TALLAHASSEE, Fla. — As the NCUA mulls member business lending risk weights for its final risk-based capital rule, the head of one credit union service organization contends that the agency needs to consider weighting more by product type than percentage of the portfolio.
The proposed new capital rule applies heavy risk weights to member business loans: 100% below 15% of the loan portfolio, 150% from 15% to 25% and 200% for any higher concentration.
NCUA chairman Debbie Matz has said that MBL risk weights will see changes in the final rule.
But Jim Gallagher, president and chief executive of Member Business Solutions, a business lending CUSO, hopes that NCUA moves away from how it constructed the weighting in the proposal, saying that the method seems "counterintuitive."
"Under the proposal, the larger your portfolio the higher the risk weights," he said. "To me, the larger portfolio suggests the credit union has more expertise in this area of lending."
Structure By Product Type
According to Gallagher, a number of MBL CUSOs, including his CUSO, have said that they would rather see the risk weights structured by product type.
"For instance, a credit union that has a well-diversified MBL portfolio with an average loan size of $200,000, and highly weighted in amortizing, secured term loans with lot of owner-occupied commercial real estate, has one risk profile," he said. "Now another CU that may look like how Texans CU [of Richardson], used to look, with a much higher average loan size and much higher concentration of non-owner-occupied or investor commercial real estate would have a totally different risk profile."
Gallagher thinks that is a better way to slice the risk weights.
"This way we are going on your product type and your average loan size," he said.
"If you lose a couple $200,000 loans you really don't impact your net worth much. You lose a couple $5 million commercial real estate loans and that hurts," Gallagher said.
"At the end of all this, isn't that what NCUA is concerned about: the impact of the CU's program on net worth?"
