The Final MBL Rule provides credit unions making business loans with greater flexibility and more autonomy, shifting the rule’s focus from the current prescriptive approach to a more principles-based methodology that emphasizes sound risk management practices for business lending.

The final Rule eliminates most of the prescriptive lending limits and their corresponding waiver provisions. The also distinguishes the policy and program responsibilities for commercial loans from the statutory limit on MBLs.

While my write-up is long (go get your coffee now), it is only a summary and should not be considered all-inclusive. Refer to the Final Rule, or contact NWCG if you have specific questions.

Personal Guarantee – EFFECTIVE 05/13/2016
Currently, §723.7(b) generally requires the personal guarantee of the principals of the organization for member business loans. The final rule amends this requirement to say:

(§723.5 Collateral and security)
(b) A federally insured credit union that does not require the full and unconditional personal guarantee from the principal(s) of the borrower who has a controlling interest in the borrower must determine and document in the loan file that mitigating factors sufficiently offset the relevant risk.
(1) Transitional provision. A federally insured credit union that, between May 13, 2016, and January 1, 2017, makes a member business loan and does not require the full and unconditional personal guarantee from the principal(s) of the borrower who has a controlling interest in the borrower is not required to seek a waiver from the requirement for personal guarantee, but it must determine and document in the loan file that mitigating factors sufficiently offset the relevant risk.

Thus, personal guarantees will no longer be required as of 05/13/2016.  The credit union will have to document and retain the reasons as to why the personal guarantee was not required to offset the risk.

All Other Sections – EFFECTIVE 01/01/2017

723.3 Board of directors and management responsibilities
(Not applicable to credit unions with less than (1) $250 million in assets; (2) having an aggregate amount of outstanding commercial loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus any outstanding commercial loan balances and unfunded commitments sold and serviced by the credit union total less than 15 percent of the credit union’s net worth; and, (3) in a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15% of the credit union’s net worth.)

The credit union’s board must:

• approve, and review annually, a commercial loan policy that complies with the requirements
• ensure the credit union appropriately staffs its commercial lending program
• understand and remain informed, through periodic briefings about the nature and level of risk in the commercial loan portfolio, including potential impact on earnings and net worth

The credit union must internally possess the following experience and competencies:

• senior executive officers must have a comprehensive understanding of the role of commercial lending in the credit union’s overall business model and establish risk management processes and controls necessary to safely conduct commercial lending
• qualified staff must have experience in
  • underwriting and processing the types of commercial loans the credit union engages in
  • Overseeing and evaluating the performance of a commercial loan portfolio, including rating and quantifying risk through a credit risk rating system
  • Conducting collection and loss mitigation activities for the type(s) of commercial lending in which the federally insured credit union is engaged

In order to comply with the experience requirements, the credit union can conduct internal training and development, hire qualified individuals, or under certain situations use a third party.

723.4 Commercial loan policy
(Not applicable to credit unions with less than (1) $250 million in assets; (2) having an aggregate amount of outstanding commercial loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus any outstanding commercial loan balances and unfunded commitments sold and serviced by the credit union total less than 15 percent of the credit union’s net worth; and, (3) in a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15% of the credit union’s net worth.)

Prior to engaging in commercial lending, the credit union must adopt and implement a comprehensive written commercial loan policy and establish procedures for commercial lending. The board-approved policy must ensure the credit union’s commercial lending activities are performed in a safe and sound manner by providing for ongoing control, measurement, and management of the federally insured credit union’s commercial lending activities. At a minimum, a federally insured credit union’s commercial loan policy must address each of the following:

• Types of commercial loans permitted
• Trade area
• Maximum amount of assets, in relation to net worth, allowed in secured, unsecured, and unguaranteed commercial loans and in any given category or type of commercial loan and to any one borrower or group of associated borrowers.
• Qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting commercial loans
• Loan approval processes, including establishing levels of loan approval authority commensurate with the individual’s or committee’s proficiency in evaluating and understanding commercial loan risk, when considered in terms of the level of risk the borrowing relationship poses to the credit union
• Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and borrowing relationships contemplated. The standards must, at a minimum, address the following:
  • The level and depth of financial analysis necessary to evaluate the financial trends and condition of the borrower and the ability of the borrower to meet debt service requirements;
  • Thorough due diligence of the principal(s) to determine whether any related interests of the principal(s) might have a negative impact or place an undue burden on the borrower and related interests with regard to meeting the debt obligations with the credit union;
  • Requirements of a borrower-prepared projection when historic performance does not support projected debt payments. The projection must be supported by reasonable rationale and, at a minimum, must include a projected balance sheet and income and expense statement;
  • The financial statement quality and the degree of verification sufficient to support an accurate financial analysis and risk assessment;
  • The methods to be used in collateral evaluation, for all types of collateral authorized, including loan-to-value ratio limits. Such methods must be appropriate for the particular type of collateral. The means to secure various types of collateral, and the measures taken for environmental due diligence must also be appropriate for all authorized collateral; and
  • Other appropriate risk assessment including analysis of the impact of current market conditions on the borrower and associated borrowers.
• Risk management processes commensurate with the size, scope and complexity of the credit union’s commercial lending activities and borrowing relationships. These processes must, at a minimum, address the following:
  • Use of loan covenants, if appropriate, including frequency of borrower and guarantor financial reporting;
  • Periodic loan review, consistent with loan covenants and sufficient to conduct portfolio risk management. This review must include a periodic reevaluation of the value and marketability of any collateral;
  • A credit risk rating system. Credit risk ratings must be assigned to commercial loans at inception and reviewed as frequently as necessary to satisfy the federally insured credit union’s risk monitoring and reporting policies, and to ensure adequate reserves as required by generally accepted accounting principles (GAAP); and
  • A process to identify, report, and monitor loans approved as exceptions to the credit union’s loan policy

723.5 Collateral and security
A credit union must require collateral commensurate with the level of risk associated with the size and type of any commercial loan. Collateral must be sufficient to ensure adequate loan balance protection along with appropriate risk sharing with the borrower and principal(s). A credit union making an unsecured loan must determine and document in the loan file that mitigating factors sufficiently offset the relevant risk.

723.6 Construction and development loans
In addition to the preceding requirements, the credit union’s commercial loan policy includes adequate provisions to determine and establish collateral value. Collateral value is the lesser of the project’s cost to complete or its prospective market value.  The commercial loan policy must also include: (1) having qualified personnel conduct a review and approve any line item construction budget before closing the loan, (2) establishing a requisition and loan disbursement process, (3) releasing or disbursing funds only after on-site inspections and determining that the remaining available funds are sufficient to complete the project, and (4) confirming that no intervening liens have been filed.

723.7 Prohibited activities
The credit union cannot grant a commercial loan to certain senior managers and their family members, or compensated directors, unless the director was recused from the approval.

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The final rule represents a significant change to MBL approach. Thus, supervisory expectations for safe and sound business lending will evolve accordingly.  Prior to the final rule become effective, NCUA will publish updated supervisory guidance to examiners, and will share this guidance with credit unions.

The final rule is available at: https://www.federalregister.gov/articles/2016/03/14/2016-03955/member-business-loans-commercial-lending?utm_campaign=subscription+mailing+list&utm_medium=email&utm_source=federalregister.gov

NCUA’s summary of key changes is available at: https://www.ncua.gov/About/Documents/Agenda%20Items/AG20160218Item2c.pdf