The National Credit Union Administration has proposed changes that would make it markedly easier for credit unions to lend to businesses.
The proposed moves set to become the agency's first comprehensive rewrite of its member business lending regulations since 2003 are sure to get bankers fired up. The revision would eliminate requirements that credit union borrowers personally guarantee loans and a provision that imposes an 80% loan-to-value cap on collateral offered as security.
The NCUA also expects to increase the amount of loans a credit union can make to a single borrower while lifting a cap on an institution's aggregate construction and development lending. Credit unions would still have to adhere to the current statutory cap limiting business lending to roughly 12.25% of total assets.
The changes would make credit unions more formidable competitors in the ongoing battle with banks and other lenders for commercial trade, said Keith Leggett, a retired American Bankers Association economist who blogs about credit unions. "It means they'll be able to market aggressively on terms, as well as pricing," he said.
The changes will allow credit unions to make much faster credit decisions. Currently, those institutions have to seek a waiver from the NCUA to remove personal guarantees or to surpass certain caps. The NCUA currently has more than 1,000 waivers in place.
That waiver process takes time and can cost credit unions business, Rick Metsger, the NCUA's vice chairman, said during a meeting Thursday. "Many credit unions have given up on serving their members' commercial lending needs because existing limits and the waiver process prevent them being competitive," he said.
The revised rule is "the right approach at the right time," Debbie Matz, the NCUA's chairman, added during this week's meeting.
The new plan eliminates the need for waivers. In its place, credit unions would be required to have a written business lending policy and to develop a credit risk rating system to evaluate individual business loans. NCUA officials describe the proposed member business lending rule as a shift from a prescriptive regulatory strategy to a broad, principles-based approach.
The proposal is a draft; the NCUA will accept comments for 60 days before preparing a final version.
Even with restrictions written into the current member business lending regulation, business lending by credit unions has mushroomed in the past decade. According to the NCUA, member business lending saw a nearly fourfold increase from 2004 to 2014, to $51.7 billion.
The agency said that, since 2010, poorly managed business lending played a part in at least five failures, costing its share insurance fund about $141 million.
The proposed rule changes should result in better overall asset quality, said Larry Fazio, director of the NCUA's office of examination and insurance. "They will change the conversation so examinations can focus on the people, policies and systems needed to do business lending safely," he said.
J. Mark McWatters, the NCUA's third board member, had a more muted response to the proposal, suggesting that credit union trade organizations and industry executives could push for an even more expansive regulation. He urged credit union executives and lenders who "understand member business lending" to comment on the proposal to make sure the final version "represents absolutely true regulatory relief."
"In my view this proposed rule represents a good faith attempt at true regulatory relief," McWatters said. "That said, I think it's in the eyes of the beholder."
The cost of implementation, which the NCUA pegs at more than $800,000 for training, is a concern for Alicia Nealon, director of regulatory affairs at the National Association of Federal Credit Unions. She argued that the NCUA should look at changes to allow more credit unions to exceed the current statutory cap on business lending.
Jim Nussle, president and chief executive of the Credit Union National Association, also said that the statutory cap issue must be addressed, noting that more than 1,000 credit unions are at or near their statutory limit.
"We appreciate NCUA's interest in making changes and we know that more can be done, which is why we'll be seeking further action," Nussle said. Absent a cap, credit unions could boost business lending by $14 billion annually, he added.
Credit unions are eager to boost business lending for the same reason it is attractive to banks, Leggett said. Commercial loans aren't commoditized, offering lenders an above average return.
Of course, bankers, who view any efforts to improve credit unions' business lending prospects with extreme skepticism, are likely to strongly oppose any attempt by NCUA that could be seen as weakening the statutory restriction.
A number of bills aimed at loosening the statutory cap have been introduced in Congress, and bank trade groups have declared their strong opposition to all of them.
The bill that probably garners the most support among credit unions is the Credit Union Small Business Jobs Creation Act, introduced in March by Reps. Ed Royce, R-Calif., and Gregory Meeks, D-N.Y. Their bill would lift the cap on aggregate business lending by credit unions to 27.5% of total assets.
Another bill, introduced in March by Rep. Jeff Miller, R-Fla., would exempt loans made to veterans from counting against the cap.
Credit union advocates also back a bill introduced by Rep. Royce the Credit Union Residential Loan Parity Act that would exempt loans secured by non-owner-occupied one- to four-family houses from counting against the cap.
In a joint letter addressed to the ranking members of the House Appropriations Committee earlier this month, the American Bankers Association and the Independent Community Bankers of America blasted a proposal to exclude loans secured by homes that aren't a borrower's primary residence from counting against the cap.
"Banks are taxed while credit unions are tax subsidized," the trade groups wrote. "This critical distinction should guide all consideration of credit union powers expansion initiatives."