WASHINGTON-The NCUA Board approved the long-awaited final rule regarding member business lending during its September meeting, as well as the first two large community charters under the updated field of membership rules. The final member business lending regulation approved unanimously by the board last week did receive some modifications. In response to concerns raised by a comment letter from the Treasury Department, two key provisions in the proposal were restricted. "We definitely supported the proposed rule.We felt they could have moved forward with the rule as proposed," NAFCU Director of Regulatory Affairs Gwen Baker said. CUNA General Counsel Eric Richard made similar remarks, adding, "It's still a great step forward and a balanced approach." Even though the final rule is not quite as broad as the proposal, it appears that the agency is attempting to implement it in a flexible manner, he said. Treasury, as well as some bankers who commented on the proposed rule, had said that it was concerned about allowing credit unions to exclude loan participations purchased without recourse from their member business lending cap. Both groups argued that credit unions could engage in "swapping" to elude the statutorily mandated 12.25% of assets ceiling. The final rule accounts for the distinction between member business loans and non-member loans; member business loans will still count toward the cap, while nonmember loans do not. It also requires that credit unions apply with the regional director for approval if a transaction would cause the credit union to exceed the cap. State charters would also have to receive approval from their state regulator first. NCUA Vice Chair JoAnn Johnson, who began the internal working group on the rule's update, said, "Credit unions will still benefit from the diversification and additional due diligence that will be provided through the purchase of nonmember business loan participations. Credit unions will not be able to circumvent the aggregate cap by purchasing loans made to their members by their CUSO or any other lender, and individual regions can monitor their overall business lending activity through an approval process. While less than 5% of the federally insured credit unions engaged in business lending are nearing their aggregate cap, the final rule will allow those credit unions the opportunity to exclude any purchased nonmember business loans or participation interests from their aggregate limit, subject to an approval process that assures the purchase is not part of a "swapping" arrangement or other plan to evade the limit." Another issue raised by Treasury was the elimination of the personal guarantee requirement for business loans. As a compromise, the final rule would only allow Reg-Flex credit unions to go without, despite the fact that no other lenders are required to obtain personal guarantees. "The personal guarantee has been addressed and addressed appropriately," NCUA Chairman Dennis Dollar said. He added that the agency still strongly recommended credit unions obtain a personal guarantee regardless. The new rule also: * clarifies that credit union to natural person credit union or credit union service organization loans are not member business loans (for federally insured state chartered credit union, it depends on the state law); * lowers the equity requirement for construction loans from 35% to 25%; * eliminates equity and 15% net worth requirement for single-family construction loan if there is a contract; * authorizes well-capitalized credit unions to make unsecured member business loans up to $100,000; * permits 100% financing consumer-type vehicle loans for business purposes; * clarifies and streamlines member business loan documentation requirements; * creates a three-tiered system of Prompt Corrective Action weighting for member business loans; and * authorizes federal credit union investment, subject to regulatory restrictions, in CUSOs for business loan originations. "There are literally millions of reasons why I support this rule-one for each credit union member who needs business capital," NCUA Board Member Deborah Matz, another driving force behind the rule's modernization, said. The importance of the rule even drew CUNA President and CEO Dan Mica to the standing-room-only meeting. "I think every credit union ought to take a look at this rule," he remarked. Small business lending is good for the economy, credit unions, and small business, he said. This rule was originally delayed from the July board meeting so the agency could have further time to review it and again Sept. 18 when Hurricane Isabel stormed up the East Coast, forcing government agencies in the Washington, D.C. area to close. OK, But Not The Hamptons In other news at the September meeting, the NCUA Board approved the closely watched application of Bethpage Federal Credit Union for a community charter. The $1.6 billion credit union applied to serve Long Island minus the tourist area known as the Hamptons. Noting the large size of the community, 2.7 million residents, Dollar explained, "size is never a qualifier or a disqualifier." He pointed out that those who are not familiar with Long Island might think it is a wealthy area due to the media portrayal. In fact, in Suffolk County alone, there are 77 census tracts that qualify as underserved, he said. NCUA also signed off on a community charter conversion for ABNB Federal Credit Union to serve nearly 1.1 million residents in Wight and Southampton Counties, including the Cities of Franklin, Chesapeake, Norfolk, Portsmouth, Suffolk, and Virginia Beach, Virginia. Dollar highlighted that the credit union took in two underserved areas under the Access Across America initiative and within six months had signed up $700,000 in deposits and over $3 million in loans, which demonstrates the credit union's desire to serve. As part of the NCUA's review of one-third of its regulations each year, staff stumbled upon the rule regarding disclosures to members in credit union to mutual savings bank conversions. Chairman Dollar pounced on the issue, in light of the potential of an emerging trend of credit unions converting to mutuals that convert to stock formation, and asked that special attention be paid to it. As a result, the board issued a proposed rule to require more information be divulged in these disclosures. The disclosure should include an "adequate description" of why the institution is considering converting and include the fact that credit union members could lose their ownership interests if the credit union converts to a mutual and then to a stock institution; disclosure that members of mutuals have less voting rights than with credit unions; and explaining any economic benefit a director or senior management official may receive due to the conversion. In the current era of corporate governance scrutiny, Dollar said this proposal shows that NCUA "comes down on the side of full disclosure." He counted 24 credit union-to-mutual conversions in the last 10 years. Of those 13 had gone public or merged with banks. Five converted less than two years ago and therefore are not eligible to convert yet. Only six former credit union mutuals that are able to do so have not converted. He commented, "It's hardly a trend.but it still has the potential to be the beginnings of a trend." Also stemming from NCUA's one-third-a-year review, the board issued a proposal on suretyship and guaranty and maximum borrowing authority. [email protected]