[Federal Register Volume 73, Number 123 (Wednesday, June 25, 2008)]
[Proposed Rules]
[Pages 35977-35978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14294]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 73, No. 123 / Wednesday, June 25, 2008 / 
Proposed Rules  

[[Page 35977]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 723

RIN 3133-AD42


Member Business Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking and request for comment 
(ANPR).

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SUMMARY: NCUA is considering amending its member business loans (MBL) 
rule to clarify or revise current provisions including those related 
to: loan-to-value (LTV) ratio requirements; collateral and security 
requirements; credit union service organization (CUSO) involvement in 
the MBL process; MBL loan participation; and waivers. NCUA seeks 
comment on these issues and any others commenters think NCUA should 
consider.

DATES: Comments must be received on or before August 25, 2008.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name]--Comments on Advanced Notice of Proposed Rulemaking for Part 
723'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

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

SUPPLEMENTARY INFORMATION:

A. Background

    In addition to making regulatory changes as the need arises, NCUA's 
policy is to review all of its existing regulations every three years. 
Interpretive Ruling and Policy Statement (IRPS) 87-2, Developing and 
Reviewing Government Regulations, (Sept. 18, 1987), as amended by IRPS 
03-2 (May 29, 2003). This review is conducted on a rolling basis so 
that a third of the regulations is reviewed each year. This helps NCUA 
update its regulations to address current regulatory concerns. NCUA 
provides notice to the public of the regulations under review so the 
public has an opportunity to comment. This ANPR is the result of that 
process and comments received from the public and NCUA offices.
    Under Part 723, an MBL is any loan, line of credit, or letter of 
credit, where the proceeds will be used for a commercial, corporate, 
other business investment property or venture, or agricultural purpose. 
12 CFR Sec.  723.1. There are several exceptions to this general 
definition. The MBL rule contains statutory and regulatory requirements 
and limitations, such as collateral and security requirements, equity 
requirements, and loan limits. The potential amendments discussed below 
cover a wide variety of MBL issues.

B. Discussion of MBL Issues

1. Loan-to-Value Ratio Requirements and Unsecured MBLs

    Generally, the MBL rule requires all MBLs to be secured by 
collateral. 12 CFR 723.7(a). The maximum LTV ratio permitted for all 
liens is 80% unless the amount in excess of 80% is covered by private 
mortgage insurance or is otherwise insured, guaranteed or subject to an 
advance commitment to purchase by certain government agencies. 12 CFR 
723.7(a)(1). In any event, the LTV ratio may not exceed 95%.
    The MBL rule has various exceptions to the LTV requirement. One 
exception permits well capitalized natural person credit unions and 
corporate credit unions that maintain required minimum capital levels 
to make unsecured MBLs. 12 CFR 723.7(c)(1). Unsecured MBLs to any one 
member or group of associated members are limited to the lesser of 
$100,000 or 2.5% of a credit union's net worth and all unsecured MBLs 
may not exceed 10% of net worth. 12 CFR 723.7(c)(2) and (3). Another 
exception available under certain circumstances is that the 
requirements and limits in Sec.  723.7 do not apply to credit card 
lines of credit offered to nonnatural person members. 12 CFR 723.7(d). 
Finally, a credit union can make vehicle MBLs, without being subject to 
LTV requirements, if the vehicle is a car, van, pick-up truck, or SUV 
and not part of a fleet.
    NCUA has received comments on several aspects of the LTV 
requirements. One commenter suggested lowering the borrower equity 
requirement for construction and development loans (C&D loans) from the 
current 25% to 20%. This translates to raising the maximum LTV limit 
for C&D loans from the current 75% to 80% and making it the same as the 
general LTV requirement. The commenter suggested this will make credit 
unions more competitive in this lending area.
    NCUA believes C&D loans are the riskiest of all MBLs and, 
therefore, require greater regulatory restrictions to ensure safe and 
sound lending. NCUA is willing, however, to consider comments in 
support of easing restrictions on C&D loans. Commenters should address 
the greater safety and soundness concerns of C&D loans. NCUA notes that 
credit unions can seek approval to waive the borrower equity 
requirement under the MBL rule's waiver provision. 12 CFR 723.10(c). If 
commenters support easing LTV requirements for C&D loans, they should 
address the sufficiency of the waiver provision. As noted below, NCUA 
is inviting comments generally on the sufficiency of the MBL rule's 
waiver provisions.
    Other comments have included a request to modify the LTV 
requirements for loans on fleet vehicles to make credit unions more 
competitive and a request for NCUA to narrow the definition of 
``fleet'' from that articulated in OGC Legal Op. 05-1038 (December 8, 
2005) so it would capture fewer business vehicles. See, http://www.ncua.gov/RegulationsOpinionsLaws/opinion_letters/2005/05-1038.pdf. 
NCUA would appreciate comments on this suggestion and asks commenters 
to

[[Page 35978]]

address relevant safety and soundness ramifications.
    NCUA welcomes general comments on any aspect of the MBL LTV 
requirements and unsecured MBL exception including if there should be a 
regulatory credit limit placed on business credit cards. One commenter 
suggested the LTV limits should be raised or eliminated. Although it is 
unlikely NCUA would entirely eliminate LTV requirements for MBLs, 
commenters are encouraged to comment and provide suggestions on 
improving or clarifying these provisions. This includes comments on 
whether NCUA has clearly explained how a credit union is to establish 
the value of a property for purposes of calculating the LTV ratio, 
defined what costs and fees may properly be included in calculating a 
borrower's equity in a project, and how the unsecured MBL exception 
should be applied when a credit union is making an MBL under a Small 
Business Administration guaranteed loan program. NCUA also is 
interested in comments on whether the differences between various kinds 
of collateral would support using a tiered approach to LTV limits so 
that a loan secured by safer collateral would have a higher LTV limit.

2. Experience Requirement and CUSO Activities

    The MBL rule requires a credit union making MBLs to use the 
services of an individual with at least two years direct experience 
with the type of lending in which the credit union will engage. 12 CFR 
723.5(a). The experience must provide the credit union with sufficient 
expertise given the complexity and risk exposure of the contemplated 
MBLs. Id.
    NCUA solicits comment on the adequacy of the two-year experience 
requirement. Also, there appears to be some confusion among credit 
unions regarding how this requirement can be met or is to be calculated 
using both in-house employees and third party contractors. Also, there 
appears to be confusion as to what role CUSOs may play in providing 
that expertise to non-owner credit unions and credit unions that wholly 
or partially own the CUSO. Additionally, credit unions appear uncertain 
on the application of the conflict of interest provision in the MBL 
rule to circumstances where a CUSO or other third party is used to meet 
the two-year experience requirement. 12 CFR 723.5(b).
    NCUA solicits comment on the need to clarify Sec.  723.5 and, if 
commenters believe it needs clarification, NCUA welcomes specific 
suggestions for amending the regulation. For instance, it would be 
helpful to know if commenters think Sec.  723.5 needs substantive 
revision or if adding specific examples in the regulatory text would be 
sufficient to clarify the standards. NCUA is also interested if 
commenters believe other aspects of CUSO involvement in the MBL process 
could be improved.

3. Loan Participations

    Credit unions are authorized to sell participation interests in 
their MBLs to the same extent as non-business loans. In noting many of 
the benefits of engaging in loan participations, NCUA stated:

    Specifically, engaging in loan participations is an effective 
tool for FCUs to manage liquidity and concentration risk. Loan 
participation is also a way for FCUs to comply with NCUA or self-
imposed lending limits. Small FCUs are able to improve the 
diversification of their loan portfolios by participating in loans 
originated by larger FCUs that have the resources to underwrite a 
wider variety of loan types.

    68 FR 75110 (December 30, 2003). NCUA's loan participation rule 
provides the basic regulatory requirements for all loan participations, 
including participations of MBL loans, and credit unions that purchase 
or sell MBL participations must comply with the loan participation rule 
requirements as well as the MBL rule. 12 CFR 701.22.
    The MBL rule specifically addresses MBL loan participations by 
instructing credit unions how they must account for MBL participations 
in member and non-member loans and how the participations will affect 
the credit union's aggregate limit on net member business loan 
balances. 12 CFR 723.1(d) and (e); Sec.  723.16(b).
    NCUA believes some credit unions overlook the link between the MBL 
and loan participation rules and have had difficulty in accurately 
accounting for MBL participations. In addition, it appears some credit 
unions may not understand or be aware of the waiver process available 
where nonmember MBL participations may otherwise cause a credit union 
to exceed the aggregate limit on MBLs.
    Accordingly, NCUA would like comments to help it assess the degree 
to which credit unions need additional guidance in this respect and 
solicits suggestions for how best to address this. For example, NCUA 
would appreciate comments on the utility of including cross-references 
in Sec.  701.22 and part 723 and revising existing regulatory 
provisions to enhance clarity. Specific suggestions and supporting 
rationales for those suggestions would be appreciated.

4. Waivers

    Section 723.10 enables credit unions to seek waivers from a variety 
of limitations and requirements in the MBL rule. While NCUA may not 
grant waivers from statutory provisions carried over into the MBL rule, 
the menu of available waivers is extensive. Despite this, it appears 
credit unions may not be taking full advantage of waiver opportunities. 
NCUA solicits comments on whether this is the case and, if so, why. 
Also, it would be helpful to know if this perceived issue is the result 
of a procedural problem and what NCUA can do to resolve it.

5. Degree of Regulatory Limits

    Some observers believe credit unions that are experienced business 
lenders are well equipped to manage the risks associated with making 
MBLs and should be given more flexibility with fewer regulatory 
restrictions. Others believe the increasing amount of MBL risk on 
credit union balance sheets is cause for concern and NCUA should impose 
greater regulatory restrictions to protect against the increased risk. 
One commenter suggested greater restrictions should include increasing 
the list of underwriting factors required by Sec.  723.6(g). 12 CFR 
723.6(g). NCUA would appreciate comments on whether part 723 would be a 
more effective regulation with more, less, or the current degree of 
regulatory limits. Commenters are reminded that some limitations in 
part 723 are required by statute and should take that into account when 
providing comments.

C. Request for Comments

    The NCUA Board invites comment on any of the issues discussed above 
including if, and how, NCUA's regulations should be amended to address 
the issues discussed in this ANPR. Commenters should not feel 
constrained to limit their comments to the above issues. Rather, 
commenters are encouraged to discuss any other relevant MBL issues they 
believe NCUA should consider.

    By the National Credit Union Administration Board on June 19, 
2008.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E8-14294 Filed 6-24-08; 8:45 am]
BILLING CODE 7535-01-P