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.

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.

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Guy Messick

Dig Deeper

 

Credit Union Times

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