NCUA Aims to Bring Minimum Capital Requirements for Corporates to Issue Unsecured Member Business Loans to Non-Members

ALEXANDRIA, Va. – NCUA has recently proposed a number of clarifications and definition changes involving member business lending including the minimum capital requirements a corporate credit union must meet to make unsecured member business loans to non-member credit unions and corporate CUSOs. As it stands, MBLs made by corporates to its member credit unions and CUSOs are exempt from the NCUA’s MBL rule 12 CFR 704.7(e)(1), (2); 12 CFR part 723 but loans made to non-member credit unions are subject to the rule and must adhere to the corresponding collateral and security requirements. Corporates are required to maintain a minimum capital ratio of 4% or a different minimum capital ratio under special circumstances. NCUA is now proposing to amend its MBL rule for capital requirements for unsecured MBLs to accommodate the differences between the more general capital requirements for natural person credit unions and for corporates. “Because of the way the regulation stands today, doing the loan directly has been an (done on a) ongoing basis of what corporates have done to be liquidity providers,” said Jay Murray, chief operating officer for Mid-Atlantic Corporate Federal Credit Union in Middletown, Pa. “From our view, we don’t see that the proposal puts anything at stake here because (business loans) have not been a larger part of our portfolio.” Murray said MidAtlantic, which serves 1,200 credit unions, CUSOs, and leagues, will still follow the minimum capital requirements in NCUA’s MBL rule going forward. At the same time, NCUA also wants to revise the definition of “net worth” in its MBL to be the same as in the prompt corrective action (PCA) regulation to avoid any confusion. The PCA regulation and Federal Credit Union Act both state that secondary capital accounts are counted in the net worth of low income credit unions. Another definition change involves the revision of “construction or development loans.” The current MBL wording is limited to financing arrangements for acquiring property or rights to property to convert it to an income producing purpose. This excludes a loan to a borrower, who already owns or has rights to a property, to convert it to or improve it as income producing property. “NCUA believes an appropriate test for determining if a loan is a construction or development loan is whether the loan will be used to renovate or otherwise develop a property for an income producing purpose,” the agency wrote. The “essential nature,” which is related to construction or development, should be excluded from the definition of “construction or development loan” just because the borrower has already acquired the property or rights to it, NCUA said. Back in October 2004, NCUA amended its MBL rule to permit credit unions to make SBA-guaranteed loans under the SBA’s “less restrictive” lending requirements. Before issuing the amendment, NCUA reviewed the SBA’s loan programs in which credit unions can participate and determined they provide reasonable criteria for participation and compliance within the bounds of safety and soundness. The regulator also sought feedback on the amendment and found that some had suggested expanding the scope to include other government guaranteed loan programs government guaranteed loan programs be included. “NCUA has made clear it is willing to consider other government guaranteed loan programs as it becomes apparent there is demand for the program among credit unions,” NCUA said. “Since October 2004, NCUA has learned there may be such demand.” NCUA is now seeking comment on how best to broaden the MBL rule to enable credit unions to participate more fully in other government guaranteed loan programs that the current MBL rule might otherwise restrict. [email protected]