[Federal Register Volume 69, Number 207 (Wednesday, October 27, 2004)]
[Rules and Regulations]
[Pages 62563-62566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24001]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 723


Member Business Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending the collateral and security requirements of 
its member business loans (MBL) rule to enable credit unions subject to 
the rule to participate more fully in Small Business Administration 
(SBA) guaranteed loan programs.

DATES: This final rule is effective November 26, 2004.

FOR FURTHER INFORMATION CONTACT: Frank Kressman, Staff Attorney, Office 
of General Counsel, at (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

A. Background

    In 2003, NCUA amended its MBL rule and other rules related to 
business lending to enhance credit unions' ability to meet their 
members' business loans needs. 68 FR 56537 (October 1, 2003). In 
addition to comments on those amendments, NCUA received other 
suggestions on how it could improve the MBL rule. Among the most 
significant of these, commenters suggested NCUA amend the MBL rule ``so 
that it could be better aligned with lending programs offered by the 
Small Business Administration,'' such as the SBA's Basic 7(a) Loan 
Program. Id. at 56538. While NCUA recognized the merits of this 
suggestion, NCUA could not include it in the final rulemaking because 
it addressed issues outside the scope of the rulemaking. The 
Administrative Procedure Act generally prohibits Federal Government 
agencies from adopting rules without affording the opportunity for 
public comment. 5 U.S.C. 553. NCUA noted in the final rule, however, 
that it would review this suggestion to determine if it would be 
appropriate to act on it in a subsequent rulemaking.
    As a result of that review, NCUA issued a proposed amendment to its 
MBL rule in June 2004 to permit credit unions to make SBA guaranteed 
loans under SBA's less restrictive lending requirements instead of 
under the more restrictive MBL rule's lending requirements. 69 FR 39873 
(July 1, 2004). NCUA reviewed the SBA's loan programs in which credit 
unions can participate and determined they provide reasonable criteria 
for credit union participation and compliance within the bounds of 
safety and soundness. Additionally, these SBA programs are ideally 
suited to the mission of many credit unions to satisfy their members' 
business loans needs.
    NCUA noted in the proposal that it recognizes NCUA's collateral and 
security requirements for MBLs, including construction and development 
loans, are generally more restrictive than those of the SBA's 
guaranteed loan programs and could hamper a credit union's ability to 
participate fully in SBA loan programs. As a result, the MBL rule's 
collateral and security requirements could prevent a credit union from 
making a particular loan that it could otherwise make under SBA's 
requirements. NCUA issued the proposal to provide relief from these 
more restrictive requirements and to

[[Page 62564]]

help enable credit unions to better serve their members' business loans 
needs.

B. Clarification of Existing Authority

    NCUA discussed in the proposal that its Office of General Counsel 
in Legal Opinion 03-0911, dated May 20, 2004, clarified that NCUA's 
general lending rule and the Federal Credit Union Act (Act) permit 
federal credit unions (FCUs) to make MBLs under the terms of the SBA's 
guaranteed loan programs to the extent the terms and conditions under 
which the guarantee is provided are consistent with the requirements 
and limitations in the MBL rule. 12 CFR 701.21(e); 12 U.S.C. 
1757(5)(A)(iii). Specifically, the opinion identified loan maturity 
limits, usury ceilings and prepayment penalties as terms of the SBA's 
guaranteed loan programs that an FCU could use in lieu of corresponding 
terms in NCUA's rules. The opinion stated, however, that a credit union 
could not rely on the exception for government guaranteed loan programs 
in NCUA's general lending rule and the Act with regard to collateral 
requirements for MBLs. 12 CFR 701.21(e); 12 U.S.C. 1757(5)(A)(iii). The 
opinion explained the MBL rule expressly sets collateral requirements 
for MBLs in the form of maximum loan-to-value ratios. The collateral 
requirements of the SBA's guaranteed loan programs are not consistent 
with those of the current MBL rule and, therefore, cannot be used. The 
proposed amendments to the MBL rule remove that impediment by exempting 
SBA guaranteed loans from the MBL rule's collateral requirements.
    The proposal also noted that there could be circumstances where a 
business loan made under an SBA loan program would not be subject to 
the MBL rule. For example, a $40,000 business loan with an SBA 
guarantee to a member who has no other loans with the originating 
credit union would be too small to meet the definition of an MBL. Thus, 
the credit union in this example can rely on the authority provided by 
Sec.  701.21(e) of NCUA's rules and make a business loan as part of an 
SBA loan program under all of the terms and conditions required or 
permitted by the program.
    The MBL rule applies to all FCUs and to most federally-insured 
state credit unions (FISCUs). The proposal noted that a FISCU is exempt 
from the MBL rule only if, after August 7, 1998, the enactment of the 
Credit Union Membership Access Act (CUMAA), Public Law 105-21, its 
state supervisory authority (SSA) has adopted its own business loan 
rule, with the approval of the NCUA Board, for use instead of NCUA's 
MBL rule. The amendments regarding collateral requirements apply to all 
credit unions subject to the MBL rule, but it is important to note that 
legal opinion OGC 03-0911 applies only to FCUs, not FISCUs. FISCUs 
follow state law and regulation with respect to loan maturity, interest 
rate and prepayment penalties. For those issues, the relationship 
between any state law limitations and SBA's requirements should be 
determined by FISCUs in consultation with their state supervisory 
authority.
    Finally, the proposal noted that, while NCUA believes many credit 
unions would greatly benefit from participating in SBA programs, NCUA 
also believes that programs of this type can create some additional 
safety and soundness concerns. For example, the loans being guaranteed 
are often riskier than other loans made by credit unions, and most 
credit unions would not make these kinds of loans without the security 
the SBA guarantees provide. NCUA noted it is aware that SBA guarantee 
programs generally place stringent requirements on participating 
lenders to comply with program requirements or face losing the 
guarantee. Accordingly, the proposal recommended that, before a credit 
union becomes a participating lender, it makes certain it fully 
understands the terms of the program and has procedures in place to 
assure its compliance with all program requirements.

C. Summary of Comments

    NCUA received twenty-four comment letters regarding the proposed 
rule: four from FCUs, three from state credit unions, one from a 
private individual, seven from credit union trade organizations, one 
from a credit union service organization, one from a certified 
development company, one from a certified development company trade 
organization, one from a professional association representing state 
and territorial regulatory agencies, one from a bank, and four from 
banking trade organizations. All commenters supported the proposal 
except the bank and banking trade organizations.
    Many of the commenters supporting the proposal also offered 
additional comments. For example, seven commenters asked NCUA to 
clarify that the proposal applies to SBA's Certified Development 
Company (504) Loan Program in addition to SBA's Basic 7(a) Loan 
Program. NCUA confirms the proposal applies to the 504 Loan Program and 
highlights that the proposal expressly states it applies to MBLs made 
as part of an SBA guaranteed loan program.
    Four commenters suggested NCUA expand the scope of the proposal to 
include other government guaranteed loan programs. Three of them 
specifically named the Farm Service Agency or United States Department 
of Agriculture loan programs. Two of them suggested all government 
guaranteed loan programs be included. As noted in the preamble to the 
proposal, NCUA is willing to consider other government guaranteed loan 
programs as it becomes apparent there is demand for the program among 
credit unions.
    Two commenters suggested NCUA reference Part 702 Prompt Corrective 
Action (PCA) in Sec.  723.4 of the MBL rule to indicate PCA applies to 
member business lending. These commenters also stated it is burdensome 
for credit unions to have to track and report MBLs differently for 
different purposes. Specifically, they noted credit unions must do this 
when calculating net member business loan balances (NMBLB) under the 
MBL rule and risk-based net worth (RBNW) requirement under PCA. One of 
these commenters asked NCUA to explore ways of minimizing this burden. 
The other suggested using the NMBLB for purposes of calculating the 
RBNW requirement and permit credit unions to exclude MBLs that have 
been paid down below $50,000 from the calculation of the RBNW 
requirement. Part 702 is currently referenced in Sec.  723.1 but not in 
Sec.  723.4. NCUA is including a reference to part 702 in Sec.  723.4 
in the final rule. While NCUA recognizes there is some degree of 
inconvenience associated with tracking and reporting MBLs differently 
when calculating NMBLB and RBNW, NCUA believes the risks associated 
with making MBLs necessitate this form of accounting. Additionally, 
this system helps preserve the flexibility a credit union has to 
exclude MBLs from its NMBLB when they have been paid down below 
$50,000.
    Three commenters asked NCUA to clarify how an SBA loan term could 
be both less restrictive than an NCUA requirement and still consistent 
with the MBL rule. This is possible when an SBA term is less 
restrictive than an NCUA requirement that is not specifically addressed 
in the MBL rule. For example, maturity limits are not specifically 
addressed in the MBL rule but are in the Act and elsewhere in NCUA's 
regulations.
    The bank and four banking trade organizations opposed the proposal 
stating, among other things, it contradicts congressional intent to 
limit credit unions' ability to make MBLs. NCUA disagrees. The proposal 
does not

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increase any congressional limits on the kind or amount of MBLs a 
credit union may make. Moreover, the legal authority allowing credit 
unions to make MBLs under the terms of an SBA guaranteed loan program 
is in the Act and, therefore, directly reflecting congressional intent. 
Finally, congressional representatives have urged NCUA to use its 
authority, conferred by Congress, to facilitate MBL lending and to 
refrain from imposing any limitations on credit unions in this context 
not explicitly called for by Congress in CUMAA. 68 FR 56537, 56538 
(October 1, 2003).
    Accordingly, except for technical amendments, NCUA adopts the 
proposed amendments to part 723 as final without change.

D. Net Member Business Loan Balance

    The MBL rule uses the phrase ``net member business loan balance'' 
to describe the outstanding loan balance plus any unfunded commitments 
reduced by a number of factors. Section 723.10(h) uses the phrase 
``outstanding member business loan balance'' instead of ``net member 
business loan balance.'' This inconsistent use of language was 
inadvertent and is corrected by amending Sec.  723.10(h) to read ``net 
member business loan balance.''

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small credit unions (those under ten million 
dollars in assets). This rule permits credit unions to more fully 
participate in SBA loan programs, without imposing any additional 
regulatory burden. The final rule would not have a significant economic 
impact on a substantial number of small credit unions, and, therefore, 
a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the final rule would not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. This final rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this final rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 723

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on October 21, 
2004.
Mary F. Rupp,
Secretary of the Board.


0
For the reasons stated above, NCUA amends 12 CFR part 723 as follows:

PART 723--MEMBER BUSINESS LOANS

0
1. The authority citation for part 723 continues to read as follows:

    Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.


0
2. Revise the introductory sentence of Sec.  723.3 to read as follows:


Sec.  723.3  What are the requirements for construction and development 
lending?

    Except as provided in Sec.  723.4 or unless your Regional Director 
grants a waiver, loans granted for the construction or development of 
commercial or residential property are subject to the following 
additional requirements.
* * * * *

0
3. Revise Sec.  723.4 to read as follows:


Sec.  723.4  What other regulations apply to member business lending?

    (a) The provisions of Sec.  701.21(a) through (g) and part 702 of 
this chapter apply to member business loans granted by credit unions to 
the extent they are consistent with this part. Except as required by 
part 741 of this chapter, federally insured State-chartered credit 
unions are not required to comply with the provisions of Sec.  
701.21(a) through (g) of this chapter.
    (b) If a federal credit union makes a member business loan as part 
of a Small Business Administration guaranteed loan program with loan 
requirements that are less restrictive than those required by NCUA, 
then the federal credit union may follow the loan requirements of the 
relevant Small Business Administration guaranteed loan program to the 
extent they are consistent with this part. A federally insured State-
chartered credit union that is subject to this part and makes a member 
business loan as part of a Small Business Administration guaranteed 
loan program with loan requirements that are less restrictive than 
those required by NCUA may follow the loan requirements of the relevant 
Small Business Administration guaranteed loan program to the extent 
they are consistent with this part if its state supervisory authority 
has determined that the credit union has authority to do so under State 
law.
    (c) The collateral and security requirements of Sec.  723.3 and 
Sec.  723.7 do not apply to member business loans made as part of a 
Small Business Administration guaranteed loan program.

0
4. Revise Sec.  723.7(a) introductory text to read as follows:


Sec.  723.7  What are the collateral and security requirements?

    (a) Except as provided in Sec.  723.4 or unless your Regional 
Director grants a waiver, all member business loans, except those made 
under paragraphs (c), (d), and (e) of this section, must be secured by 
collateral as follows:
* * * * *

0
5. Revise Sec.  723.10(h) to read as follows:


Sec.  723.10  What waivers are available?

* * * * *
    (h) Maximum aggregate net member business loan balance to any one

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member or group of associated members under Sec.  723.8.

[FR Doc. 04-24001 Filed 10-26-04; 8:45 am]
BILLING CODE 7535-01-P