adhere to the SBA’s program requirements or face losing the guarantee on the loans. [email protected]

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