The updated Member-Business Lending Rule becomes effective January 1, 2017. Learn the details behind the member-business lending update and how they will impact your credit union’s extension of commercial loans to members.
Summary of the Updated Member-Business Lending Rule
The updated Member-Business Lending Rule gives credit unions more flexibility in deciding whether to extend commercial loans. Most credit unions have already established member-business lending systems and risk management procedures. As part of the NCUA’s Regulatory Modernization Initiative, limits on collateral and security requirements, equity requirements and loan limits are shifting from clearly defined limits to regulations with broad but well-defined principles. As a result, the current member-business loan waiver process will no longer be enforced.
Benefits of the Rule
Federally insured credit unions will have greater control over creating and overseeing their lending programs for member businesses to ensure that those programs best fit the businesses’ goals. For example, credit union loan officers may not, under specific circumstances, require a personal guarantee. Also, loan-to-value limits will be replaced with having adequate collateral and not needing a waiver. In addition, there will be no limits on extending construction and development loans. Furthermore, credit unions with less than $250 million in assets and small commercial loan portfolios will be exempt from specific requirements. Finally, loan participations to non-members will not count against the required lending cap for member businesses.
Increasing the extension of commercial loans will help diversify credit unions’ portfolios and revenue sources. Such diversity will help credit unions withstand down times in the economy, assist small businesses’ growth, and create jobs for further economic development.
What Credit Unions Need to Do
Credit unions providing loans to member businesses must have the employees, policies and processes in place by January 1, 2017, to continue ensuring the safety of extending commercial loans. This includes continuing practice and updating of well-established lending systems to member businesses and risk management procedures. Also, credit unions may create their own rules and limits for servicing members according to the credit union’s ability. In addition, about 660 smaller credit unions that engage in commercial lending will be exempt from creating a commercial loan policy and hiring commercial lending employees.
The updated member-business lending rule also creates a baseline minimum safety and soundness standard for protecting the Share Insurance Fund. States may decide to enforce greater standards than those being set. The seven states that have pre-approved commercial lending rules for members are grandfathered in. States may submit a new rule for the NCUA to review as well.
No further funds are being budgeted for implementing the updated member-business lending rule. A cost for staff training is already included in the Board-approved 2016 Operating Budget. The NCUA will train state examiners and provide credit unions and examiners supervisory guidance before the implementation date. Removal of the personal guarantee requirement will become effective 60 days after it is published in the Federal Register.
Make sure your credit union is ready for the updated Member-Business Lending Rule. For additional assistance, contact the trained financial compliance recruiting experts at CarterWill Search & Flex today!