NCUA has signaled that it is tired of being in the waiver business when it comes to member business lending regulations, and will propose a new rule that would provide MBL regulatory relief to credit unions.
"Credit unions know their members' needs best, and our member business lending rule needs to reflect that," NCUA Chairman Debbie Matz told Credit Union Journal. "Credit union officials have told us the current waiver process for business lending sometimes prevents them from making timely and prudent loans. This month, NCUA plans to propose a rule that would provide regulatory relief and eliminate the need for such waivers."
That's good news to Larry Middleman, president and CEO of Credit Union Business Group in Portland, Ore. During a recent CUBG Webinar, Middleman noted that so many credit unions have requested waivers to various MBL rules, there now is a bottleneck at NCUA.
"Regulations have created an uncompetitive situation, which is why credit unions apply for waivers—so they can compete with banks," Middleman said. "It will be really interesting how NCUA makes it work. It could be huge for the industry if credit unions are allowed to manage business lending themselves and have parity with commercial banks."
Jeff Stone, CU Business Group's vice president and senior business services officer, told the webinar audience NCUA "clearly" wants to eliminate the need for waivers.
"It is not clear what the NCUA Board will do, other than probably pushing business lending decisions back to credit unions and holding credit union boards liable," Stone said. "We are sure looking forward to what comes out of this. If there is a proposed rule, credit unions will need to submit comments."
Disadvantaged in Construction Lending
According to Stone, one hot spot for waivers is construction lending. He said there are "many limitations" facing CUs wishing to make loans in this category, topped by a maximum loan-to-value ratio of 75% of total cost.
"Banks do not have a 75% limitation," he said, adding many "soft costs" of construction projects are not well defined under current regulations, leaving CUs unsure if they are acting correctly. "NCUA has recognized the need for better definitions. Hopefully, the new initiative will solve this problem.
"At 75%, we are at a disadvantage," Stone added.
Middleman said there are "many moving parts" to obtaining a waiver to MBL regulations, with the CU having to "prove" itself that it is "worthy." Stone added: "if the credit union has a state charter, there is an extra step to the waiver process."
Another potential regulatory change that would give credit unions parity with banks when it comes to insurance on Interest on Lawyer Trust Accounts, or IOLTA, is an "opportunity" for CUs, Middleman declared.
According to Stone, who used to work at North Island CU in San Diego, credit unions had been missing out on a chance to take business deposits from law firms due to rules related to field of membership.
"At North Island we had a branch across the street from the San Diego County Courthouse. We wanted to approach lawyers, but we couldn't," he recalled. "There is a proposed rule on IOLTA that is open for comments. It will mean credit unions will be able to offer these accounts."
Middleman said all credit unions are asking for—in the case of IOLTA and other regs—is "parity" with the commercial banking industry. "Which we are in the process of getting."
Current Expected Credit Loss
The Financial Accounting Standards Board (FASB) soon is expected to produce a final rule regarding "Current Expected Credit Loss." Middleman said the change is because FASB decided a "backward-looking" model is not best for estimating the possibility of loan losses.
Stone predicted the new rule will change the way CUs calculate their loan loss reserves. He noted the proposed rule was published in December 2012, and said the final rule should be on its way.
"Keep an eye out," he counseled credit unions. "Expect the allowance reserve account will go up based on this new methodology. FASB wants to allow for losses over the life of the loan, which is very complex."
Taxi Medallion Lending
NCUA issued a guidance letter re: taxi medallion lending in 2014, then followed up with a recent FAQ document. Stone said the federal regulator released the FAQ to "reiterate" they guidance letter.
"NCUA wants credit unions to look at these loans in the same way as other business loans," Stone appraised. "Especially in cases where one owner holds multiple medallions—that is a complex entity."
With the influx of Uber and other ride-sharing services, Stone and Middleman warned the value of a taxi medallion could be usurped.
Said Stone: "NCUA is telling credit unions if they are in that business, they need to know the value of the loans. They need to calculate the income needed to pay the loan, or the speculative premium."
Added Middleman: "These loans are pretty specialized, so many credit unions do not do them. However, there are lots of participations in taxi medallion loans."