In a much anticipated move, NCUA last week approved new member business lending rules aimed at expanding a still small, but growing part of the credit union portfolio.
The new rules will both make it easier to make loans for real estate development and for small businesses, and to fit the loans under the congressionally mandated ceiling on MBLs.
"With President Bush declaring last week as Small Business Week, what better way for NCUA to assist small business owners but with this new rule on member business lending," said NCUA Board Member JoAnn Johnson, who headed an agency task force that developed the rule. Johnson added that she hopes the initiative will bring flexibility to member business lending while maintaining safety and soundness.
The new rules, approved unanimously by the board, will: lower the equity requirements for real estate development and construction loans to 25% from the current 35%; allow well-capitalized credit unions to make unsecured MBLs for the first time; eliminate the requirement for personal guarantees for Reg-Flex-qualified credit unions; allow CUSOs to originate MBLs, and permit 100% financing for vehicles used for business purposes.
The rules will also simplify required documentation for MBLs, allowing individual credit unions to decide on the needed paperwork, instead of NCUA.
The rules, amending the agency's current MBL regulation, will also allow credit unions to buy business loans or participation interests in business loans and allow loans to CUSOs and other credit unions without having to count them against the congressional cap of 12.25% of assets, which has been a growing concern among credit unions since the cap was enacted under the 1998 CU Membership Access Act.
NCUA and industry leaders have been pushing credit unions over the past few years to take advantage of the underserved niche of small businesses and increase their business lending. Several years of lobbying the U.S. Small Business Administration paid off earlier this year when the SBA expanded the eligibility to participate in its guaranteed loan program to all credit unions.
The efforts have paid off, somewhat, with credit unions almost doubling their business loans since January 2001 to $7.6 billion at mid-year, but that still amounts to just 2.2% of the total loan portfolio, not much more than it did a decade ago.
Johnson, who has been out stumping for the proposal the past few months, noted that only 1,600 credit unions, less than 17% of the total number of credit unions, make MBLs, with the average loan size of approximately $118,000.
Fellow NCUA Board member Deborah Matz, who helped draft the proposal, said credit unions are ripe to serve the segment of start-up entrepreneurs, many of whom are ignored by banks and other traditional sources of business capital.
"I want to make it clear: I'm not talking about loans for golf courses or high-rise buildings. I'm talking about loans that credit union members need to start a home cleaning business or an ethnic market, or to buy a dump truck or business supplies," said Matz. "These are loans that banks generally won't make? not because they are too risky, but because they are too small. Credit unions' average business loan is $118,000 early 90% of banks' business loans are larger. In fact, more than 70% of banks' business loans are now over $1 million."
David Marquis, chief examiner for NCUA, said the new rule recognizes that credit union expansions into new and broader markets, especially the proliferation of community charters, requires credit unions to have a presence in the small business communities in those new markets, and to develop and expertise in marketing and training business lending departments.
