[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]
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Proposed Rules
Federal Register
________________________________________________________________________
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