Summary of NCUA s Proposed Rule: Member Business Loans and Commercial Lending

Transcription

1 Summary f NCUA s Prpsed Rule: Member Business Lans and Cmmercial Lending Summary: The prpsed rule makes cmprehensive and significant changes t the member business lan (MBL) rule. Belw is a simple list f the changes; please see the fllwing pages fr mre details n the prpsed rule. Remves almst all requirements nt in the Federal Credit Unin Act (Act). Creates a categry f cmmercial lans fr safety and sundness purpses and utilizes the categry f MBLs fr cmpliance with the statutry cap. Implements bard f directr (BOD) and management respnsibilities fr cmmercial lending, including a requirement fr a cmmercial lending plicy, senir management understanding f the credit unin s cmmercial lending activities, and hiring qualified staff with experience in cmmercial lending. Remves the persnal guarantee requirement. (Nte: NCUA believes that persnal guarantees in mst cases are very imprtant and expects there will be few lans withut a persnal guarantee.) Clarifies that nn-member lans and nn-member participatin interest in cmmercial lans d nt cunt tward the statutry MBL cap. Remves the limit fr cnstructin and develpment lans (15% net wrth); federally insured credit unins (FICUs) set their wn limits. Requires a FICU s cmmercial lan plicy t include hw cllateral value is determined. Changes the interpretatin f hw the MBL cap is calculated. Increases the single bligr limit frm 15% f net wrth t 25%, if the amunt greater than 15% is supprted by readily marketable cllateral (see New Definitins elsewhere in this dcument); it als eliminates the waiver prcess. If a FICU has an existing waiver, the waiver will remain in effect until the aggregate balance f lans t the brrwer are reduced t new requirements. Eliminates the lan-t-value (LTV) requirements; FICUs must address this in their plicy and require sufficient cllateral. Eliminates unsecured lending limits; FICUs must address this in their plicy. (Nte: NCUA s expectatins are that unsecured lans shuld be limited and treated as exceptins.) Cmment Letters The cmment perid ends August 31, Please lg int PwerCmment t submit yur cmment letter directly t the NCUA. In additin, we encurage yu t ask yu member business lan brrwers/members t submit a cmment letter and tell their stry n hw this prpsed rule will help them t have access t credit, grw their business and help imprve the ecnmy. Withut my credit unin Unable t get financing frm a big bank, but my credit unin. Letters can be submitted t the NCUA at: regcmments@ncua.gv Subject line: [Yur Name] Cmments n Prpsed Rulemaking fr Part 723

2 Purpse and Scpe: WHY? SCOPE Credit unins are an imprtant surce f credit fr small businesses. Average MBL balance: $217,000 Credit unins have experience and cnduct business lending safely Grwth ver last 10 years; increased frm $13.4 billin in 2004 t $51.7 billin in 2014; an annualized grwth f 14% Percentage f credit unins ffering business lans als increased significantly, frm 19% t 36% The delinquency and net charge-ff rates fr business lans in 2014 drpped t 85bps and 28bps respectively Mdernize the MBL rule and shift frm a prescriptive rule t a principles-based rule. Gives FICUs mre flexibility and autnmy t manage their cmmercial lending activity Fcuses n brad principles that clarify regulatry expectatins rather than prescriptive requirements and limitatins such as cllateral and security requirements, equity requirements, and lan limits Examiners will fcus n effectiveness f a credit unin s risk management prcess and their aggregate risk prfile in their lan prtfli With adptin f a final rule, NCUA wuld publish updated supervisry guidance t examiners, which wuld be shared with credit unins, t prvide mre extensive discussin f expectatins in relatin t the revised rule. Questin: D yu believe a shift frm a prescriptive rule t a principles-based rule will prvide yur credit unin with mre flexibility in managing yur cmmercial lending activity? Questin: Are yu cmfrtable that yur examiner will be able t examine yur prtfli and plicies utilizing a principles-based rule? Why r why nt? Credit Unins Applies t: FCUs and federally-insured state-chartered credit unins Lans Exempt frm the cmmercial lan plicy and bard and management requirements if: Less than $250 millin in assets; and Have a cmmercial lan prtfli less than 15 percent f ttal net wrth; and Nt regularly making and selling r participating cmmercial lans. These exempt FICUs must still ensure their existing lan plicy includes the types f cmmercial lans granted and ther cmmercial lending requirements. Questin: Is an asset threshld apprpriate, r shuld the exemptin be based slely n vlume? Des NOT apply t: Lans made by a crprate credit unin; Lans made by a FICU t anther FICU; Lans made t a CUSO; r Lans fully secured by a lien n a 1- t 4-family residential prperty that is the brrwer s principal residence. Nne f these are cnsidered cmmercial lans r MBLs. Prpsed MBL Rule Summary Page 2 f 8 Califrnia and Nevada Credit Unin Leagues

3 Cmmercial Lending The prpsal intrduces the cncept f cmmercial lending t distinguish between (a) the safety and sundness bjectives applicable t all lans fr cmmercial, industrial, agricultural, and prfessinal purpses (whether an MBL r nt), and (b) the statutry limits fr MBLs. Cmmercial lans require prudent lending fr safety and sundness purpses MBLs cunt tward statutry cap Nt all MBLs are cmmercial lans and vice-versa. Type f Lan MBL Cmmercial Lan Lan fully secured by a 1- t 4- family residential prperty (brrwer s N N primary residence) Business lan with aggregate net member business lan balance less than N N $50,000 Cmmercial lan fully secured by shares in the credit unin making the N N extensin f credit r depsits in ther financial institutins Tw types f lans that are MBLs and cunt twards the statutry cap, but are nt cmmercial lans subject t safety/sundness prvisins: Member business lan secured by a 1- t 4- family residential prperty (nt Yes N 1 the brrwer s primary residence) Member business lan secured by a vehicle manufactured fr husehld Yes N 2 use Tw types f cmmercial lans subject t safety/sundness prvisins, but are nt MBLs and d nt cunt tward the statutry cap : Cmmercial lan in which a federal r state agency (r its plitical N Yes 3 subdivisin) fully insures repayment, fully guarantees repayment, r prvides an advance cmmitment t purchase the lan in full Nn-member cmmercial lan r nn-member participatin interest in a cmmercial lan made by anther lender N Yes Member business lans secured by a 1- t 4- family residential prperty (nt the brrwer s primary residence) nt a cmmercial lan, but NCUA says they have similar risks and underwriting and cmplexity f risk analysis shuld increase as the number f prperties fr the same r assciated brrwers increase. When repayment f the lan depends n successful peratin f the multiple rental units, underwriting shuld include a cmprehensive glbal cash-flw analysis. 2 - Member business lans secured by a vehicle manufactured fr husehld use nt a cmmercial lan, unless used t purchase fleet vehicles r t carry fare-paying passengers. 3 - Gvernment secured lans. When an FCU makes a cmmercial lan in which a federal r state agency (r its plitical subdivisin) fully insures repayment, fully guarantees repayment, r prvides an advance cmmitment t purchase the lan in full and that prgram has requirements that are less restrictive than thse required by this rule, then the FCU may fllw the lan requirements f the relevant guaranteed lan prgram. FISCU may als fllw the prgram s requirements, prvided that its state supervisry authrity has determined that it has authrity t d s under state law. (The League will clarify with the CA DBO and NV FI Divisin.) 4 - Nn-member cmmercial lan r nn-member participatin interest in a cmmercial lan made by anther lender. Nt a MBL prvided that the FICU acquired the nn-member lans and participatin interests in cmpliance with all relevant laws and regulatins and it is nt, in cnjunctin with ne r mre ther credit unins, trading member business lans t circumvent the aggregate limit. Prpsed MBL Rule Summary Page 3 f 8 Califrnia and Nevada Credit Unin Leagues

4 Bard f Directrs and Senir Management Respnsibilities BOARD OF DIRECTORS Must apprve a written cmmercial lan plicy that cmplies with Part Must review the plicy at least annually r mre frequently if material change in prtfli perfrmance r ecnmic cnditins Must ensure the FICU apprpriately staffs its cmmercial lending prgram Must understand the nature and level f risk assciated with the FICU s cmmercial lending activity, including ptential impact n earnings and net wrth Must receive peridic updates frm management n the perfrmance f the cmmercial lans prtfli Must ensure management takes necessary steps t identify, mnitr, and cntrl risks COMMERCIAL LENDING EXPERIENCE The prpsal eliminates the 2-year experience requirement, but still requires experienced management and staff. Senir executive fficers: A federally insured credit unin s senir executive fficers verseeing the cmmercial lending functin must understand the credit unin s cmmercial lending activities. At a minimum, senir executive fficers must have a cmprehensive understanding f the rle f cmmercial lending in the federally insured credit unin s verall business mdel and establish risk management prcesses and cntrls necessary t safely cnduct cmmercial lending. Qualified lending persnnel. A federally insured credit unin must emply qualified staff with experience in the fllwing areas: Underwriting and prcessing fr the type(s) f cmmercial lending in which the credit unin is engaged; Overseeing and evaluating the perfrmance f a cmmercial lan prtfli, including rating and quantifying risk thrugh a credit risk rating system (see New Definitins elsewhere in this summary); and Cnducting cllectin and lss mitigatin activities fr the type(s) f cmmercial lending in which the federally insured credit unin is engaged. The prpsed rule allws FICUs t meet the experience requirements by: Training and develping existing staff; Hiring experienced staff; r Using a third-party, such as a CUSO. Prpsed MBL Rule Summary Page 4 f 8 Califrnia and Nevada Credit Unin Leagues

5 Cmmercial Lending Plicy The cmmercial lan plicy requirement is cmparable t the current MBL plicy requirements and sets ut minimum expectatins fr risk assessment f the cmmercial brrwer and fr active risk management f the cmmercial lan prtfli. The plicy must prvide fr nging cntrl, measurement, and management f the FICU s cmmercial lending activities and address each f the fllwing: 1. Types f cmmercial lans permitted (meet the needs f membership) 2. Trade area (ability t cnduct peridic site visits) 3. Maximum lan amunts (prpsed new sectin): a. By lan categry; and b. T any ne brrwer r assciated brrwer The prpsal impses the same limit fr ne brrwing relatinship as the current rule; 15% f net wrth; hwever, FICUs may exceed this by 10% f net wrth if the amunt greater than 15% is fully secured by readily marketable cllateral. 4. Qualificatins and experience requirements fr lending staff 5. Lan apprval prcesses (prpsed new sectin) NCUA expectatin fr separatin f duties; assign credit apprval authrity t individuals r cmmittees; review and apprval by senir management prir t lan decisin fr cmplex and/r large lans r credit relatinships; versight f apprval prcess. 6. Cmprehensive underwriting standards (prpsed new sectin) The prpsed rule clarifies the requirements fr assessing risk at inceptin and ver the life f the lan and prvides in greater detail the types f cnsideratins and analyses that are required fr prper cmmercial lan underwriting. (See Underwriting Standards elsewhere in this summary.) 7. Risk management prcesses a. Use f lan cvenants, if apprpriate b. Peridic lan review c. Credit risk rating system d. Prcess t identify, reprt, and mnitr lans apprved as exceptins t plicy NCUA ntes that an FICU s credit risk rating system will be a majr emphasis in exams. Cllateral and Security All f the specific prescriptive limits and requirements related t cllateral in the current rule have been eliminated and replaced with the fundamental principle that cmmercial lans must be apprpriately cllateralized. The marketability and type f cllateral shuld be cnsidered in determining the cllateral requirements. The term f the lan shuld als be reflective f the anticipated useful life f the cllateral. In additin, credit unins shuld cnsider the vlatility f the asset as it relates t value and quantities. Specifically, current assets, especially accunts receivable and inventry, are dynamic, with changing market values and regular fluctuatin in quantity n hand. UNSECURED COMMERCIAL LENDING The prpsal states unsecured cmmercial lending shuld be limited and treated as an exceptin, t be ffered nly when the additinal risk is adequately ffset by apprpriate risk mitigants. Prpsed MBL Rule Summary Page 5 f 8 Califrnia and Nevada Credit Unin Leagues

6 Cllateral and Security (cntinued) PERSONAL GUARANTEES The prpsal remves the requirement t btain the persnal guarantee f the business principals; this decisin t require the guarantee r nt is left t the credit unin. Hwever, the NCUA cntinues t believe that persnal guarantees in mst cases are very imprtant and the prpsal includes the fllwing: When a persnal guarantee is nt btained, the FICU must dcument in the lan file that mitigating factrs sufficiently ffset the risk. FICUs shuld set prtfli limits fr these types f lans, measured in a reasnable percentage f the credit unin s net wrth. Cmmercial lans withut persnal guarantees shuld be tracked and peridically reprted t senir management and the bard. Cnstructin and Develpment Lans DEFINITION The prpsal establishes a new definitin fr cnstructin and develpment lans (CD lans) that distinguishes between incme-prducing prperty and prjects built fr a cmmercial purpse. Incme prducing means any prperty that generates incme frm the rental r sale f the units cnstructed with lan prceeds and the repayment f the lan is dependent n the successful cmpletin f the prject. Cmmercial purpse, by cntrast, is a term that applies t structures that d nt directly generate incme but enhance the peratin f a cmmercial r industrial peratin, such as a warehuse, manufacturing facility, and management ffice space. COLLATERAL VALUE The prpsed rule als establishes prcedures fr the valuatin f cllateral fr CD lans and utlines tw distinct methds fr determining cllateral value: ne fcused n the cst t cmplete the prject, the ther n prspective market value. The prpsed rule states explicitly that the credit unin must use the lesser value resulting frm these tw valuatin methds in its determinatin f cllateral value. ADMINISTRATION OF CD LOANS The prpsed rule requires a submissin f a line-item budget by the brrwer and calls fr it t be reviewed and accepted by a qualified individual representing the credit unin s interest. The prpsal utlines the necessary cmpnents f the disbursement prcess that will ensure that funds are disbursed as planned and in accrdance with the budget fr wrk cmpleted and t ensure that the cllateral prtectin has nt been adversely affected by intervening liens. Prpsed MBL Rule Summary Page 6 f 8 Califrnia and Nevada Credit Unin Leagues

7 MBL Cap The general aggregate statutry limit n MBLs is applied in the current rule as the lesser f 1.75 times the credit unin s net wrth r percent f the credit unin s ttal assets. (In the current rule, the percent is a shrthand reference t hw the cap applies t the requirement t maintain at least 7 percent f ttal assets t be well-capitalized; 1.75 x 7% = 12.25%). The prpsed rule interprets the statutry requirement as 1.75 times the applicable net wrth requirement fr a FICU t be well-capitalized. Thus, the prpsal remves the percentage and mdifies the regulatin t be the lesser f: 1.75 times the FICUs actual net wrth; r 1.75 times the minimum net wrth requirement t be categrized as well-capitalized. Per Larry Fazi s instructins during NCUA s recent Twn Hall Webinar, t calculate yur credit unin s aggregate limit n net member business lans: Exemptins: Cmpare: 7% x ttal assets; t 10% x risk-weighted assets (if subject t RBC requirements); then Whichever dllar amunt is greater, use that t multiply by 1.75 t get statutry MBL Cap. Credit unins that have a lw-incme designatin r that participate in the Cmmunity Develpment Financial Institutins prgram are exempt frm cmpliance with the aggregate MBL limit. Credit unins chartered fr the purpse f making cmmercial lans are als exempt frm cmpliance with the aggregate MBL limit. Underwriting Standards Underwriting standards must, at a minimum, address the fllwing: 1. The level and depth f financial analysis necessary t evaluate the financial trends and cnditin f the brrwer and the ability f the brrwer t meet debt service requirements; 2. Thrugh due diligence f the principal(s) t determine whether any related interests f the principal(s) might have a negative impact r place an undue burden n the brrwer and related interests with regard t meeting the debt bligatins with the credit unin; 3. Requirements f a brrwer prepared prjectin when histric perfrmance des nt supprt prjected debt payments. The prjectin must be supprted by reasnable ratinale and,at a minimum, must include a prjected balance sheet and incme and expense statement; 4. The financial statement quality and the degree f verificatin sufficient t supprt an accurate financial analysis and risk assessment; 5. The methds t be used in cllateral evaluatin, fr all types f cllateral authrized, including lan-tvalue rati limits. Such methds must be apprpriate fr the particular type f cllateral. The means t secure varius types f cllateral, and the measures taken fr envirnmental due diligence must als be apprpriate fr all authrized cllateral; and 6. Other apprpriate risk assessment including analysis f the impact f current market cnditins n the brrwer and assciated brrwers. Prpsed MBL Rule Summary Page 7 f 8 Califrnia and Nevada Credit Unin Leagues

8 Definitins MODIFIED DEFINITIONS: Assciated Brrwer: Replaces assciated member. Under the prpsal, an assciated brrwer is any ther persn r entity with a shared wnership, investment, r ther pecuniary interest in a business r cmmercial endeavr with the brrwer. This means any persn r entity named as a brrwer r debtr in a lan r extensin f credit, r any ther persn r entity, such as a drawer, endrser, r guarantr, engaged in a cmmn enterprise with the brrwer, r deriving a direct benefit frm the lan t the brrwer. Lan-t-value rati: This definitin is revised t clarify hw the LTV rati shuld be calculated. Must include in the numeratr all utstanding lan balances plus any unfunded cmmitments secured by the cllateral, including thse frm ther lenders that are senir t the credit unin s lien psitin. Clarifies that junir debt frm ther lenders des nt need t be included in in calculating lan-t-value ratis. Hwever, FICUs shuld evaluate the impact n the brrwer s cash flw all utstanding debt wed by the brrwer in determining their ability t repay the lan and FICUs shuld limit the amunt f subrdinate financing the brrwer may btain and require an equity investment by the brrwer that is cmmensurate t the risk. The rule further clarifies that the denminatr f the LTV rati is the market value fr cllateral held lnger than 12 mnths, and the lesser f the purchase price and the market value fr cllateral held 12 mnths. Market value is defined in part 722 f NCUA s regulatins fr real estate. Fr ther assets, NCUA expects FICUs t use prudent and apprpriate valuatin methds. The rule specifies that a cmmercial lan plicy must cntain the methds t be used in cllateral evaluatin fr all types f cllateral authrized, including lan-t-value rati limits; hwever, the limits are left t the discretin f the FICU via plicy. (Current regulatin cntains a limit f 80%; with certain exceptins). Net wrth: Fr cnsistency, the prpsed definitin f net wrth prvides a crss reference t NCUA s prmpt crrective actin and risk-based capital rules in part 702, which mre fully address the methdlgy fr determining a credit unin s net wrth. NEW DEFINITIONS: Cmmercial Lan: The rule prpses a new definitin f cmmercial lan t distinguish between the cmmercial lending activities in which a FICU may engage, and statutrily defined MBLs which are subject t the MBL cap. (See chart.) Credit Risk Rating System: The prpsal defines Credit Risk Rating System as a frmal prcess t identify and measure risk thrugh the assignment f risk ratings, als referred t as credit risk grades. An effective credit risk rating system assigns risk ratings at inceptin and reviews the ratings as frequently as necessary t satisfy the FICU s risk mnitring and reprting plicies. Risk ratings must be supprted by cmprehensive analysis and have sufficient granularity t differentiate the level f credit risk assciated with each brrwer. Risk ratings are determined thrugh an evaluatin f quantitative factrs based n financial perfrmance and qualitative factrs based n management, peratinal, market, and business envirnmental factrs. Readily Marketable Cllateral: Means a financial instrument r bullin that is salable under rdinary market cnditins with reasnable prmptness at a fair market value determined by qutatins based upn actual transactins n an auctin r similarly available daily bid and ask price market. Effective Date The NCUA prpses t delay implementatin f the final rule fr 18 mnths, t allw NCUA and state supervisry authrities adequate time t adjust t the new requirements, including training staff, and fr affected credit unins t make necessary changes t their cmmercial lending plicies, prcesses, and prcedures in cmpliance with the new rule. A final rule is expected by the end f the year, s it culd be mid-2017 befre FICUs benefit frm the changes. Questins: Is an 18-mnth implementatin perid fr credit unins apprpriate? Why r why nt? What implementatin perid d yu recmmend? Prpsed MBL Rule Summary Page 8 f 8 Califrnia and Nevada Credit Unin Leagues