NCUA's MBL Proposal: Where Credit is Due

At its September 18 meeting, the NCUA Board considered its March 2003 proposal to significantly relax its MBL rule. Notwithstanding its final decision on the proposed rule, the NCUA deserves credit for moving boldly to propose a progressive set of revisions that would help credit unions better serve their members’ business borrowing needs. Undoubtedly there were many factors that entered into the NCUA’s thinking in proposing the rule, but I’d like to highlight one that may be overlooked: the effect of the dual chartering system. Ironically, this force was set into motion on the MBL issue a few years ago by the NCUA itself. Before the passage of the Credit Union Membership Access Act (CUMAA) in 1998, the NCUA’s MBL rule had what was, in effect, a “reverse preemption” provision. State MBL rules determined by the NCUA Board to be “substantially similar” would supersede the NCUA’s MBL rule. Unfortunately, the NCUA took a rather narrow view of the “substantially similar” standard. In practice, the NCUA was not likely to approve a state rule unless it was virtually identical to NCUA’s rule. Although there is some value to having an identical state rule, because the state and not the NCUA has the power of interpretation, the de facto “identical” standard left little significant room for states to fashion more flexible rules. Despite the hope the provision offered, state regulators were still effectively preempted by a federal insurance rule many felt went well beyond safety and soundness. Along came CUMAA in 1998, with a new bucket restriction on aggregate MBLs. Thanks in large part to NASCUS, the provision contained some exceptional wording mandating that the NCUA “consult and seek to work cooperatively” with state regulators in implementing the MBL restrictions. Senior NCUA staffers invited NASCUS to name several individuals to provide state input in furtherance of the Congressional mandate. In response, NASCUS created a working group known as the 1151 Task Force, which included several regulators and CEOs. To serve initially on the Task Force, NASCUS named me, the then-Washington regulator, David Paul, the Colorado regulator, Gary Mielock, the Michigan regulator, Gary Oakland, the CEO of Boeing Employees Credit Union, and Craig Esrael, the CEO of First South Credit Union. After working up ideas among the Task Force members, the state regulators in the group and Mary Martha Fortney of NASCUS would meet for days at a time with the NCUA staffers, at locations around the country, to develop a workable set of CUMAA rules. We all took a lot of pride in the draft rules that came out of those sessions. In working up revisions to the MBL rule to reflect the new CUMAA limitations, the NASCUS regulators encouraged the NCUA staff to update the other, pre-existing provisions of the MBL rule, particularly the “substantially similar” standard. To its credit, the NCUA was amenable to the suggestion. Under the new test, the NCUA Board may approve a state MBL rule if it finds, in essence, that the state rule does not compromise safety and soundness. In application, this test has proven to be much more flexible than the old “substantially similar” test. I would hope that states would continue to take advantage of this reverse preemption provision, notwithstanding the NCUA’s adoption of a new MBL rule. States should continue to propose their own MBL rules, challenging the NCUA’s thinking on how an MBL rule can be made more flexible within safety and soundness parameters. Since November of 1999, seven states have had their MBL rules approved under the new standard, providing more lending flexibility to nearly 900 state-chartered credit unions in Texas, Missouri, Washington, Maryland, Wisconsin, Connecticut, and Oregon. These state rules contained significant variations from the NCUA’s pre-existing MBL rule. Among others: * No requirement for personal guarantees * Greater unsecured MBL authority * Lower equity requirements on construction and development loans If you compare the wording of these state provisions to the NCUA’S MBL proposal, you will notice a striking similarity. The NCUA has, in the explanation to its proposed rule, acknowledged the contribution of these seven states. Shortly after the state rules were approved, the force of the dual chartering system began to take hold. Federal credit unions, perceiving a charter disadvantage, applied pressure on the NCUA to change its MBL rule and correct the imbalance. After all, if the NCUA determined that state charters could abide by a more flexible set of MBL rules in seven states, and not compromise safety and soundness, why shouldn’t federal charters have the same freedoms? In response, the NCUA proposed a progressive MBL rule that would help federal charters and federally-insured state charters in those states that had not adopted their own MBL rules. What we have witnessed here is the dual chartering system at work, helping to create a win-win for both charters and the credit union system. The NCUA’s MBL proposal is a perfect example of why the dual chartering system is vital to every credit union, whether state or federally chartered. And the NASCUS 1151 Task Force continues its work with the NCUA. It has some new members now, but the benefit to the dual chartering system remains the same.