By now you have likely heard quite a bit about the proposed amendments to the NCUA's Member Business Lending rule. As a whole, the comments have been favorable and the industry seems poised to welcome a less restrictive regulatory structure. This lifting of restrictions will allow credit unions to compete in the marketplace for member business loans by making sound loans on a case-by-case basis relative to the circumstances of a particular deal.
The existing MBL rule outlines "how" a credit union should underwrite a loan. The proposed MBL rule tells the credit union "what" the goal is (a well documented loan with risks that have been reasonably mitigated) and allows the credit union to decide how to underwrite such loans. As long as the credit union can articulate what they did was commercially reasonable to an examiner, and the examiner accepts the explanation, the credit union can make business loans on its terms. This is the difference between a prescriptive regulatory philosophy and a principal based regulatory philosophy.
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NCUA culture has been built around a prescriptive regulatory philosophy. However, a "one size fits all," paternalistic approach has caused well-run credit unions to lose good loans. Prescriptive rules can reduce the impact of bad decisions of poor performers at the cost of reducing success opportunities for high performers, and high performers will survive and grow the credit union industry if permitted to do so.
Under the current MBL rule, all business loans to for-profit businesses must have personal guarantees unless the credit union obtains a waiver from the NCUA Regional Director. That process takes time and has killed many good deals. Just as significantly, it has communicated to borrowers that the credit union is a financial institution with training wheels and borrowers were better off paying higher rates and dealing with grown-up financial institutions that can make quick decisions with more flexibility.
One of our credit union clients, the $2.5 billion, Raleigh, N.C.-based Coastal Federal Credit Union, is a very grown-up financial institution and had an extremely successful lending program. They have members who purchase buildings and lease office space to the U.S. Government through the General Services Administration. There were never personal guarantees asked for or given. For years, the program generated terrific loans, with good yields and no losses under an NCUA waiver. Then, the NCUA inexplicably stopped permitting these loans without personal guarantees. No commercial lender in this country would require personal guarantees for these loans. We are talking about the full faith and credit of the U.S. Government to offset the credit risk. The prescriptive nature of the rule killed the lending program.
Toward the end of the preamble to the proposed rule, the NCUA states that the new rule, when passed, will include a delayed implementation. This delay is due to "the significant change in approach that will require a period of adjustment for both credit unions and examiners." The proposed delay is eighteen months. Why the proposed delayed implementation? While the NCUA has business lending experts, it needs to develop much more bench strength in business lending expertise among its examiners. The examinations will be less about checking boxes and more about discussions on risk mitigation, which is both an art and a science. Credit unions must make sure their staff and advisors have the credit analysis experience to make sound underwriting decisions and can explain them. If one side is not up to the task, the examination process will be very frustrating.
This proposal has the potential to position credit unions as more valuable community business lender sources. The training wheels have come off and credit unions have more opportunities to serve and succeed. We encourage the NCUA to apply a principal-based regulation to other regulations as appropriate to give credit unions more options to serve members in this ever-changing financial marketplace.
Guy A. Messick (pictured first) and Brian Lauer (pictured second) are attorneys with Messick & Lauer PC. They can be reached at 610-891-9000, [email protected] or [email protected].
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