If you have ever taught teenagers how to drive a car, you probably have vivid memories of watching their every move while you sat nervously in the passenger seat. You remember their awkward starts and stops; their uncertain decisions when facing complex situations; and your instinct to grab the steering wheel and slam on the brakes.
But hopefully, after surviving those rough stretches on their road to independence, you remember the moment when you realized your teenager no longer needed you to tell them what to do at every turn. You no longer needed to approve or override their every decision. You felt confident they would obey the basic safety rules of the road. And you were convinced they were ready to set off on their own (with your careful oversight, of course).
This narrative parallels the road to member business lending taken by credit unions. I feel confident handing qualified credit unions the license to make their own business lending decisions moving forward. And I am convinced this is the time to do so, when I reflect upon how we arrived at this point.
After Congress placed new limits on member business lending in 1998, NCUA wrote prescriptive rules to ensure sound underwriting, solid collateral, and experienced management.
For many years, the prescriptive approach may have been appropriate as credit unions entering the business loan marketplace gained experience.
Today, however, the vast majority of credit union business lenders have well-established commercial lending infrastructure and sound risk management policies.
The results have been remarkable: Over the last 15 years, the credit union system’s business lending portfolio has grown more than 12 times larger, from $4 billion in 2000 to more than $51 billion today. Yet, delinquencies and charge-offs for commercial loans at credit unions indicate strong performance overall.
The bottom line is: The credit union system has grown its commercial lending portfolio in a safe and sound manner.
So, it’s time to transition away from prescriptive regulatory limits toward general principles that will provide credit unions greater flexibility to serve business owners.
Of course, commercial lending may not be appropriate for every credit union. It’s a strategic decision for each board of directors to make.
If they decide to engage in member business lending, as long as they comply with the statutory cap, each credit union would have the freedom to prudently write their own business loan policy under our new proposed rule without prescriptive regulatory limits.
Credit unions with small commercial loan portfolios would not even have to write a policy. Based on current volume, nearly 700 credit unions (about one of every three credit unions making commercial loans) would be exempt from the policy requirement altogether.
For example, credit unions that may just make an occasional commercial loan for a pizza oven or a delivery truck would be able to serve those small business owners without additional paperwork.
As I’ve traveled the country to hold Listening Sessions and speak at credit union conferences, I’ve heard directly from credit union officials about operational challenges they face with NCUA’s current MBL rule.
Our new proposal completely rewrites the current rule to address those challenges and remove unnecessary burdens. For example:
I’ve heard loud and clear: Requiring a personal guarantee on every business loan can lose business for credit unions. Even though NCUA Regional Offices approve most requests to waive personal guarantees, some members don’t wait for waiver approvals; they take their business to other lenders. Under our proposed rule, credit unions would make the decisions to waive members from personal guarantees.
I’ve also heard that prescriptive LTV limits are sometimes an obstacle to serving business owners. As with personal guarantees, our Regional Offices approve waivers of LTV limits wherever reasonable. However, we recognize the primary focus in commercial lending must be on the borrower’s ability to repay based on the business’ operations, not collateral. That’s why we’re proposing to remove LTV limits and remove the waiver process altogether.
Construction and Development Loans
I’ve visited the Dakotas and other states where credit unions are playing key roles in financing emerging businesses. Credit union officials provided thoughtful feedback, which compelled us to reconsider our policy of placing lower limits on construction and development loans. That’s why we’re proposing to lift all unnecessary limits on C&D loans.
Credit union officials also urged us to remove any unnecessary barriers on loan participations, which help credit unions pool and diversify risks. That’s why our proposed rule clarifies participation interests in loans to non-members do not count against the statutory MBL cap.
Nonetheless, commercial loans still pose unique risks and require specialized oversight. When this rule becomes final, we plan to update guidance for credit unions and supervise effectively for sound commercial lending practices.
Changing the way we do business will require retraining our examiners. Retraining will take some time and resources to implement; but it will be well worth the effort.
A modernized and flexible rule, supervised by well-trained examiners, would allow credit unions to safely and soundly serve more of America’s small business owners.
Credit unions know their members better than we do, and our modernized business lending rule will reflect that fact.
Clearly, our proposal would provide real regulatory relief, which credit unions have requested. Most important, it would empower credit unions to responsibly serve the needs of their communities by providing small businesses with the loans they need to start up or expand.
Small businesses are recognized as the engine that drives the U.S. economy forward. It’s time for credit unions to take the wheel.