The National Credit Union Administration is considering an industry request to ease restrictions on construction and development lending, though acknowledging that construction loans are particularly risky these days.
In a notice published in the Federal Register late last month, the NCUA said it is seeking input on whether relaxing loan-to-value requirements on construction and development loans would help credit unions better compete with banks and other lenders.
Credit unions are permitted to finance no more than 75% of a construction project, meaning borrowers must put up at least 25% of their own money. Banks can finance up to 85% of such loans, depending on the type of project.
The idea of relaxing restrictions on construction lending comes as many lenders scale back. With housing markets reeling, delinquencies in lenders' construction and development portfolios are at their highest since the early 1990s.
One of Texas' largest credit unions, for example, has not made a construction and development loan in roughly a year as problem loans have increased to 5% of its portfolio, according to a story in this week's Dallas Business Journal.
Some credit union advocates said the proposed changes are minor and would not significantly increase their business lending. A far more meaningful change, they said, would be for Congress to raise the cap on credit unions' overall business lending, from 12.25% of assets to 20% — a proposal that has failed to gain much momentum.
Banking industry officials have asked, however, why the NCUA would consider relaxing restrictions on construction and development lending when bank regulators are tightening theirs.
The NCUA, for its part, does not appear to be leaning one way or the other.
"NCUA believes" construction and development loans are the "riskiest of all" member business loans "and, therefore, require greater regulatory restrictions to ensure safe and sound lending," it said in its advance notice of proposed rulemaking published June 25. "NCUA is willing, however, to consider comments in support of easing restrictions on C&D loans."
The NCUA published the request for comments as part of a periodic review of its member business lending policies. It is also seeking input on the involvement of credit union service organizations in loan production, collateral and security requirements, waivers, and loan participations.
Mary Dunn, a senior vice president and deputy counsel at the Credit Union National Association, said that though changes could result in some credit unions' doing more business lending they are unlikely to herald a major expansion. Equally, she said, it is possible that a tightening of regulations could occur as regulators examine the risk business loans pose to credit union portfolios.
CUNA supports the idea of raising the construction and development lending cap, Ms. Dunn said, but "we want to make sure that any new rules changes are not going to expose our members to undue risk. I think the goal is to make sure the regulations uphold the safety and soundness of credit unions without being burdensome."
If the cap were raised it would probably go no higher than 80%, which is the cap on credit unions' other commercial loans.
But Keith Leggett, the senior economist at the American Bankers Association, said he sees any relaxation of business lending regulation, particularly involving construction and development during an economic downturn, as "encouraging folly."
"We are seeing problems throughout the financial industry," he said. "It is ill-advised to consider easing business loan requirements."
