[Federal Register Volume 81, Number 49 (Monday, March 14, 2016)]
[Rules and Regulations]
[Pages 13530-13559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03955]



[[Page 13529]]

Vol. 81

Monday,

No. 49

March 14, 2016

Part III





 National Credit Union Administration





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12 CFR Parts 701, 723, and 741





 Member Business Loans; Commercial Lending; Final Rule

  Federal Register / Vol. 81 , No. 49 / Monday, March 14, 2016 / Rules 
and Regulations  

[[Page 13530]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 723, and 741

RIN 3133-AE37


Member Business Loans; Commercial Lending

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY:  As part of NCUA's Regulatory Modernization Initiative, the 
NCUA Board (Board) is amending its member business loans (MBL) rule to 
provide federally insured credit unions with greater flexibility and 
individual autonomy in safely and soundly providing commercial and 
business loans to serve their members. The final amendments modernize 
the regulatory requirements that govern credit union commercial lending 
activities by replacing the current rule's prescriptive requirements 
and limitations--such as collateral and security requirements, equity 
requirements, and loan limits--with a broad principles-based regulatory 
approach. As such, the amendments also eliminate the current MBL waiver 
process, which is unnecessary under a principles-based rule.

DATES: This final rule is effective January 1, 2017, except for 
amendatory instruction number 4 adding Sec.  723.7(f), which is 
effective May 13, 2016.

FOR FURTHER INFORMATION CONTACT:  Vincent Vieten, Member Business Loan 
Program Officer, or Lin Li, Credit Risk Program Officer, Office of 
Examination and Insurance, at 1775 Duke Street, Alexandria, Virginia or 
telephone (703) 518-6360 or Pamela Yu, Senior Staff Attorney, Office of 
General Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION: 
I. Background
II. Proposed Rule
III. Public Comments
IV. Final Rule
V. Section-by-Section Analysis
VI. Regulatory Procedures

I. Background

    The Board promulgated its first regulation governing MBLs in 1987 
(previously section 701.21(h) and currently part 723 of NCUA's 
regulations) and has since made a number of revisions to the rule, 
including substantive amendments to incorporate provisions included in 
Section 107A of the Federal Credit Union Act (FCU Act). Section 107A 
was enacted into law in 1998 in Title II of the Credit Union Membership 
Access Act (CUMAA).\1\ Among other things, CUMAA limited the aggregate 
amount of MBLs that a credit union may make to the lesser of 1.75 times 
the actual net worth of the credit union or 1.75 times the minimum net 
worth required under the FCU Act for a credit union to be well 
capitalized.\2\ The statutory MBL limit is incorporated in part 723 of 
NCUA's regulations.\3\ Part 723 also defines MBLs,\4\ establishes 
minimum safety and soundness standards for making MBLs, and implements 
various statutory exceptions from the aggregate MBL limit.\5\
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    \1\ 12 U.S.C. 1757a; Public Law 105-219, 112 Stat. 913 (1998).
    \2\ 12 U.S.C. 1757a.
    \3\ 12 CFR part 723.
    \4\ Under the current rule, 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 723.1(a). However, there 
are several exceptions to this general definition. The following are 
not member business loans: (1) A loan fully secured by a lien on a 1 
to 4 family dwelling that is the member's primary residence; (2) A 
loan fully secured by shares in the credit union making the 
extension of credit or deposits in other financial institutions; (3) 
Loan(s) to a member or an associated member which, when the net 
member business loan balances are added together, are equal to less 
than $50,000; (4) A loan where a federal or state agency (or its 
political subdivision) fully insures repayment, or fully guarantees 
repayment, or provides an advance commitment to purchase in full; or 
(5) A loan granted by a corporate credit union to another credit 
union. 12 CFR 723.1(b).
    \5\ 12 U.S.C. 1757a.
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    The Board has not significantly amended part 723 since 2003.\6\ 
Over the past 12 years, however, the credit union industry has gained 
valuable experience as the level of commercial loan activity has 
increased \7\ and as credit unions navigated the 2008-2009 recession. 
Once an ancillary product offered by a small number of credit unions, 
business lending is now becoming a core service offered by many credit 
unions as they strive to meet the expanding needs of their small 
business members. Today, credit unions represent an important source of 
credit for small businesses.
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    \6\ See 68 FR 56537 (Oct. 1, 2003).
    \7\ Based on Call Report data as of September 2015, total 
business loans including unfunded commitments at federally insured 
credit unions grew from $13.4 billion in 2004 to $56 billion in 
September 2015, an annualized growth rate of 14 percent. Business 
loans have also become a larger share of credit unions' loans and 
assets. During the same time period, business loans outstanding as a 
percentage of total assets grew from 1.9 percent to 4.5 percent, and 
business loans as a percentage of total loans grew from 3.0 percent 
to 6.8 percent. The percentage of credit unions offering business 
loans also increased significantly.

              % of Credit Unions That Offer Business Loans
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                                                               September
       Credit unions with total assets . . .        2004  (%)     2015
                                                                  (%)
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Below $100 million................................         13         21
Between $100 and $500 million.....................         53         77
Greater than $500 million.........................         72         94
  Total throughout industry.......................         19         36
------------------------------------------------------------------------

II. Proposed Rule

    In 2011, Chairman Matz announced NCUA's Regulatory Modernization 
Initiative, consistent with President Obama's Executive Order 13579. 
NCUA remains committed to regulatory modernization, including 
modifying, streamlining, refining, or repealing outdated regulations. 
In addition to making regulatory changes as the need arises, the Board 
has a policy of continually reviewing NCUA's regulations to ``update, 
clarify and simplify existing regulations and eliminate redundant and 
unnecessary provisions.'' \8\ To carry out this policy, NCUA identifies 
one-third of its existing regulations for review each year and provides 
notice of this review so the public may comment. In 2013, NCUA reviewed 
its MBL rule as part of this process. Public comments on the rule 
included general requests for regulatory relief and more flexibility in 
the MBL rule. Specific requests for relief focused on provisions 
regarding the loan-to-value (LTV) ratio requirement, the personal 
guarantee requirement, vehicle lending, and construction and 
development lending. Commenters also requested changes to streamline 
the waiver process. Other commenters broadly called for NCUA to 
eliminate from the MBL rule any prescriptive requirements that are not 
specifically required by the FCU Act.
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    \8\ NCUA 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) and 13-1 (Jan. 18, 2013).
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    Recognizing that credit unions generally have conducted business 
lending safely, and that NCUA has been largely successful in 
effectively supervising credit unions in this area, the Board 
determined the time was right for NCUA to modernize the MBL rule and to 
permit credit unions a greater degree of autonomy in optimizing their 
MBL programs to meet the specific needs of their member-borrowers. 
Specifically, at its June 18, 2015 meeting, the Board issued for a 60-
day comment period a proposed rule to

[[Page 13531]]

amend the MBL rule and provide reasonable regulatory relief to 
federally insured credit unions.\9\
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    \9\ 80 FR 37898 (July 1, 2015).
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    The proposed rule would provide credit unions with greater 
flexibility and individual autonomy in safely and soundly serving the 
business borrowers in their membership. The proposed rule would 
significantly alter the overall approach to regulating business 
lending, by shifting from a prescriptive rule to a principles-based 
rule. Specifically, the proposed rule would eliminate detailed 
collateral criteria and portfolio limits focusing instead on broad, yet 
well-defined, principles that clarify regulatory expectations for 
federally insured credit unions engaged in business lending activities.
    The proposal also sought to eliminate some unintended consequences 
of the current prescriptive approach, such as causing credit unions to 
manage their lending practices to regulatory restrictions instead of 
focusing on sound risk management practices. The proposal also would 
eliminate the current MBL waiver process, which in some cases had 
hampered credit unions' ability to meet the commercial credit needs of 
their members. The current waiver process requires significant time and 
resources from both credit unions and NCUA, and has at times prevented 
credit unions from timely acting on borrowers' applications.\10\
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    \10\ There are currently over 1,000 active MBL-related waivers. 
In 2014 and 2015, NCUA processed 336 and 225 MBL waivers, 
respectively.
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    The proposal would also modernize the MBL rule by providing greater 
emphasis on risk management. The current rule does not distinguish 
between commercial loans and MBLs. MBLs are defined by the FCU Act and 
the current MBL rule, but commercial loans are not. As a result, the 
safety and soundness risk management requirements contained in the MBL 
rule have not always been consistently applied to commercial loans that 
are not MBLs. Thus, the proposed rule distinguished between the 
specific category of statutorily defined MBLs and the broader universe 
of commercial loans that a credit union may extend to a borrower for 
commercial, industrial, agricultural, and professional purposes. 
Prudent risk assessment is necessary for all commercial loans, and the 
proposal focused on the principles and supervisory expectations for 
safe and sound commercial lending.
    The proposed rule also incorporated a broader, more practical 
approach to ensuring that credit unions have the pertinent staff 
expertise and organizational discipline necessary to support a safe and 
sound commercial loan program. It also reinforced that a credit union's 
board of directors is ultimately responsible for the credit union's 
commercial loan risk, and that the board must establish adequate 
controls and provide sound governance for the credit union's commercial 
lending program.

III. Public Comments

    The public comment period for the proposed MBL rule ended on August 
31, 2015. NCUA received nearly 3,100 comments on the proposal. However, 
many commenters submitted multiple or duplicate comments or letters 
that contained, or appeared to be mostly based on, form language or 
standardized industry talking points and included minimal unique 
substantive comment (``form letters''). Approximately 85 percent of the 
total comments received appeared to be form letters or duplicative 
submissions.
    Approximately three-quarters of the total comments received on the 
proposed rule were submitted by banks, bank trade associations, or 
other bank-affiliated parties. Of these, roughly 95 percent appeared to 
be form letters. The remaining one-quarter of the total comments 
received were submitted by credit union or other trade associations, 
state credit union leagues, federal credit unions, federally insured 
state-chartered credit unions, credit union service organizations 
(CUSOs), state supervisory authorities (SSAs), members of Congress, 
individuals, and other commenters. Of these, slightly more than half 
appeared to be form letters. Overall, nearly 500 comments were 
generally unique comments or comments consisting mostly of original or 
unique content.

General Comments

    With the exception of bank commenters, most commenters expressed 
overall support for the proposal to modernize the MBL rule, in 
particular the conceptual shift from the current prescriptive 
regulation to a principles-based regulatory approach. A significant 
number of commenters fully supported the proposal. Most commenters, 
however, indicated overall support for the rule but expressed concern 
about some aspect of the proposal, or recommended adjustments or 
provided suggestions on ways to improve specific provisions of the 
rule.
    Commenters indicated support for the rule for one or more of the 
following reasons. A significant number of commenters indicated that a 
principles-based rule will provide credit unions with the necessary 
flexibility to develop and maintain MBL programs to best fit their 
members' needs, and provide much needed regulatory relief. Commenters 
noted the shift to a regulation based on broad principles represents a 
sound rulemaking approach. Commenters also indicated that safety and 
soundness for commercial lending is better achieved through supervision 
and examination, rather than through prescriptive one-size-fits-all 
regulatory requirements. Moreover, commenters stated the amendments 
will allow each credit union to tailor its MBL program to fit its 
specific risk tolerances and strategic goals, thus enabling credit 
unions to act in service of their members, rather than in compliance 
with strict regulation. Other commenters noted that the amendments will 
allow credit unions to establish credit risk management programs that 
are appropriate for the size, complexity, and risk profile of their 
organization and to operate MBL programs in a safe and sound manner. 
Commenters also stated that credit unions with the appropriate 
experience, sound lending practices, and strong leadership should be 
allowed more autonomy in their lending decisions. These commenters 
noted that the current prescriptive rule hinders credit unions' ability 
to compete for and conduct sound business lending. Commenters also 
noted that the amendments simplify and improve the regulation. 
Additionally, many commenters expressed support for the removal of the 
many restrictions in the current rule not mandated by the FCU Act.
    A significant number of commenters, while generally supportive of 
the overall rule, also provided substantive input on the specific 
provisions of the proposed rule. Comments on specific aspects of the 
proposal are further detailed in the section-by-section analysis below.
    Bank commenters generally expressed opposition to the proposal, in 
overall concept and principle. Most bank commenters indicated they 
opposed the rule for one or more of the following general policy 
reasons. A significant number of bank commenters suggested that the 
proposal disregards Congressional intent to limit credit union business 
lending. Other bank commenters maintained that credit unions are not 
fulfilling their mission and purpose by increasing their business 
lending activity. Bank commenters further argued that there is no 
public benefit to credit union expansion into commercial lending, and 
that the proposed changes could result in unfair competition for banks 
or have

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a negative impact on the bank industry. Other bank commenters expressed 
concern that credit unions are ill-prepared to expand their commercial 
lending activity and allowing credit unions to increase their share of 
the commercial lending market could cause another financial crisis. 
Bank commenters also asserted that the proposal poses safety and 
soundness concerns that could place the National Credit Union Share 
Insurance Fund (NCUSIF) and American taxpayers at risk. In addition, 
bank commenters suggested that NCUA is ill-prepared to supervise credit 
union commercial lending. Bank commenters also generally argued that 
the credit union tax-exemption is unfair and credit unions should 
therefore not be permitted to increase their business lending 
activities.
    A small number of commenters expressed neutrality or did not 
expressly support or oppose the proposal. For example, one commenter 
questioned whether the proposal will truly benefit any credit unions 
other than the largest component of the industry, for example, those 
credit unions with assets greater than $1 billion. In addition, a few 
commenters indicated the amendments may create uncertainty for credit 
unions. In addition, a number of commenters asserted that the proposed 
rule could have gone further in providing relief and flexibility to 
credit unions involved in business lending, for example, by redefining 
the parameters of the statutory exemptions for credit unions chartered 
for the purpose of making, or that have a history of primarily making 
MBLs.

Discussion

    The Board emphasizes that the proposed amendments are fully 
consistent with the provisions of the FCU Act. As amended by CUMAA, the 
FCU Act, among other things, limits the aggregate amount of MBLs that a 
credit union may make to the lesser of 1.75 times the actual net worth 
of the credit union or 1.75 times the minimum net worth required under 
the FCU Act for a credit union to be well capitalized.\11\ The FCU Act, 
however, does not mandate prescriptive safety and soundness standards 
for credit union business loans. The current MBL rule's prescriptive 
requirements, including the collateral and security requirements, 
equity requirements, and loan limits, were established under the 
Board's broad safety and soundness mandate and general rulemaking 
authority.\12\ The Board is within its statutory authority in 
promulgating this final rule to remove those prescriptive requirements. 
The amendments do not expand credit unions' business loan authority or 
modify the statutory MBL limit established by Congress in CUMAA.
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    \11\ 12 U.S.C. 1757a.
    \12\ The Board has broad rulemaking authority to ensure the 
industry and the NCUSIF remains safe and sound. Section 120 of the 
FCU Act authorizes the Board to prescribe rules and regulations for 
the administration of the FCU Act. 12 U.S.C. 1766(a). Further, Title 
II of the FCU Act provides that the Board may insure members' 
accounts and administer the NCUSIF, and may prescribe regulations 
for FICUs that are necessary to carry out that purpose. 12 U.S.C. 
1781(b)(9), 1789(11).
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    Credit unions have a long history of meeting the business lending 
needs of their members. This history dates back to the U.S. credit 
union industry's inception in 1908. From their roots, credit unions 
have played a role in supplying credit to farmers, immigrants, and 
small business owners. In fact, the first credit union chartered in the 
United States, St. Mary's Bank Credit Union, had as its primary lending 
focus ``to establish neighborhood business.''
    In enacting CUMAA in 1998, Congress stated:

    Credit unions . . . are exempt from Federal . . . taxes because 
they are member-owned, democratically operated, not-for profit 
organizations generally managed by volunteer boards of directors and 
because they have the specified mission of meeting the credit and 
savings needs of consumers, especially persons of modest means.

    Congress has long recognized that credit unions should have 
authority to grant member business loans. Indeed, the FCU Act clearly 
provides that credit unions may be chartered for the purpose of making 
or have a history of primarily making MBLs. Congress has also 
recognized the importance of making capital available to lower-income 
communities by exempting all low-income designated credit unions from 
the MBL cap. Today, many credit union members are small business owners 
who need access to reliable commercial credit. Credit unions that offer 
member-business loans continue to fulfill their missions of meeting the 
credit and savings needs of their members.
    According to a 2001 study for the Small Business Administration 
(SBA), while banks tend to reduce lending during economic stress, 
credit unions continue to lend to small businesses. This means that, in 
the past, credit unions have partially offset the fluctuations in the 
amounts of small business loans supplied by banks.\13\ For example, 
while lending at banks contracted during the recent recession, credit 
unions continued to lend. Between year-end 2007 and 2010, total loans 
at banks decreased by 7 percent, while credit union lending increased 
by 7 percent. During this period, total commercial loans at banks 
decreased by 13 percent, whereas total credit union MBLs increased by 
41 percent, including a 63 percent increase in SBA loans.\14\
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    \13\ James A. Wilcox, The Increasing Importance of Credit Unions 
in Business Lending, SBA Office of Advocacy (Sept. 2011).
    \14\ Id. Data includes all FDIC insured institutions. Commercial 
loans include loans secured by nonfarm nonresidential properties, 
farmland, and multifamily residential properties, construction and 
development loans, farm loans and commercial and industrial loans.
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    While credit unions play an important role in the overall lending 
market, the volume of business lending by credit unions is still minor 
in comparison to banks. As of September 30, 2015, credit unions held 
$52.7 billion in member business loans outstanding. FDIC-insured banks 
and savings institutions held $3.8 trillion in business loans. Thus, 
credit union business lending is only 1.4 percent of total business 
lending done by financial institutions.\15\
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    \15\ Id.
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    Nevertheless, results from the 2011 SBA study suggest that credit 
union lending to small businesses adds to the overall availability of 
small business loans.\16\ Empirical results suggest that each dollar of 
new member business lending by credit unions generated 81 cents of an 
entirely new credit source for small businesses. In other words, the 
majority of credit union member business lending is new lending that 
would not have occurred otherwise. As a whole, the report's findings 
suggest that credit union lending to small businesses could play an 
increasingly important role in ensuring the sector has adequate access 
to credit.
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    \16\ Id.
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    As noted above, over the last 5 years, NCUA has endeavored to 
modernize its regulations by providing responsible regulatory relief to 
credit unions. However, regulatory modernization has also meant, in 
some cases, revising or adopting rules that are unpopular with the 
credit union industry. Examples include the Board's recent 
modernization of its rules on interest rate risk, loan participations, 
CUSOs, liquidity and contingency funding, and risk-based capital (RBC). 
These prudent rule changes were opposed by industry stakeholders, but 
necessary to ensuring the safety and soundness of the credit union 
industry, and they demonstrate NCUA's continued commitment to 
responsible regulation.

[[Page 13533]]

    As stated in the preamble to the proposed rule, the Board 
emphasizes that credit unions generally have conducted business lending 
safely, and the supervision process has been largely successful in 
addressing most of those credit unions that did not perform as well. 
NCUA has been insuring and supervising credit unions that make member 
business loans since it became an independent agency in 1970. Credit 
union business loan portfolios have generally performed well. 
Delinquency and net charge-off rates over the last 10 years are 
comparable to similar sized banks, including during the recession. 
Member business loans have not been a disproportionate contributor to 
credit union failures or NCUSIF losses. According to the Office of 
Inspector General's Material Loss Reviews, only five credit unions that 
failed at a loss to the NCUSIF between 2010 and 2014 were cited as 
having member business loans as a contributing factor to the failure.
    Credit unions have made MBLs successfully through various economic 
cycles, including the recent recession. Consider the following:
     As of September, 2015, 98 percent of the credit unions 
that have member business loans are well capitalized.
     As of September, 2015, 83 percent of credit unions making 
business loans have a composite CAMEL rating of 1 or 2, compared to 71 
percent of credit unions that do not make business loans.
     Business loan delinquency and loss performance data for 
credit unions and banks over the last 10 years indicate credit union 
business lending has performed on par with similar size banks over this 
time period.
    Further, credit unions are subject to more stringent capital (net 
worth) standards than banks, with both a higher statutory leverage 
requirement and a higher risk weight tier for concentrations of 
business loans.
    Accordingly, and for the reasons discussed in greater detail below, 
the Board is adopting this final rule to modernize NCUA's current 
regulations regarding business lending by shifting from a prescriptive 
rule to a principles-based rule.

IV. Final Rule

    After careful consideration of all the public comments, the Board 
has made several changes based on the comments. Initially, the Board 
made changes for improved clarity of several definitions, including 
``associated borrower,'' ``commercial loan,'' and ``loan-to-value 
ratio.'' In addition, the Board has modified the single-borrower 
limitation to exclude the government-guaranteed portion of a loan; 
narrowed the scope of ineligible borrowers under the rule's prohibited 
activities provision to allow senior staff who are not involved in the 
credit union's loan underwriting, servicing, and collection process to 
be eligible to receive commercial loans; shortened the final rule's 
implementation timeline; and provided provisions to allow any business 
lending rule adopted by a state supervisory authority that at least 
covers all the provisions in part 723 and is no less restrictive, upon 
determination by NCUA, to govern in place of part 723 for federally 
insured state-chartered credit unions in the state. The final rule is 
discussed in greater detail below.

Supervision

    The final rule will provide federally insured credit unions with 
greater flexibility and individual autonomy in safely and soundly 
making commercial and business loans to meet the needs of their 
membership. The amendments modernize the regulatory requirements that 
govern credit union commercial lending activities by replacing the 
current rule's prescriptive requirements and limitations, such as 
collateral and security requirements, equity requirements, and loan 
limits, with broad principles to govern safe and sound commercial 
lending. The amendments also eliminate the current MBL waiver process, 
which is unnecessary under a principles-based rule. The principles are 
predicated on NCUA's expectation that credit unions will maintain 
prudent risk management practices and sufficient capital commensurate 
with the risks associated with their commercial lending activities.
    The Board emphasizes that the final rule represents a meaningful 
shift in regulatory approach, and supervisory expectations will adapt 
accordingly. NCUA remains committed to rigorous and prudential 
supervision of credit union commercial lending activities. Moving 
forward, oversight will focus on the effectiveness of the risk 
management process and the aggregate risk profile of the credit union's 
loan portfolio, as opposed to compliance with prescriptive measures. 
Responsible risk management and comprehensive due diligence remain 
crucial to safe and sound commercial lending, and credit unions are 
expected to embrace these overarching principles in administering, 
underwriting, and servicing commercial loans.
    The Board recognizes that clear and timely supervisory guidance is 
important to the effective implementation of this final rule. Thus, 
before this final rule takes effect in whole, NCUA will issue 
supervisory guidance to examiners that will be shared with credit 
unions. The Board notes that the guiding principles of the rule are 
consistent with prevailing sound practices found in well-managed 
commercial lending programs. In turn, the supervisory guidance will 
also be consistent with these principles and align closely with the 
standards in place by federal banking agencies.
    A significant number of commenters expressed concern about 
supervisory expectations with respect to the amended rule. Several 
commenters were concerned that if the supervisory guidance does not 
fully and clearly define NCUA's expectations, credit unions may face 
uncertainty in implementing changes to their commercial loan policies 
and procedures. Several commenters suggested the forthcoming guidance 
should provide credit unions with a safe harbor by clearly detailing 
the minimum requirements that are acceptable for a safe and sound 
business lending program. Other commenters urged NCUA to draw on 
existing commercial lending guidance issued by federal banking 
agencies.
    Many commenters noted that supervisory guidance should not be cited 
by examiners as equivalent to regulation and rule of law. Commenters 
expressed concern that the current prescriptive regulatory requirements 
will simply migrate over into supervisory guidance, mitigating the 
rule's improved flexibility. Other commenters were concerned that the 
guidance will be even more restrictive than the current regulation.
    Commenters were also concerned about examiner judgment and 
consistency under the new rule. Commenters expressed concern that 
examiners will not be properly trained or have adequate expertise to 
properly evaluate individual credit union lending policies under a 
principles-based rule. Commenters also stated the principles-based 
approach will require a significant amount of judgment by examiners, 
and that clear guidance prior to implementation should be provided to 
examiners to ensure exam consistency. Commenters also noted the 
importance of adequate training for examiners.
    Commenters asked for clarification on the appeals process if a 
conflict arises during the MBL examination process. At least one 
commenter requested detail on how the principles-based rule will be 
enforced.
    A number of commenters also suggested the supervisory guidance

[[Page 13534]]

should be formally issued for public comment or asked for the 
opportunity to review the guidance before the final rule is 
implemented.
    While the Board appreciates the value in affording the opportunity 
for public comment, formal notice-and-comment procedures for the 
forthcoming supervisory guidance are not required. The Board notes that 
supervisory guidance does not require notice and comment rulemaking 
under the Administrative Procedure Act (APA), and thus, it does not 
have the force and effect of law or regulation.\17\ The purpose of 
supervisory guidance and other interpretive rules is generally ``to 
advise the public of the agency's construction of the statutes and 
rules that it administers.'' \18\ The final rule is intended to provide 
credit unions with greater flexibility and autonomy in providing 
business loans to their members. The forthcoming supervisory guidance 
regarding credit union commercial lending is not intended to supplant 
credit unions' business decisions or to impose the same rigid and 
prescriptive requirements contained in the current MBL rule. Rather, 
the guidance will provide examiners and credit unions with clear 
information about NCUA's supervisory expectations with respect to the 
final rule, and establish a consistent framework for the exam and 
supervision process for the review of credit union commercial lending.
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    \17\ Section 4(b)(A) of the APA provides that, unless another 
statute states otherwise, the notice-and-comment requirement does 
not apply to ``interpretative rules, general statements of policy, 
or rules of agency organization, procedure, or practice.'' 5 U.S.C. 
553(b)(A). The term ``interpretative rule,'' or ``interpretive 
rule,'' is not defined by the APA, but the United States Supreme 
Court has noted that the critical feature of interpretive rules is 
that they are ``issued by an agency to advise the public of the 
agency's construction of the statutes and rules which it 
administers.'' Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199, 
1203-04, 191 L. Ed. 2d 186 (2015) (citing, Shalala v. Guernsey 
Memorial Hospital, 514 U.S. 87, 99, 115 S. Ct. 1232, 131 L.Ed.2d 106 
(1995)).
    \18\ Id.
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    The Board agrees clear and detailed supervisory expectations are 
both necessary and important and that it is incumbent on NCUA to 
develop comprehensive guidance and training for its examiners. By 
having detailed guidance that includes representative examples, 
examiners and credit unions will have a mutual understanding of the key 
supervisory expectations. The Board views comprehensive guidance as 
crucial to achieving a smooth transition to a more flexible standard as 
well as to mitigate the risk of inconsistent enforcement. The Board 
does not agree that guidance should be limited to a description of 
minimum expectations. Rather, it believes the guidance should provide a 
range of acceptable practices that are commensurate with the size, risk 
and complexity typically found in credit unions' MBL programs. Such 
guidance will provide examiners and credit unions greater understanding 
of how to scale their expectations to differing and unique 
circumstances. The forthcoming guidance will require some degree of 
specificity and include examples that relate to a broadly 
representative variety of potential scenarios and conditions. 
Importantly, the guidance will provide sufficient detail and clarity 
for the agency's supervisory expectations and ensure proper consistency 
of interpretation.
    NCUA guidance and training will include a comprehensive focus upon 
the core elements of a sound MBL program including: Overarching 
principles for managing commercial loan risk; critical components of 
commercial loan policies; the credit approval process; credit risk-
rating systems; structuring of credit packages to properly align 
members' needs with financial abilities to repay; and credit risk 
management processes for underwriting, ongoing loan administration and 
risk monitoring. The guidance and training will further address various 
aspects of business lending such as the use of personal guarantees, 
collateral valuation and management, construction and development 
lending, loan collection, and appropriate reporting to senior 
management and the board of directors.
    The Board emphasizes that it is not NCUA's goal to second-guess 
credit unions' reasonable business decisions, and it anticipates that 
open communications between a credit union and its examiner should 
resolve most disputes about which commenters have raised concern. 
Nevertheless, conflicts may arise during the MBL examination process. 
All rights and procedures generally available to a credit union in 
appealing an NCUA examination matter are likewise available to a credit 
union under this final rule.

Delayed Implementation

    The final rule's shift to a principles-based rule represents a 
fundamental change in approach that will require a period of adjustment 
for both credit unions and examiners. Accordingly, the Board proposed 
to delay implementation of the final rule for 18 months, to allow NCUA 
and state supervisory authorities adequate time to adjust to the new 
requirements, including training staff, and for affected credit unions 
to make necessary changes to their commercial lending policies, 
processes, and procedures in compliance with the new rule. Many 
commenters supported the proposed 18-month implementation timeframe, 
and some commenters advocated for a longer timeframe. Most commenters, 
however, urged the Board to make the final rule effective as soon as 
possible. Some commenters suggested implementation timelines between 6 
to 12 months would allow sufficient time to train examination staff 
while providing regulatory relief more quickly.
    The Board will provide some measure of regulatory relief to credit 
unions as soon as reasonably possible. The Board notes that many 
commenters in particular asked that implementation of the personal 
guarantee provision be expedited to allow credit unions to better serve 
their members. Accordingly, the personal guarantee provision in Sec.  
723.5(b) of this final rule will become effective 60 days after 
publication in the Federal Register. Implementation of the remaining 
provisions of this final rule will be delayed until January 1, 2017, to 
allow adequate time for both regulators and credit unions to adjust to 
the new requirements.
    To better facilitate an early implementation of the personal 
guarantee provision, the Board has made modifications to Sec.  723.5(b) 
in order to improve its reading as a stand-alone provision. The final 
rule adds a transitional provision, Sec.  723.5(b)(1), to clarify that 
during the final rule's implementation period (i.e., between the 
effective date of Sec.  723.5(b) and the January 1, 2017 effective date 
of the remainder of the rule) a credit union that makes a member 
business loan, as defined in current Sec.  723.1, and decides not to 
require a personal guarantee on the loan is not required to seek a 
waiver for the current requirement for personal liability and guarantee 
pursuant to current Sec.  723.10. However, it must determine and 
document in the loan file that mitigating factors sufficiently offset 
the relevant risk.

V. Section-by-Section Analysis

    A detailed discussion of the final rule's key provisions follows.

Sec.  723.1--Purpose and Scope

    Section 723.1 of the proposed rule articulated and summarized the 
rule's overall purpose. It also described which credit unions and loans 
are covered by Part 723, and which other regulations apply to 
commercial loans made by federally-insured credit unions.

[[Page 13535]]

Other Regulations That Apply
    One commenter suggested proposed Sec.  723.1(c) could be improved 
by more clearly delineating between those other regulations that are 
applicable to FCUs and to FISCUs. The Board agrees that greater clarity 
is desirable and has revised the language in the final rule to more 
clearly distinguish between the other lending regulations that apply to 
FCUs versus FISCUs.
Exemption for Small Credit Unions
    The proposed rule exempted from the requirements of proposed Sec.  
723.3 and Sec.  723.4 credit unions with both assets less than $250 
million and total commercial loans less than 15 percent of net worth 
that are not regularly originating and selling or participating out 
commercial loans (qualifying credit unions). Accordingly, qualifying 
credit unions, especially smaller institutions which are only 
occasionally granting a loan(s) that meets the rule's commercial loan 
definition, would be alleviated from the burden of having to develop a 
full commercial loan policy and commercial lending organizational 
infrastructure.
    A number of commenters disagreed with exempting institutions under 
$250 million from certain requirements. Commenters argued that these 
smaller institutions should not be exempted, since limited involvement 
and lack of familiarity with commercial lending is likely to lead to 
mistakes or misjudgments as to risk management that could result in 
losses to the credit union. Another commenter noted that commercial 
lending presents an elevated level of risk compared with consumer 
lending, and credit unions engaged in commercial lending must 
understand the inherent differences between consumer and commercial 
credit. This commenter expressed concern that the exemption minimizes 
the importance of these differences and may have negative consequences 
for the safety and soundness of the credit union industry. One 
commenter stated that any credit union engaging in commercial lending 
above the most de minimis of portfolios should have a commercial 
lending policy, procedure, and program in place commensurate with its 
activity. Another commenter said while it may not be necessary for 
certain institutions to have an extensive commercial lending 
infrastructure, it is important from a safety and soundness perspective 
for any financial institution to develop and follow appropriate 
policies for any type of lending they may engage in, regardless of the 
frequency with which they originate such loans. Another commenter 
argued that there should be no exemptions for policy and infrastructure 
based on asset size, and credit unions that intend to make commercial 
loans should have a full policy and an infrastructure to support 
commercial lending on any scale.
    The majority of commenters, however, were supportive of the 
exemption. A significant number of commenters agreed that smaller 
credit unions, and credit unions that hold a de minimis number and 
amount of commercial loans, should be provided relief from the policy 
and infrastructure requirements. Most commenters supported a $250 
million asset threshold for exemption. However, a number of commenters 
asserted that the exemption could be improved by raising the asset 
threshold to allow more credit unions to receive regulatory relief. For 
example, some commenters argued the asset threshold for exemption 
should be raised to $500 million or eliminated entirely. Commenters 
advocating for eliminating or raising the asset threshold argued that 
relief should be focused on a credit union's complexity and asset size 
alone does not determine its complexity. At least one commenter 
indicated the asset size threshold is unnecessary and not a good proxy 
for determining the risk of a credit union with a de minimis amount of 
commercial loans. Another commenter recommended the exemption should be 
available to all credit unions, regardless of asset size, through an 
exception that would remove the $250 million asset threshold but retain 
the 15 percent of net worth limitation. Thus, larger credit unions with 
only minimal engagement in commercial lending relative to their net 
worth and assets could also receive relief.
    The Board reiterates its intent in providing an exemption from 
Sec.  723.3 and Sec.  723.4 is to avoid the inclusion of credit unions 
that infrequently originate minimal amounts of loans that technically 
meet the regulatory commercial loan definition. In the final rule, a 
credit union with less than $250 million in assets that holds a 
relatively small amount of commercial loans compared to its net worth 
and originates and sells commercial loan participations infrequently is 
alleviated from the burden of more rigorous staffing and infrastructure 
requirements. The Board has clarified in this final rule how both the 
15 percent of net worth and regularly originating and selling or 
participating out commercial loans standards in the proposed rule will 
be measured by specifying credit unions with less than $250 million in 
assets must satisfy both of the following conditions:
     The credit union's aggregate amount of outstanding 
commercial loan balances and unfunded commitments,\19\ 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.
---------------------------------------------------------------------------

    \19\ The aggregate amount of outstanding commercial loan 
balances and unfunded commitments amounts include any such balances 
outstanding, including those that were originated and purchased by 
the credit union.
---------------------------------------------------------------------------

     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 percent of the credit union's net worth.
    The exemption provision is not intended to create a means by which 
a credit union can frequently generate and sell substantial amounts of 
commercial loans, while keeping its held-in-portfolio amount below 15 
percent of net worth, to strategically avoid the requirements of Sec.  
723.3 and Sec.  723.4. As such, the final rule includes language that 
makes it clear the ``less than 15 percent of net worth'' exemption 
threshold is measured against all commercial loans originated by the 
credit union to include commercial loans on the balance sheet, 
commercial loans sold and serviced, and commercial loans sold and not 
serviced. By adopting this clarifying language in the final rule, it 
will be easier for credit unions to determine when they qualify for the 
exemption.
    As discussed in the preamble to the proposed rule, the 15 percent 
of net worth threshold is consistent with the longstanding single-
obligor limit common in the credit union and banking industries. The 
Board regards 15 percent as a prudent level for exempting credit unions 
from Sec.  723.3 and Sec.  723.4 and it coheres to standard industry 
practices. The $250 million asset threshold is consistent with similar 
provisions the Board adopted in NCUA's derivatives \20\ and liquidity 
and contingency funding plans \21\ regulations.
---------------------------------------------------------------------------

    \20\ 12 CFR part 703.
    \21\ 12 CFR 741.12.
---------------------------------------------------------------------------

    With regard to commenters' suggestions to raise or eliminate the 
asset size threshold, extending this exemption to credit unions over 
$250 million in assets could encourage some credit unions, regardless 
of their capacity and member business loan needs, to unduly restrict 
the volume of

[[Page 13536]]

business lending--a vital source of working capital and job creation--
to avoid higher prudential standards. The Board recognizes that credit 
unions under $250 million in assets have more limited staff and 
facility resources and are generally not engaged in business lending on 
a material scale. The exemption acknowledges that small portfolio 
exposures coupled with a generally inactive business lending program do 
not warrant the adoption of the broader risk management standards 
included in the rule. Conversely, credit unions that are holding a 
substantial portfolio of business loans, and that are $250 million in 
assets or greater, have sufficient size and capacity to incorporate 
these common prudential standards into their operations. Accordingly, 
the less than $250 million threshold is retained as part of the 
exemption criteria in the final rule.
    The Board emphasizes that while credit unions qualifying for the 
exemption will not be required to meet the policy and infrastructure 
requirements of Sec.  723.3 and Sec.  723.4, all credit unions need to 
have a board-approved loan policy covering their lending activity in 
general. Qualifying credit unions merely need to make sure their 
existing loan policy provides for the types of commercial loans 
granted, including satisfying all the other applicable commercial 
lending requirements in the rule.

Sec.  723.2--Definitions

    For clarity and improvement, the proposed rule modified the 
definitions for certain terms in the current rule, included new 
definitions for terms not currently defined in the MBL rule, and moved 
definitions to more relevant sections of the proposed regulation. The 
modified, new, and moved definitions are discussed below.
    Modified definitions:
Associated borrower
    The proposed rule replaced the current rule's definition of 
``associated member'' with the term ``associated borrower,'' and 
updated the definition to improve clarity and to incorporate elements 
of the combination rules applicable to banks. The proposed definition 
also introduced the concepts of direct benefit, common enterprise, and 
control into the associated borrower definition.
    Commenters generally expressed support for the proposed definition 
of associated borrower. At least one commenter appreciated that it 
provides more consistency with the combination rules applicable to 
other banking institutions. Another commenter stated the new definition 
better aligns the calculation of aggregate loan exposure with all 
financial institutions, as well as requiring credit unions to place 
greater emphasis on evaluating and underwriting an entire relationship 
as opposed to a stand-alone transaction. One commenter supported 
bringing the associated member concept more in line with bank 
regulations, but suggested the banks' special treatment rules for 
partnerships, joint ventures, and associations should also be 
incorporated into the rule.
    Several commenters suggested the definition should be further 
clarified. For example, one commenter stated that while the definition 
may help credit unions definitively decide who is an associated 
borrower, clarity is needed on whether credit unions are permitted to 
have more conservative criteria in their policies for identifying 
associated borrowers. Another commenter said it is unclear how a credit 
union can verify that it knows all of the associated borrowers of a 
borrowing entity. This commenter proposed adding additional language so 
a credit union can safely rely on the borrower's disclosure, unless the 
credit union has actual knowledge of a different corporate structure. 
One commenter asked how loan limits to one borrower should be 
calculated when dealing with minority owners of businesses when the 
business is financially sound and operates without any guarantor 
support. Another commenter noted that the definition does not take into 
consideration the sponsor relationship, which is unique to credit 
unions.
    The Board notes that a clear understanding of the overall borrowing 
relationship plays an important role in the credit risk assessment of a 
commercial borrower. Consistent with common industry practice, lenders 
are expected to make credit decisions based on a full understanding of 
the risks posed by their commercial borrowers, including the influences 
of other individuals and/or entities that may have a material impact on 
the borrower's operational activities and/or loan repayment ability. 
This influence stems from interdependent business actions between 
different borrowers and borrowers that share management and ownership. 
As such, credit unions are expected to require commercial borrowers to 
disclose associated individuals and/or entities so that they can 
understand the overall borrowing relationship and perform appropriate 
risk assessment. Associated relationships can be complex, and therefore 
it is necessary to have consistent and definitive criteria for 
identifying borrower-related interests. The proposed definition is 
generally consistent with accepted industry practices and guidelines 
from other financial regulators.
    The Board agrees, however, that the final rule should incorporate 
elements of the banks' special treatment rules for partnerships, joint 
ventures, and associations. Accordingly, the Board has amended the 
final definition to provide three exceptions applying to loans 
involving partnerships, joint ventures, and associations to address the 
treatment of limited partners, the connection between the partners and 
the influence of the partners on the partnerships, joint ventures, or 
associations. First, if the borrower is a partnership, joint venture or 
association, and the other person with a shared ownership, investment, 
or other pecuniary interest in a business or commercial endeavor with 
the borrower is a member or partner of the borrower, and neither a 
direct benefit nor a common enterprise exists, such other person is not 
an associated borrower for purposes of the rule. Second, if the 
borrower is a member or partner of a partnership, joint venture, or 
association, and the other entity with a shared ownership, investment, 
or other pecuniary interest in a business or commercial endeavor with 
the borrower is the partnership, joint venture, or association and the 
borrower is a limited partner of that other entity, and by the terms of 
a partnership or membership agreement valid under applicable law, the 
borrower is not held generally liable for the debts or actions of that 
other entity, such other entity is not an associated borrower. Finally, 
if the borrower is a member or partner of a partnership, joint venture, 
or association, and the other person with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is another member or partner of the 
partnership, joint venture, or association, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower under the final rule.
    This topic will also be further discussed in the forthcoming 
supervisory guidance.
    Additionally, as discussed in more detail below, for consistency, 
the parallel definitions in NCUA's loan participation rule is also 
amended in an equivalent manner.\22\
---------------------------------------------------------------------------

    \22\ 12 CFR 701.22(a).

---------------------------------------------------------------------------

[[Page 13537]]

Loan-to-Value Ratio
    The proposed rule modified the current definition of ``loan-to-
value ratio'' (LTV) to clarify how this ratio should be calculated. The 
proposed definition excluded outstanding exposures from other lenders 
that are subordinated to the credit union's lien position from the 
numerator of the LTV ratio. In addition, the proposed definition 
clarified that the denominator of the LTV ratio is the market value for 
collateral held longer than 12 months, and the lesser of the purchase 
price and the market value for collateral held 12 months or less.
    Many commenters appreciated the change to exclude from the LTV 
ratio outstanding exposures from other lenders that are subordinated to 
the credit union's lien position. Several commenters said the change 
was much needed in order to bring LTV ratio calculations in alignment 
with customary commercial loan calculations. One commenter indicated 
that excluding junior liens from LTV ratio calculations is more 
consistent with other financial institution requirements. Commenters 
also supported the amendment's clarification of the valuation basis for 
collateral.
    A significant number of commenters, however, argued for more 
flexibility in the requirement to use the ``lesser of purchase price or 
market value for collateral held 12 months or less.'' Many commenters 
suggested the 12-month requirement should be eliminated. Several 
commenters contended the definition is too inflexible because it does 
not include improvements made to the collateral. Another commenter 
observed that valuations can increase with improvements; thus, the 
value of a property should never be considered static. One commenter 
noted there are situations where a 12-month standard is unworkable or 
unreasonable, for example, in non-disclosure states the consideration 
of property transfer is not publicly available or readily 
ascertainable. This commenter suggested that a better approach is to 
require that credit unions use robust appraisal review and underwriting 
processes to manage risk. Another commenter said the definition should 
be revised to require the purchase price to be used for LTV only when 
the funds of a loan are used to purchase the collateral. One commenter 
asserted that if collateral is already owned, even if only for less 
than 12 months, the market value is a more appropriate calculation to 
be used in the denominator for lending purposes. Another commenter said 
the definition is too rigid, and credit unions should be allowed to use 
an appraised market value approach to valuation even where collateral 
has been owned for less than six months. A different commenter 
suggested the definition of market value in NCUA's appraisal rule 
should be used in the denominator of the LTV for any real estate 
transaction regardless of whether the actual purchase price is lower. 
This commenter argued market value represents the best approximation of 
the expected yield if the credit union were forced to liquidate the 
collateral.
    Several commenters suggested that if the 12-month requirement is 
retained, the definition should be expanded to cover purchase price 
plus the cost of any improvements. Of these, several commenters argued 
it is appropriate to include improvement costs because market value of 
the collateral can materially increase in a short period of time due to 
improvements or other factors (for example, zoning changes, other 
entitlements, infrastructure enhancements, etc.). According to one 
commenter, limiting the assumed value to only the purchase price would 
needlessly restrict credit unions from being competitive lenders on 
such projects. Another commenter noted that borrowers who acquire 
property below cost or who independently finance property improvements 
should not be held captive to that value for the next 12 months. 
Several commenters contended that instituting a time limit as part of 
the definition of cost is prescriptive and inconsistent with a 
principles-based approach. One commenter said a prescriptive definition 
is excessive and unnecessary. A different commenter suggested that 
imposing a prescriptive definition implies appraisals cannot be 
trusted. The same commenter argued that while cost can be arbitrary, 
appraisals may be regarded as reliable and appropriately reflecting the 
market values at the time of completion.
    One commenter generally observed that the definition as drafted is 
more appropriate in a residential context rather than a business or 
commercial setting. Another commenter suggested the definition appears 
to address real estate collateral rather than negotiable, inventory, 
and equipment collateral.
    One commenter asserted that the proposed definition of collateral 
market value is not consistent with that used by other federal agencies 
involved in commercial lending (for example, SBA and USDA), which allow 
the use of ``as is,'' ``as completed'' and ``as stabilized'' 
methodologies to determine the market valuation of income producing 
properties for loan guarantee purposes.
    The Board has carefully considered these comments and agrees that 
the proposed requirement to use the ``lesser of the purchase price or 
market value for collateral held 12 months or less, and market value 
for collateral held longer than 12 months'' may not be appropriate for 
all scenarios. The Board agrees that in certain cases, cost of 
improvement should be considered when those expenditures add value and 
are capitalized in accordance with Generally Accepted Accounting 
Principles (GAAP). However, the expenses necessary to maintain the 
collateral, and those generally considered operating expenses, such as 
real estate taxes or maintenance of the structure, should not be 
included in the valuation of the cost component of collateral. To 
provide more flexibility, the final rule replaces ``the lessor of the 
purchase price or market value for collateral held 12 months or less, 
and market value for collateral held longer than 12 months'' with ``the 
current collateral value.'' The current collateral value is the most 
up-to-date value of the collateral based on appropriate valuation 
methodologies according to standard industry practices. The forthcoming 
supervisory guidance will provide additional detail with respect to 
determining current collateral value for various types of collateral in 
different scenarios.
    The Board reemphasizes that commercial loans must be appropriately 
collateralized. The type and marketability of collateral should be 
considered in determining the collateral requirements. The LTV ratio 
requirement established by a credit union should accomplish sufficient 
risk sharing between the borrower/principals and the credit union to 
provide adequate protection in the event of borrower default and the 
repayment of the loan is ultimately dependent on the liquidation of 
collateral. In a construction and development loan, establishing a 
borrower's investment requirement on the cost of the project will 
ensure the borrower infuses sufficient capital and establishes a 
stronger incentive and commitment toward the success of the project.
Net Worth
    For consistency, the proposed definition of ``net worth'' provided 
a cross reference to NCUA's prompt corrective action and risk-based 
capital rules in part 702, which more fully address the methodology for 
determining a credit union's net worth. The Board received no 
substantive comment on the proposed definition

[[Page 13538]]

and is therefore retaining the definition in this final rule without 
change.
    New definitions:
Commercial Loan
    The Board proposed to add a new definition to the rule in order to 
distinguish between the commercial lending activities in which a credit 
union may engage, and the statutorily defined MBLs, which are subject 
to the aggregate MBL cap contained in the FCU Act.\23\ The proposed 
rule generally defined a ``commercial loan'' as any credit a credit 
union extends to a borrower for commercial, industrial, agricultural, 
and professional purposes, with several specific exceptions.
---------------------------------------------------------------------------

    \23\ 12 U.S.C. 1757a.
---------------------------------------------------------------------------

    Most commenters that offered input on this aspect of the proposal 
were supportive of the Board's objective in adding a definition for 
commercial loans to delineate between MBLs subject to the statutory 
limit and business purpose loans subject to the rule's safety and 
soundness provisions. One commenter said the distinction will provide 
credit unions with needed flexibility. Several commenters, however, 
disagreed with creating a distinction between commercial loans and 
MBLs. A number of commenters said the distinction between commercial 
loans and MBLs is too complex and unnecessary. At least one commenter 
suggested that drawing a distinction between MBLs and commercial loans 
provides no real benefit, and simply adds to credit unions' reporting 
burden. Several comments suggested the rule adds unnecessary burden and 
complexity to the tracking and monitoring of these loan types on the 
5300 Call Report. One commenter indicated that the definition does not 
provide the necessary clarity for accurate 5300 reporting. The Board 
understands these concerns. However, the distinction is imperative to 
distinguishing MBLs subject to the statutory cap and commercial loans 
subject to the rule's safety and soundness provisions. The Board notes 
that the 5300 form will be modified and detailed instructions will be 
provided to credit unions prior to the implementation of the final 
rule.
    A number of commenters suggested that further clarification is 
needed. For example, the proposed rule generally defined a ``commercial 
loan'' as any credit a credit union extends to a borrower for 
commercial, industrial, agricultural, and professional purposes, but 
not for investment or personal expenditure purposes. One commenter 
suggested that the phrase, ``not for investment . . . purposes'' is 
ambiguous, noting that certain commercial loans would be considered to 
be for investment purposes, such as financing commercial real estate 
(e.g., apartment buildings, shopping centers, etc.). The Board agrees 
that the term ``not for investment . . . purposes'' could cause 
confusion and has removed it from the final definition.
    Several commenters expressed specific support for the seven 
categories of loans excluded from the commercial loan definition. In 
particular, commenters indicated they would experience significant 
regulatory relief because certain MBLs, such as loans secured by a 1- 
to 4-family residential property that is not the member's primary 
residence, will no longer be subject to full commercial lending safety 
and soundness requirements. Several commenters asked for clarification 
on the specific types of loans exempted from the commercial loan 
definition. For example, a commenter asked for clarification for loans 
to a borrower or an associated borrower with an ``aggregate balance'' 
less than $50,000, observing that the current rule refers to 
``aggregate net balances'' such that portions of a loan secured by 
shares or by government guarantees are deducted from the determination 
of the loan amount. The commenter requested clarification on whether 
the ``aggregate balance'' is different from the ``net member business 
loan balance.'' To provide more clarity, the Board has changed the 
phrase ``aggregate balance'' to ``the aggregate outstanding balances 
plus unfunded commitments less any portion secured by shares in the 
credit union'' in the final rule.
    A number of commenters suggested that more types of loans should be 
exempt from the definition, including loans that present zero or remote 
risk of loss to a credit union. For example, one commenter suggested 
that loans fully secured by deposits should be exempt. Another 
commenter recommended excluding loans fully guaranteed by the SBA or 
other government agency because such loans are in essence risk-free. A 
different commenter contended that for loans that are partially insured 
or guaranteed, or that have a partial commitment to purchase, should be 
specifically excluded from the commercial loan definition, to the 
extent of the amount insured or guaranteed, and the amount of the 
purchase commitment. As indicated above, the Board notes that the 
portion of a loan secured by shares or deposits in the credit union may 
be deducted from the outstanding loan balance plus any unfunded 
commitments in counting against the $50,000 commercial loan threshold. 
However, if the aggregate outstanding balances plus unfunded 
commitments less any portion secured by shares in the credit union to a 
borrower or an associated borrower is greater than $50,000, a partially 
cash secured loan will be considered a commercial loan and thus subject 
to the appropriate safety and soundness provisions.
    However, loans guaranteed by the SBA or other government agencies 
cannot prudently be excluded from the commercial loan definition, 
because credit unions could potentially lose the government guarantee 
if they do not comply with program requirements of the corresponding 
government agencies. Also, these loans are commercial in nature and 
require similar safety and soundness provisions as other types of 
commercial lending.
    One commenter recommended tying the small loan exception (i.e., 
loans under $50,000) to a percentage of the credit union's net worth 
instead of the absolute size of the loan. However, the intent of the 
small loan exception is to provide regulatory relief to credit unions 
that offer small-dollar loans for commercial purposes. Tying the 
exception to a percentage of net worth could result in large commercial 
loans not being underwritten and managed using appropriate commercial 
risk management practices. Therefore, the final rule maintains the 
current small loan threshold of $50,000.
    Finally commenters noted it is redundant to require credit unions 
to have both a commercial loan policy and an MBL policy. To clarify, 
the Board does not expect credit unions to maintain separate policies 
for commercial loans and MBLs. Member business loans that are also 
commercial loans should follow the credit union's commercial loan 
policy. Member business loans that are not commercial loans should 
follow the credit union's general loan policy or other specific loan 
policy as the credit union deems appropriate.
Common Enterprise
    As noted above, the proposed definition of ``associated borrower'' 
included any person or entity engaged in a ``common enterprise'' with 
the borrower.
    Most commenters that provided feedback on this definition said 
greater flexibility is needed for credit unions to determine common 
enterprise and common control. Several commenters suggested the 
definition is too restrictive and contrary to a principles-based rule. 
One commenter asserted the definition

[[Page 13539]]

is too prescriptive and credit unions should be allowed to take a more 
conservative approach in determining if a common enterprise exists. 
Another commenter suggested the definition as proposed could lead to 
instances where two unrelated borrowers are improperly covered as a 
common enterprise, for example, where two unrelated, separate trusts 
may derive income from the same publicly-traded stock. One commenter 
indicated the common enterprise definition requires more analysis than 
is practical. Several commenters suggested that a more practical 
approach is to count any borrower who has a joint interest with another 
borrower or entity as an associate borrower.
    However, the proposed definition is more consistent with how the 
term is defined in similar bank regulations, and it provides important 
clarification for how ``common enterprise'' relates to the definition 
of ``associated borrower.'' As discussed earlier, understanding of the 
overall borrowing relationship is critical in managing the credit risk 
associated with commercial loans. It is essential to understand the 
effects posed by the existence of common control and financial 
interdependence amongst multiple parties who are borrowing from the 
credit union. Credit unions must remain mindful that in business 
lending, the borrowers and principals often have multiple credit 
relationships with the credit union and the borrowing entities often 
have an interdependence through operations or common ownership and 
management. The common enterprise definition in the final rule 
identifies the related parties that have direct influence on the 
overall risk through connected operations and management, while 
eliminating other borrowing relationships where the borrower and 
principles have only a passive investment or involvement. Accordingly, 
this definition is adopted as proposed.
Control
    The proposed definition of ``associated borrower'' also 
incorporated the concept of controlling interests. Under the proposal, 
``control'' would exist when, among other things, a person or entity 
directly or indirectly, or acting through or together with one or more 
persons or entities, owns, controls, or has the power to vote 25 
percent or more of any class of voting securities of another person or 
entity. A number of commenters raised concerns with respect to the 25 
percent rule for control. Several commenters disagreed with the 25 
percent threshold by asserting that, in practice, a majority requires 
the power to vote more than 50 percent of shares outstanding. Several 
commenters stated the 25 percent threshold is unnecessarily 
prescriptive. A few commenters suggested the rule should clarify that 
control does not exist when the person having control qualifies under 
only temporary conditions, for example, where a Power of Attorney is 
assigned due to death.
    The Board agrees that a majority control usually exists when an 
individual or entity owns 50 percent or more of a business entity. 
However, the proposed 25 percent threshold was established in 
recognition that owners with a material ownership stake that is less 
than a majority stake may still have significant influence over a 
business entity's operations. As a dimension of credit risk management, 
the 25 percent control threshold is widely utilized in the marketplace 
and is more consistent with similar definitions employed in comparable 
bank regulations. As such, the definition of ``control'' is adopted as 
proposed in the final rule.
Credit Risk Rating System
    The proposed rule defined ``credit risk rating system'' as a formal 
process to identify and measure risk through the assignment of risk 
ratings, or credit risk grades, a standard means for establishing the 
level of risk associated with a commercial loan and the overall 
commercial loan portfolio.
    Most commenters supported the proposed definition. At least one 
commenter, however, observed that the definition requires the use of an 
ordinal number to represent the degree of risk and suggested the 
definition should allow flexibility for a rating system to use a non-
numerical risk rating (for example, low/medium/high or A/B/C/D).
    This definition is adopted as proposed, but the Board clarifies 
that non-numerical risk ratings are also acceptable under the final 
rule.
Direct Benefit
    Under the proposal, ``direct benefit'' means the proceeds of a loan 
or extension of credit to a borrower, or assets purchased with those 
proceeds, that are transferred to another person or entity, other than 
in a bona fide arm's-length transaction where the proceeds are used to 
acquire property, goods, or services.
    Commenters generally supported the proposed definition. One 
commenter suggested replacing the word ``property'' with the phrase 
``tangible and intangible assets.'' This commenter suggested that the 
proposed use of the word ``property'' could imply that the ``direct 
benefit'' definition would only apply to real estate.
    The definition of ``direct benefit'' is adopted, unchanged, in the 
final rule, but the Board clarifies that reference to ``property'' in 
the final definition is not intended to mean only real property.
Loan Secured by a 1- to 4-Family Residential Property
    Under the proposed rule, a ``loan secured by a 1- to 4-family 
residential property'' means any loan secured wholly or substantively 
by a lien on a 1- to 4-family residential property for which the lien 
is central to the extension of credit. The proposed definition was 
intended to clarify that loans secured by a 1- to 4-family residential 
property are not commercial loans for the purposes of the rule.
    Most commenters were strongly supportive of excluding 1- to 4-
family residential property loans from the rule's commercial loan 
definition. Commenters noted that by excluding these loans from the 
commercial loan definition, credit unions will be able to grant such 
loans without the need for a commercial lending policy and additional 
board responsibilities. Commenters were also generally supportive of 
the proposed definition of the term. Accordingly, the Board has 
determined to finalize the definition without change.
Loan Secured by a Vehicle Manufactured for Household Use
    Loans secured wholly or substantively by a vehicle manufactured for 
household use for which the lien is central to the extension of credit 
are generally not commercial loans for the purposes of the final rule. 
The Board proposed ``vehicle manufactured for household use'' to mean 
new and used passenger cars and other vehicles such as minivans, sport-
utility vehicles, pickup trucks, and similar light trucks or heavy-duty 
trucks generally manufactured for personal, family, or household use 
and not used as fleet vehicles or to carry fare-paying passengers.
    Commenters were generally supportive of this definition; therefore, 
the definition is finalized as proposed. However, one commenter 
requested clarification on whether a personal vehicle used to transport 
fare-paying passengers on a part-time basis (e.g. Uber or Lyft) would 
qualify as a commercial loan. The Board clarifies that in general any 
vehicle loan that exceeds $50,000 and is secured by a vehicle used to 
transport fare-paying passengers (e.g., a commercial ride-share 
vehicle) will be considered a

[[Page 13540]]

commercial loan under the final rule. The Board understands, however, 
that in some circumstances a member may purchase a vehicle primarily 
for personal use and use it only for a portion of the time to generate 
ride-share revenue. It is incumbent upon the lending credit union to 
determine the intended use of a financed vehicle and the borrower's 
level of dependence on ride-share revenue to repay the loan. For 
example, if more than 50 percent of the repayment source will come from 
ride-share activity and the loan or associated borrower relationship 
exceeds $50,000, the vehicle loan should be treated as a commercial 
loan and underwritten accordingly.
Readily Marketable Collateral
    The Board proposed to add the term ``readily marketable 
collateral'' to the rule to clarify the proposed collateral 
requirements. The proposal defined this term as a financial instrument 
or bullion that is salable under ordinary market conditions with 
reasonable promptness at a fair market value determined by quotations 
based upon actual transactions on an auction or similarly available 
daily bid and ask price market.
    Some commenters expressed concern that, as defined in the proposal, 
the term ``readily marketable collateral'' was not sufficiently clear. 
Others suggested that borrowers may not have realistic access to this 
type of collateral and asked that the term be expanded to also include 
broader types of collateral.
    The definition will not be expanded to include broader types of 
collateral, for the reason explained below. However, the Board does 
agree that lenders should be clear on what is meant by ``readily 
marketable.'' Under comparable existing bank regulations in use for 
decades, this term refers to financial instruments that must be 
``salable under ordinary circumstances with reasonable promptness at a 
fair market value determined by quotations based on actual 
transactions, on an auction or similarly available daily bid and ask 
price market. Readily marketable collateral should be appropriately 
discounted by the lender consistent with the lender's usual practices 
for making loans secured by such collateral.''
    The purpose of including readily marketable collateral in NCUA's 
regulation is to provide a means for qualifying credit unions to 
increase their single obligor limit to a business loan borrower to as 
much as 25 percent of the credit union's net worth. But, any amount 
above the 15 percent of net worth limit is only prudent if it is fully 
secured by marketable collateral as described above. Many member 
business borrowers may lack the capacity to provide readily marketable 
collateral in which the lender can perfect a security interest. As 
such, it is expected that single-borrower limits set above 15 percent 
of net worth will occur on a more limited basis rather than become the 
norm. Therefore the final rule adopts this definition as proposed.
Residential Property
    The Board proposed to define ``residential property'' as a house, 
condominium, cooperative unit, manufactured home, and unimproved land 
zoned for 1- to 4-family residential use. The definition was added to 
the rule to clarify that loans secured by a 1- to 4-family residential 
property are excluded from the definition of commercial loan.\24\
---------------------------------------------------------------------------

    \24\ However, loans secured by a 1- to 4-family residential 
property that is not the borrower's primary residence are MBLs 
subject to the statutory cap. Loans fully secured by a 1- to 4-
family residential property that is the borrower's primary residence 
are neither commercial loans nor MBLs.
---------------------------------------------------------------------------

    At least one commenter suggested the residential property 
definition should include trailers and campers, which are often used as 
residences in certain geographical areas. One commenter noted that the 
definition does not specifically address townhouses. Another commenter 
recommended that the definition refer specifically to FFIEC guidance in 
defining single family residence.
    The Board sees a distinction between trailers or campers and 
manufactured homes and clarifies that such recreational-type vehicles 
are not residential property for the purposes of the final rule. While 
trailers and campers may in some instances be used as residences, they 
are potentially more transient and tend to lack the permanency and 
continuity that generally characterizes a manufactured home or other 
residential property. However, townhouses and other similar housing 
styles share essentially the same characteristics as houses, 
condominiums or cooperative units and, therefore, fall within the scope 
of the final definition.
    Definitions moved to a different section:
Construction and Development Loan
    To improve the readability of the rule, the Board proposed to move 
the current definition of ``construction and development loan'' to 
Sec.  723.6 because that is the section that addresses all of the 
requirements for construction and development loans. The Board received 
no comments on the proposal to move this definition to Sec.  723.6 and 
has adopted the technical change in this final rule. The substantive 
definition is discussed below.
Net Member Business Loan Balance
    The proposed definition of ``net member business loan balance'' was 
substantively the same as in the current rule; however, the Board 
proposed to move it from current Sec.  723.21 to proposed Sec.  723.8, 
which addresses the statutory limits on the aggregate amount of member 
business loans that may be held by a credit union. The Board received 
no comments on the proposal to move this definition to Sec.  723.8 and 
has adopted the technical change in this final rule. The substantive 
definition is discussed in greater detail below.

Sec.  723.3--Board of Directors and Management Responsibilities

    Proposed Sec.  723.3 of the final rule addressed the overall 
elements necessary to administer a safe and sound commercial loan 
program. It reinforced the expectation that a credit union's board of 
directors is ultimately accountable for the safety and soundness of the 
credit union's commercial lending activities and must remain adequately 
informed about the level of risk in the credit union's commercial loan 
portfolio. The proposal modified the experience and expertise 
requirements in the current rule for personnel involved in member 
business lending and delineated the qualifications required for a 
credit union's senior executive officers and staff. It also provided 
options for how a credit union may meet such requirements. In addition, 
the proposal required a credit union's board of directors to approve a 
commercial loan policy that complies with Sec.  723.4, which is 
discussed below.
Board Responsibility
    Generally, commenters expressed concern that the rule will place 
too much burden or responsibility on volunteer credit union boards of 
directors. Commenters suggested that imposing too much responsibility 
on volunteer boards will make it increasingly difficult for credit 
unions to find members willing to serve as board members. Specific 
concerns expressed included: The rule places unclear or unduly high 
expectations on credit union boards of directors; it requires too much 
ongoing oversight; it shifts managerial responsibilities to directors; 
it invites too much involvement by the board; it may be construed to 
mean that boards should be involved in day-to-day operations; that

[[Page 13541]]

a perceived increase in director responsibility and liability will 
deter potential volunteers and MBL activity; and, the lack of specific 
director duties in the regulation increases the potential for 
disagreements between credit unions and examiners.
    None of these comments change the fact that a credit union's board 
of directors has a fiduciary duty to the membership. Thus the board 
responsibilities provisions in the final rule reinforces the 
expectation that a credit union's board of directors is ultimately 
accountable for the safety and soundness of the credit union's 
commercial lending activities and must remain adequately informed about 
the level of risk in the credit union's commercial loan portfolio. The 
Board agrees that guidance in this area would benefit both credit 
unions and examiners and will include a discussion of board and 
management responsibilities in the revisions to its examiner training 
and forthcoming guidance for commercial lending.
    The Board does not expect directors to involve themselves in 
procedural or day-to-day operational aspects of business lending. 
Rather, directors are expected to set the strategic direction of their 
credit union, approve the guiding risk management policies, remain 
informed about the nature and levels of risk, and require that the 
institution is appropriately staffed. By spelling out general 
responsibilities for senior executive officers and lending personnel, 
the rule avoids being overly prescriptive and at the same time gives 
directors a guideline for how to delineate between their role and that 
of staff responsible for hands-on management of commercial lending. 
Lastly, the Board notes that business lending is a complex and 
potentially higher-risk activity that is not appropriate for all credit 
unions. If a credit union's board and/or management team does not 
possess the experience, skills and resources to manage MBLs, it should 
refrain from making such loans until it does.
Experience Requirements
    Most commenters agreed with the Board's proposal to eliminate the 
current rule's specific two-year staff experience requirement, and 
indicated that qualitative requirements are preferable to prescriptive 
staffing requirements. Other comments, however, favored the 
continuation of the two-year requirement (or another prescriptive 
experience standard), noting that adequate training and experience are 
crucial to a safe, sound, and successful commercial lending program. 
Several commenters noted that oftentimes two years of experience is not 
sufficient to support the complexity of offering a full range of MBLs 
and to further manage risk within the portfolio, but a qualitative 
requirement will enable credit unions to independently determine and 
evaluate the degree of experience needed in order to successfully 
manage its commercial loan program. One commenter suggested that the 
shift from an arbitrary experience requirement to a qualitative 
standard will better align the knowledge, skill, and experience of 
staff with the size, complexity, and risk profile of each credit union.
    Several commenters expressed concern about proposed Sec.  
723.3(b)(2), which requires expertise in three distinct areas. These 
commenters suggested the rule should clarify that while management 
should have experience in all three areas, staff will not necessarily 
have or need experience in all three areas.
    The Board agrees that having an experience requirement expressed in 
years is overly simplistic and may be unreliable as a means to ensure 
adequately skilled credit staff are in place. Rather, a requirement 
that includes specific knowledge, skills and abilities is preferred. 
The rule establishes criteria that is appropriate and necessary for 
managing commercial loan risk. The elimination of a discreet years-of-
experience requirement also makes it easier for a credit union with a 
well-run commercial loan department to develop staff internally rather 
than being forced to hire external candidates because of the current 
rule's two-year criterion.
    The competencies and skills outlined in the rule are considered 
basic proficiencies necessary to safely manage credit risk both at the 
individual loan-relationship level as well as the overall portfolio. 
The Board is aware that in some cases the credit risk management 
function may be managed by multiple personnel, each with specific 
responsibilities based on their roles and respective skill sets. When 
the commercial loan relationship with a member is managed by more than 
one individual, it is incumbent on the group who is managing the member 
relationship to possess the required competencies and skills. The 
credit union should establish its credit risk management program to 
include well-defined roles and responsibilities and thereby ensure 
effective coordination between the key credit functions.

Sec.  723.4--Commercial Loan Policy

    Section 723.4 of the proposal set out the expectations and policy 
requirements for credit unions offering commercial loans. The proposal 
specified that each credit union engaging in commercial lending must 
ensure that its policies have been approved by the credit union's board 
of directors. Further, policies and procedures must provide for ongoing 
control, measurement, and management of the credit union's commercial 
lending activities. The proposal also reinforced current supervisory 
expectations that credit unions will adopt a formal credit risk rating 
system to identify and quantify the level of risk within their 
commercial loan portfolios.\25\ It also eliminated prescriptive risk 
management requirements for LTV ratios, minimum equity investments, 
portfolio concentration limits for types of loans, and personal 
guarantees. As a result, the need for waivers of these requirements 
would also be eliminated. Finally, the proposal required that a credit 
union's commercial loan policy must address a number of specified 
areas, as enumerated in the rule.
---------------------------------------------------------------------------

    \25\ While a credit union may use a risk rating methodology 
developed by a third party, the credit union must perform 
appropriate due diligence on the methodology and determine it meets 
the credit union's needs for properly categorizing the risk of 
commercial loans.
---------------------------------------------------------------------------

    Most commenters were strongly supportive of allowing credit unions 
to establish their own individualized commercial lending policies 
instead of imposing prescriptive requirements through regulation. 
Several commenters, however, suggested that elements included in the 
commercial loan policy requirements were overly detailed and more 
properly characterized as procedures that should not be included in the 
policy. NCUA maintains that the rule reflects the necessary elements to 
be included in credit unions' commercial lending policies.
    A number of commenters also suggested the rule should allow for the 
commercial loan policy to be approved by a committee of the board 
because board functions are often split among various board committees. 
The final rule clarifies that a credit union's board of directors can 
delegate the responsibility to its committee. However, the board of 
directors is ultimately accountable for the safety and soundness of the 
credit union's commercial lending activities.
    Commenters generally supported the requirement for a credit risk 
rating system but requested further guidance to lay out detailed 
supervisory

[[Page 13542]]

expectations on what will be deemed an acceptable credit risk rating 
system. One commenter encouraged NCUA to leverage existing guidance 
from federal bank regulators addressing credit risk rating systems. The 
Board agrees that clear guidance is beneficial and plans to further 
address this topic in the forthcoming supervisory guidance. NCUA will 
leverage the existing information from other financial regulators where 
appropriate.
    At least one commenter requested clarification on whether the 
requirement that credit unions identify and track loan exceptions will 
apply retroactively to all existing loans. The Board clarifies that 
upon full implementation of the final rule, credit unions will be 
required to identify and track loan exceptions only on a prospective 
basis. Another commenter suggested that tracking all loan exceptions 
would be burdensome, and credit unions should only track certain types 
of exceptions. The Board emphasizes that it is important for credit 
unions to track all types of loan exceptions.
    Several commenters recommended that the rule allow for credit 
unions to combine their MBL and commercial lending policies to avoid 
redundancy. Commenters also suggested that credit unions should have 
flexibility to incorporate the required credit risk rating system into 
its existing policies, such as an enterprise risk management policy. As 
mentioned above, the Board does not expect credit unions to maintain 
separate policies for commercial loans and MBLs. Credit unions may also 
incorporate required credit risk rating systems into other existing 
policies.
Single-Borrower Limit
    Under the proposal, a credit union's commercial lending policy must 
specify that the aggregate dollar amount of commercial loans to any one 
borrower or group of associated borrowers may not exceed the greater of 
15 percent of the federally insured credit union's net worth or 
$100,000, plus an additional 10 percent of the credit union's net worth 
if the amount that exceeds the credit union's 15 percent general limit 
is fully secured at all times with a perfected security interest by 
readily marketable collateral, as defined by the rule. Most commenters 
supported this change. However, several commenters expressed concern 
that the amendment imposes a prescriptive limitation without the 
ability to request a waiver. Commenters suggested that removing the 
waiver option creates a hardship and competitive disadvantage for small 
credit unions and is contrary to the rule's overall objective of 
shifting from a prescriptive to principles-based rule. Commenters also 
expressed concern that basing the single borrower limit on a percentage 
of net worth could cause a problem for smaller credit unions. A few 
commenters suggested that, alternatively, the limit should be based on 
a percentage of shares and undivided earnings. Several commenters 
suggested the single-borrower limit should be eliminated entirely.
    However, a single-borrower limit based on a percentage of the 
lender's net worth is an essential component of credit risk management 
that prevents imprudent concentrations in any single borrower. While 
the provision is modeled after similar bank rules, the primary 
objective in retaining an explicit limit on single-borrower 
concentrations is safety and soundness. In expanding the rule to allow 
for concentrations of up to 25 percent, the Board is providing 
flexibility for credit unions while maintaining an appropriate limit 
for protection against one borrower's impact on the capital of the 
credit union. For these reasons, the limit on single-borrower 
concentrations in the final rule is not subject to waivers.
    A key element of measuring single-borrower exposure is to determine 
the associated individuals and entities that comprise the borrower's 
business relationships. The identification of associated borrowers 
captures those parties who are interdependent and have operational 
influence with the borrower due to shared ownership and management. 
NCUA cautions that credit unions that grant the maximum regulatory 
limit of credit to an associated borrower relationship will inhibit 
their ability to meet any subsequent financing needs of the associated 
borrowers.
    Several commenters suggested that the rule should exclude 
government-guaranteed loan balances from the single-borrower limit. The 
Board agrees that this additional flexibility would be beneficial to 
credit unions and would not raise significant safety and soundness 
concerns. Thus, the final rule adopts this change.
Financial Statement Quality
    A notable number of commenters raised concerns about the proposed 
financial statement quality standards. Commenters suggested the 
requirement for audited or reviewed financial statements for more 
complex and larger borrowing relationships should be less prescriptive 
and left to the discretion of each credit union. Commenters noted there 
may be larger relationships where the loan and collateral is not 
complex and obtaining audited or reviewed financial statements would 
not provide any major support to the loan but would cause the borrower 
to incur additional expense. Commenters also stated that ``more 
complex'' borrowing relationships are undefined and examiners may 
interpret a large or complex relationship differently than commercial 
underwriters. In addition, several commenters argued that requiring 
auditor review or audited financial statements in all cases will put 
credit unions at a competitive disadvantage with banks and other 
lending institutions that do not currently have these requirements. One 
commenter noted that, due to the cost and complexity of obtaining a 
financial statement prepared in accordance with GAAP, most lending 
institutions only require tax returns for less complex borrowing 
activities. Another commenter recommended that, to reduce costs, credit 
unions should be allowed to meet financial statement quality standards 
by obtaining tax returns, rather than costly GAAP-audited financial 
statements. This would allow credit unions to develop policies and 
procedures for financial reporting that are appropriately commensurate 
with the complexity of their lending activities and relationships. A 
different commenter observed that smaller credit unions often do not 
have the sophistication or resources to undergo CPA auditing and CPA 
prepared and audited statements should not be required under the rule.
    The Board agrees that the degree of accuracy and assurance of 
financial statement quality standards should correspond with the level 
of risk in the transaction and size and complexity of the borrowing 
relationship. As the size and complexity of the relationship increases, 
the quality of the financial information should be commensurate. 
Financial statement quality is determined by the level of assurance 
provided by the preparer and the required professional standards 
supporting the preparer's opinion. In many cases, tax returns and/or 
financial statements professionally prepared in accordance with 
generally accepted accounting principles (GAAP) will be sufficient for 
less complex borrowing relationships, such as those that are limited to 
a single operation of the borrower and principal with relatively low 
debt. For more complex and larger borrowing relationships, such as 
those involving borrowers or principals with significant loans 
outstanding or multiple or interrelated operations, the

[[Page 13543]]

credit union should require borrowers and principals to provide either: 
(1) An auditor's review of the financial statements prepared consistent 
with GAAP to obtain limited assurance (i.e., a ``review quality'' 
financial statement), or (2) an independent financial statement audit 
under generally accepted auditing standards (GAAS) for the expression 
of an opinion on the financial statements prepared in accordance with 
GAAP (i.e., an ``audit quality'' financial statement).
    Credit unions should address the criteria and thresholds for the 
required financial reporting in their policies. Credit unions should 
allow exceptions in their credit policies if they determine the 
relationship does not require the same level of assurance and they are 
satisfied that the lesser quality still provides them with accurate 
reporting of the borrower's financial performance. Credit unions will 
be expected to address the issue of exceptions in their loan policies. 
Any exception should be documented by staff and approved by the 
appropriate designated internal authority.

Sec.  723.5--Collateral and Security

    Under the proposal, all of the specific prescriptive limits and 
requirements related to collateral in the current rule were eliminated 
and replaced with the fundamental principle that commercial loans must 
be appropriately collateralized.
    A minority of commenters were opposed to the elimination of the 
current rule's prescriptive collateral requirements. These commenters 
argued that the elimination of these important safety and soundness 
checks and balances represents lax regulatory policy and will result in 
unsafe and unsound commercial lending practices. Most commenters, 
however, were strongly supportive of the elimination of prescriptive 
collateral requirements. These commenters said the change in approach 
will help credit unions better serve their members. One commenter 
indicated the new rule will level the playing field for credit unions. 
One commenter noted the change will allow credit unions to offer more 
flexible financing options for strong borrowers with satisfactory cash 
flow and capitalization. Another commenter said the modernized 
collateral requirements will provide credit unions with more options to 
mitigate risks associated with different collateral types, and allow 
for more competitive loan terms for members.
    Many commenters specifically supported the elimination of unsecured 
lending limitations. One commenter indicated this particular change 
will allow credit unions to provide financing to professionals with 
strong incomes but limited or depreciated collateral value. Another 
said it will allow credit unions to expand product offerings. A 
different commenter indicated that service to small businesses will 
improve, particularly those that despite excellent cash flow have 
limited lendable assets and those that use cash accounting. Several 
commenters, however, urged NCUA to leave in place the current limits on 
unsecured loans. One commenter contended that unsecured loans pose 
additional risks and should be held to a minimum in order to maintain 
the quality and integrity of credit union member business lending.
    A significant number of commenters strongly supported the 
elimination of the current LTV requirement. Commenters generally agreed 
LTV limits are best left to the individual credit union. One commenter 
observed that the current 80 percent LTV limit serves as a good rule of 
thumb, but such a prescriptive limitation undermines lenders' ability 
to account for other factors that may mitigate credit risk such as a 
high debt service coverage ratio, strong guarantors, or high liquidity. 
Several commenters, however, suggested that if the rule does not impose 
maximum LTV requirements, some state-chartered credit unions may be 
subject to conflicting state regulations that do impose maximum LTV 
limits. As such, those commenters recommended the final rule direct 
credit unions to set their LTV limits no higher than allowed by their 
respective state regulations. At least one commenter appreciated the 
proposal's increased flexibility but indicated that retaining 
regulatory limits would protect the industry from the acts of imprudent 
lenders. This commenter suggested that the final rule set regulatory 
LTV limits similar to the supervisory LTV limits for real estate loans 
addressed in FDIC's real estate lending standards.
    NCUA will issue guidance to examiners to outline appropriate 
industry methods for valuing collateral and for establishing an 
appropriate maximum LTV for various collateral types. The Board agrees 
with commenters who suggest NCUA's guidance for LTV ratio limits should 
be consistent with that set by bank regulators. The forthcoming 
supervisory guidance will focus on credit unions' processes for 
establishing collateral protection sufficient to offset the specific 
risk associated with the borrowing relationship. The Board recognizes 
the commenters' concerns about removal of portfolio and relationship 
limits for unsecured loans but emphasizes unsecured lending should be 
an exception, not the norm, to be practiced on a limited basis and only 
to accommodate financially strong members. Credit unions should address 
portfolio limits and appropriate risk monitoring and reporting for 
unsecured loans in their credit policies.
    The Board reiterates that for loans granted by credit unions to 
support either the purchase of an asset or working capital to fund 
inventory or accounts receivable during the business cycle, those 
assets should collateralize the loan.
    Accordingly, the final rule sets the expectation that a credit 
union making a commercial loan will require the borrower to provide 
collateral that is appropriate for the type of transaction and the risk 
associated with the borrowing relationship. Credit unions must use 
sound judgment when requiring collateral and require collateral 
coverage for each commercial loan in an amount that is sufficient to 
offset the credit risk associated with that loan.
    The marketability and type of collateral should also be considered 
in determining the collateral requirements. Marketability can be 
influenced by the age, condition, and alternative uses of the 
collateral. For depreciating assets such as equipment or vehicles, 
newer collateral in good condition would warrant a relatively higher 
loan-to-value ratio. Collateral with limited alternative uses, such as 
single-purpose real estate, or assets with limited useful life, such as 
used equipment or vehicles, would warrant a lower loan-to-value ratio. 
The term of the loan should also be reflective of the anticipated 
useful life of the collateral, which is determined based on the type of 
collateral and its expected use. In addition, credit unions should 
consider the volatility of the asset as it relates to value and 
quantities. Specifically, current assets, especially accounts 
receivable and inventory, are dynamic, with changing market values and 
regular fluctuation in quantity on hand. Accordingly, when these assets 
serve as collateral, a lower loan-to-value ratio is warranted to 
account for the volatility. Also, when establishing loan-to-value 
limits, credit unions should align their policies with prudent 
commercial lending practices.
    The rule requires that a credit union must establish a policy for 
monitoring collateral, including systems and processes to respond to 
changes in asset values. For example, real estate in good condition and 
in demand may be inspected less frequently than other types of assets 
such as current assets,

[[Page 13544]]

which can undergo more frequent changes in value and which require 
regular reporting and monitoring to ensure continued compliance with 
collateral requirements. Unsecured lending should be granted on a 
limited basis with strict policy limits and appropriate monitoring and 
management reporting.
    A strong majority of commenters also expressed broad support for 
the elimination of the current rule's requirement that credit unions 
must obtain a personal guarantee from the principal(s) of the borrower. 
Commenters generally indicated that the change will enable credit 
unions to better serve their members. Commenters noted the current 
requirement is burdensome and time consuming and, even if a waiver is 
granted, significantly inhibits credit unions' ability to offer 
commercial loans. Others noted the current requirement has been very 
restrictive and has resulted in the loss of business on many occasions. 
For example, one commenter noted the current requirement for 
professional partnerships for full personal guarantees from 51 percent 
of the owners is unrealistically burdensome and has prevented credit 
unions from making good loans. Another commenter said the current rule 
has made it difficult to meet the needs of its membership, which 
includes uniquely structured entities such as Native Corporations whose 
corporate structure makes it impractical to obtain individual 
guarantees.
    Commenters also indicated that allowing credit unions more 
flexibility in taking personal guarantees will enable them to be more 
competitive with banks and other lenders, which have greater 
flexibility in this area. One commenter said the current prescriptive 
requirements make it difficult to compete with banks and other lenders 
on well-qualified borrowers. Multiple commenters said they will 
continue to take personal guarantees where appropriate, but flexibility 
in this regard is critical. Another commenter agreed that personal 
guarantees are generally prudent, but said the elimination of strict 
rules requiring guarantees is advantageous for credit unions.
    A notable number of commenters, however, opposed the elimination of 
the current rule's personal guarantee requirement. Those commenters 
suggested that eliminating the personal guarantee is unsafe and unsound 
and will introduce unnecessary risk into many credit union portfolios. 
At least one commenter expressed doubt as to whether credit unions can 
exercise the judgment necessary to determine if a guarantee is 
appropriate or not. In addition, several commenters asserted that 
credit unions making loans without taking a personal guarantee would 
effectively be making impermissible non-member loans because the 
personal guarantee by a member is what makes an MBL a ``member'' 
business loan.
    By granting flexibility to credit unions to individually decide 
whether to require personal guarantees or not, the Board is not 
implying that their function or importance as a risk mitigation has 
diminished. The Board clarifies that the rule allows credit unions to 
grant loans without the personal guarantee of the principal(s) only 
when there are strong mitigating factors to offset the additional risk 
created when the loan is not guaranteed by the primary beneficiary of 
the transaction, which is generally the principal(s) of the borrower. 
The Board does not agree that competitive pressure is a justification 
to grant a loan without the personal liability or guarantee of the 
controlling interest of the borrower. The credit union's decision to 
forego the use of a guarantee should only be approved when it meets the 
needs of a financially strong member and other credit-risk mitigations 
exist.
    The Board reiterates that having the principal(s) of the borrower 
commit their personal liability to the repayment obligation is, in many 
cases, very important for commercial lending. Accordingly, the rule 
makes clear that excusing principals from providing their personal 
guarantee for the repayment of the loan may only be done with 
appropriate corresponding underwriting parameters and portfolio 
safeguards. The credit union should set prudent portfolio limits for 
these types of loans, measured in terms of a reasonable percentage of 
the credit union's net worth. Commercial loans without a personal 
guarantee should be tracked and periodically reported to senior 
management and the board.
    Personal guarantees provide an additional form of credit 
enhancement for a commercial loan. In small business, investor real 
estate, and privately held entity lending, it is standard industry 
practice for principals of the business to assume the majority of the 
risk by personally guaranteeing the loan. Business owners or principals 
will benefit the most from the success of the business operation; 
therefore, it is appropriate for principals to shoulder the bulk of the 
risk by committing their personal guarantee.
    A personal guarantee by the principal offers additional financial 
support to back the loan, but more importantly it solidifies the long-
term commitment by the principal to the success of the business 
operation. The most effective guarantee will be from the principals who 
have control of the borrower's operation and have sufficient financial 
resources at risk. A firm commitment by such a principal is vital to 
preserving the value of the borrower's business, either by improving 
operations or, in the worst case, by preserving asset values in the 
event of default and liquidation. The guarantor's economic incentive is 
to manage the business successfully and retain value, which will 
ultimately serve to offset any deficiency the guarantor might otherwise 
be obligated to pay.
    As discussed above, numerous commenters suggested that 
implementation of the personal guarantee provision should be expedited 
to afford credit unions with this regulatory relief as soon as 
possible. The Board is persuaded that the change will enable credit 
unions to better serve their members and it will be prudent to provide 
this measure of regulatory relief to credit unions as soon as 
reasonably possible. Accordingly, the personal guarantee provision in 
Sec.  723.5(b) of this final rule is effective 60 days after 
publication of the final rule in the Federal Register. In the interim, 
credit unions may continue to seek a waiver of the personal guarantee 
requirement under current Sec.  723.10(e). Once the new personal 
guarantee provision goes into effect (60 days after publication in the 
Federal Register), a credit union making a member business loan (as 
defined in current Sec.  723.1) will no longer be required to seek a 
waiver if it decides that a full and unconditional guarantee from the 
principal(s) of the borrower is not necessary and it determines and 
documents in the loan file that mitigating factors sufficiently offset 
the relevant risk.

Sec.  723.6--Construction and Development Loans

    The proposed rule outlined separate requirements that pertain 
exclusively to construction and development lending. Construction and 
development lending represents an important and necessary service that 
credit unions can provide to their membership. However, construction 
and development lending presents risk, in addition to credit risk, in 
the areas of loan disbursement administration and valuation of 
collateral.
    The proposed rule clarified the definition of a construction and 
development loan, described alternative methods for valuing a 
construction project, and explained which costs are considered 
allowable in determining value of the project and therefore may be 
funded from loan proceeds. The proposal also outlined required

[[Page 13545]]

procedures to be followed in the administration of construction and 
development loans.
    The Board proposed a new definition for construction and 
development loans that distinguished between income-producing property 
and projects built for a commercial purpose. The Board proposed 
``income producing'' to mean any property that generates income from 
the rental or sale of the units constructed with loan proceeds and the 
repayment of the loan is dependent on the successful completion of the 
project. ``Commercial purpose,'' by contrast, applied to structures 
that do not directly generate income but enhance the operation of a 
commercial or industrial operation, such as a warehouse, manufacturing 
facility, and management office space. The proposal also clarified that 
a construction and development loan includes any loan for the 
construction or renovation of real estate where prudent practice 
requires multiple controlled disbursements as the project progresses 
and the ultimate valuation of the project and collateral protection is 
determined from the completed project.
    The proposed rule also established procedures for the valuation of 
collateral for construction and development loans. The proposal 
outlined two distinct methods for determining collateral value: One 
focused on cost, the other on market value. The first method entails an 
evaluation of the cost to complete the project. The proposal described 
allowable costs for valuation and funding purposes consistent with 
prudent commercial practice. The proposed rule also described a second 
valuation method, which is the prospective market value method. The 
prospective market value method is described in the Uniform Standards 
of Professional Appraisal Practice (Statement 4), which discusses the 
method for valuing a completed and stabilized construction project. The 
language in the rule described two different aspects of this approach, 
based on whether the property is held for a commercial or an income-
producing use. The first method, ``as-completed,'' is for a commercial 
purpose building, while the second, ``as-stabilized,'' is for income-
producing real estate.
    Finally, the proposed rule clarified the requirements for 
administering a construction and development loan process, including 
requiring appropriate disbursement controls, to ensure the project is 
adequately funded and managed to reduce risk.
    Most commenters were generally supportive of the proposed changes. 
At least one commenter noted that the amendments should make the 
construction and development loan requirements more consistent with 
expectations of commercial borrowers and help credit unions to more 
effectively provide loans to members. Another commenter indicated that 
the easing of unnecessary and arbitrary limits on construction and 
development loans will help credit unions to better serve their members 
and communities.
    Most commenters supported removing the current 15 percent aggregate 
limit on these types of loans. One commenter said this change would be 
very positive for credit unions. One commenter indicated that removal 
of the limit on construction and development loan balances will enable 
credit unions to offer construction financing to more businesses at the 
same time. The same commenter also noted that under the current rule, 
construction projects are sometimes delayed in order for the credit 
union to stay under a restrictive limit.
    Most commenters also supported the removal of the minimum equity 
requirement of 25 percent on construction and development loans. One 
commenter noted the 25 percent requirement is a best practice but it is 
not always achievable, even on loans that are strong for other reasons. 
One commenter noted that the removal of the equity requirement will 
lift unnecessary hurdles that have put credit unions at a competitive 
disadvantage under the current rule. Another commenter observed that 
the current restriction has curtailed credit unions' willingness to 
participate in certain projects. Another commenter noted the change 
brings NCUA's rule more in line with industry standards.
    Other commenters, however, expressed concern that removal of the 
prescriptive limits creates too much risk. At least one commenter 
recommended keeping both the 15 percent aggregate limit as well as the 
25 percent equity requirement in place in this area. One commenter 
supported the removal of regulatory limits, but suggested that each 
credit union's individual policy should set a limit on construction and 
development loans because of the overall inherent risk and experience 
necessary to manage the development process.
    Several commenters expressed opposition to the requirement of using 
the lesser of purchase price or appraised value for collateral held 
less than 12 months. At least one commenter argued that the appraised 
value should always be used. Another commenter said it is too 
restrictive to require two appraisals due merely to the passage of 
time.
    At least one commenter suggested the rule should be more flexible 
with respect to the requirement for obtaining on-site inspections prior 
to any loan disbursement. Another commenter noted it can be cost 
prohibitive on smaller projects that submit a draw schedule to hire a 
third party to review line-item budgets.
    One commenter asked for clarification on the definitions of hard 
cost and soft cost. Another commenter recommended that the rule more 
clearly distinguish between construction and development loans and 
loans for renovation.
    The Board agrees that the rule's increased flexibility on limits 
will provide credit unions with greater opportunity to meet the 
potential business needs of their members. The risks associated with 
construction and development lending are unique and complex. NCUA 
encourages credit unions to weigh the decision to provide construction 
and development loans carefully and only after they have made a 
determination that staff responsible can clearly understand and manage 
the risks. The rule establishes minimum process requirements to ensure 
the credit union can adequately administer an effective construction 
and development process. The administration of construction and 
development loans is generally more involved than other types of 
lending because of the requisite monitoring requirements, and therefore 
administration costs are likely to be higher. Some credit unions may 
find these higher administrative costs prohibitive if they lack the 
economies of scale to support the more intensive credit risk management 
process. Credit unions lacking adequate resources and/or experience 
should refrain from construction and development lending.
    The Board notes the concerns expressed by commenters who caution 
about the risk of construction and development lending and the levels 
of expertise necessary to safely conduct it. The rule requirements are 
designed to ensure credit unions follow sound practices such as the use 
of qualified individuals, development of budgeting and planning, and 
monitoring of projects throughout the construction and development 
lending process. The Board understands that the specific expertise 
required to properly manage a project may not reside with the credit 
union staff and allows credit unions to obtain the necessary expertise 
by hiring qualified third parties. By establishing an effective 
administration of the process, the credit union can detect any

[[Page 13546]]

variance from the original plan earlier in the process. This advantages 
both the credit union and the member because an early detection of 
problems affords the credit union and its member the best opportunity 
to develop a mutually beneficial solution.
    Considering the general support of most commenters, the Board has 
decided to adopt the requirements of proposed Sec.  723.6 unchanged in 
this final rule. The process outlined is standard construction 
financing practice and serves both the credit union and the member.

Sec.  723.7--Prohibited Activities

    The Board proposed to move the prohibitions contained in current 
Sec.  723.2 to proposed Sec.  723.7, essentially unchanged, except for 
minor clarifications in the wording. This section of the proposed rule 
also included provisions governing conflicts of interest, which had 
been taken virtually intact from Sec.  723.5(b) of the current rule. 
The proposal also added a clause to clarify what it means to be 
``independent from the transaction'' and specifically provided that any 
third party providing advice or support to the credit union in 
connection with its commercial loan program may not receive 
compensation of any sort that is contingent on the closing of the loan.
    A number of commenters indicated that the current prohibitions are 
unnecessarily prescriptive and should not be retained in the final 
rule. One commenter stated that outright prohibition of insider 
commercial loans is overly harsh. This commenter acknowledged that 
insider loans present an opportunity for abuse, but argued that such 
loans can be effectively managed through enhanced due diligence, 
reporting and policy requirements, and aggregate lending limits. At 
least one commenter argued that Regulation O,\26\ which governs insider 
lending for banks, bans preferential loans to insiders but does not 
impose an outright prohibition on all loans to insiders. The commenter 
suggested NCUA should adopt a similar approach to Regulation O, whereby 
additional due diligence, board responsibilities, and aggregate limits 
are required for insider loans, but the rule allows for such loans to 
be made. Another commenter suggested that, rather than prohibiting 
insider loans, the rule should implement similar safeguards that govern 
insider credit transactions in connection with personal loans and 
mortgages.
---------------------------------------------------------------------------

    \26\ 12 CFR part 215.
---------------------------------------------------------------------------

    The Board carefully considered these comments but has determined 
not to incorporate an approach similar to Regulation O because the bank 
rule depends to a large extent on public disclosures as a deterrent to 
improper insider commercial lending activities. Because credit unions 
are not-for-profit, cooperative, non-publicly traded institutions, 
disclosure provisions similar to those contained in Regulation O may 
have limited efficacy in the credit union context. The Board, however, 
recognizes that the rule could provide greater flexibility to permit 
credit unions to provide insider loans while maintaining safeguards 
against insider abuse and conflicts of interest. Accordingly, the final 
rule narrows the scope of ineligible borrowers to permit credit unions 
to provide commercial loans to senior staff (and their family members) 
who have no influence over and are not directly or indirectly involved 
in the commercial loan underwriting, servicing, and collection process.
    Proposed Sec.  723.7(c) also restricted a third party that is 
providing business loan services to one or more credit unions from 
receiving compensation contingent upon the closing of a loan. Several 
commenters argued that CUSOs should be exempted from this provision. 
One commenter contended the rule should not prohibit compensation 
contingent on a loan closing, especially where a CUSO is providing the 
services, since the CUSO and credit union are united by common 
ownership and their interests do not conflict. Another commenter 
similarly argued that CUSOs should be exempted from this provision as 
they are generally credit union owned with interests of the CUSO and 
credit union in alignment. One commenter said a CUSO should be viewed 
as avoiding the client relationship since it is owned by credit unions 
and functions as the collaborative extension of those owners. Another 
commenter argued the condition of a loan closing is only improper if 
there is a conflict of interest. This commenter disagreed that CUSOs 
pose the same conflict as other third parties, such as borrower-paid 
loan finders or brokers. Another commenter asserted fees and payment 
terms and conditions should be left to each credit union and their 
vendors to negotiate. This commenter observed that fees payable at 
closing are not uncommon and they represent the culmination of work 
product.
    CUSOs, simply by definition, are not necessarily an extension of 
particular credit unions. CUSOs' interests are not necessarily or 
completely in alignment with a particular credit union's interests. In 
fact, CUSOs are for-profit and legally separate entities. Under NCUA's 
CUSO regulation, a CUSO is generally defined as ``any entity in which a 
[federally insured credit union] has an ownership interest or to which 
a FICU has extended a loan, and that entity is engaged primarily in 
providing products or services to credit unions or credit union 
members.''\27\ CUSO ownership is not restricted to credit unions nor is 
any level of credit union ownership required to make an entity a CUSO. 
A CUSO may be wholly owned by one credit union, owned by multiple 
credit unions, or could have no credit union owners. Further, under the 
CUSO rule, a federal credit union can invest in or loan to a CUSO only 
if the CUSO is structured as a corporation, limited liability company, 
or limited partnership and it obtains written legal advice that the 
CUSO is established in a manner that will limit potential exposure of 
the credit union to no more than the amount of funds invested in, or 
loaned to, the CUSO.\28\ A federally insured credit union and CUSO must 
be operated in a manner that demonstrates to the public the separate 
corporate existence of the credit union and the CUSO.\29\
---------------------------------------------------------------------------

    \27\ 12 CFR 712.1(d).
    \28\ 12 CFR 712.3(a).
    \29\ 12 CFR 712.4(a).
---------------------------------------------------------------------------

    For these reasons, CUSOs are not exempted from final Sec.  
723.7(c). While in many cases a CUSO and its credit union owner may 
share a common interest, this is not always true, and the rule is 
intended to guard against potential conflicts. The Board notes, 
however, that the rule permits a credit union to use the services of a 
CUSO even if it is not independent from the transaction, provided the 
credit union has a controlling financial interest in the CUSO as 
determined under GAAP.
    Additionally, the Board clarifies that the final rule permits fees 
to be payable at closing, but not contingent upon closing.

Sec.  723.8--Aggregate Member Business Loan Limit; Exclusions and 
Exceptions

    Proposed Sec.  723.8 set out the statutory aggregate limits 
mandated by Section 107A of the FCU Act. Specifically, Section 107A 
states, in pertinent part that no insured credit union may make any 
member business loan that would result in a total amount of such loans 
outstanding at that credit union at any one time equal to more than the 
lesser of 1.75 times the actual net worth of the credit union; or 1.75 
times the minimum net worth required under

[[Page 13547]]

section 1790d(c)(1)(A) of this title for a credit union to be well 
capitalized.\30\
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 1757a(a).
---------------------------------------------------------------------------

    This aggregate statutory limit on MBLs is applied in the current 
rule as the lesser of 1.75 times the credit union's net worth or 12.25 
percent of the credit union's total assets.\31\ For greater consistency 
with the statute, however, the Board proposed to incorporate the 
statutory language contained in the FCU Act in Sec.  723.8(a).
---------------------------------------------------------------------------

    \31\ In the current rule, the 12.25 percent figure is a 
shorthand reference to how the cap applies to the requirement to 
maintain at least 7 percent of total assets to be well capitalized--
1.75 times 7 percent equals 12.25 percent.
---------------------------------------------------------------------------

    The proposal also clarified the distinction between commercial 
loans subject to the safety and soundness provisions and MBLs subject 
to the statutory limit. The following table was included in the 
preamble to the proposed rule to illustrate and compare the member 
business loan and commercial loan definitions under the proposed rule.
---------------------------------------------------------------------------

    \32\ If a member's primary residence.
    \33\ If the outstanding aggregate net member business loan 
balance is greater than $50,000.
    \34\ If the outstanding aggregate net member business loan 
balance is greater than $50,000.
    \35\ If the aggregate outstanding balances plus unfunded 
commitments less any portion secured by shares in the credit union 
is greater than $50,000.
    \36\ If the aggregate outstanding balances plus unfunded 
commitments less any portion secured by shares in the credit union 
is greater than $50,000.

      Table--Comparison of Member Business Loan and Commercial Loan
                               Definitions
------------------------------------------------------------------------
           Type of loan                    MBL          Commercial loan
------------------------------------------------------------------------
Loan fully secured by a 1- to 4-    No \32\..........  No.
 family residential property.
Member business loan fully secured  Yes \33\.........  No.
 by a 1- to 4-family residential
 property (not a member's primary
 residence).
Member business loan secured by a   Yes \34\.........  No.
 vehicle manufactured for
 household use.
Business loan with aggregate net    No...............  No.
 member business loan balance less
 than $50,000.
Commercial loan fully secured by    No...............  No.
 shares in the credit union making
 the extension of credit or
 deposits in other financial
 institutions.
Commercial loan in which a federal  No...............  Yes \35\.
 or state agency (or its political
 subdivision) fully insures
 repayment, fully guarantees
 repayment, or provides an advance
 commitment to purchase the loan
 in full.
Non-member commercial loan or non-  No...............  Yes \36\.
 member participation interest in
 a commercial loan made by another
 lender.
------------------------------------------------------------------------

    In addition, the proposed rule clarified that a credit union's non-
member commercial loans or participation interests in non-member 
commercial loans made by another lender \37\ continue to be excluded 
from the MBL definition \38\ and are not counted for Call Report 
purposes or in calculating the statutory aggregate amount of MBLs, 
provided the credit union acquired the loan or participation interest 
in compliance with all relevant laws and regulations and the credit 
union is not, in conjunction with one or more other credit unions, 
trading MBLs to circumvent the aggregate limit. However, the proposed 
rule eliminated the current rule's requirement to apply for prior 
approval from the NCUA Regional Director for a credit union's non-
member loan balances to exceed the lesser of 1.75 times the credit 
union's net worth or 12.25 percent of the credit union's total 
assets.\39\
---------------------------------------------------------------------------

    \37\ Federally insured credit unions are authorized to purchase 
participation interests in loans made by other lenders to credit 
union members. 12 U.S.C. 1757(5)(E); 12 CFR 701.22. The borrower 
need not be a member of the purchasing credit union, only a member 
of one of the participating credit unions. 12 CFR 701.22(b)(4). 
Additionally, federal credit unions generally may purchase eligible 
obligations of its members from any source if the loans are those 
the FCU is empowered to grant. 12 U.S.C. 1757(13); 12 CFR 701.23(b). 
Certain well capitalized federal credit unions may also purchase 
whole loans from other federally insured credit unions, including 
commercial loans, without regard to whether they are obligations of 
their members. 12 CFR 701.23(b)(2).
    \38\ See 68 FR 56537, 56543 (Oct. 1, 2003).
    \39\ 12 CFR 723.16(b).
---------------------------------------------------------------------------

    The proposed rule also identified those credit unions that are, by 
statute, exempt from the aggregate MBL limit, including credit unions 
that have a low-income designation or that participate in the Community 
Development Financial Institutions program. Credit unions chartered for 
the purpose of making business loans were also exempted under the 
proposed rule, consistent with the statute. An additional statutory 
exemption was provided for credit unions that had a history of 
primarily making member business loans, determined as of the date of 
enactment of CUMAA. NCUA continues to apply the ``history of primarily 
making member business loans'' exemption by reference to the date of 
CUMAA's enactment;\40\ therefore, the proposal removed the outdated 
provisions in the current rule that relate to the evidentiary 
documentation necessary to demonstrate a credit union's qualification 
for the exemption.
---------------------------------------------------------------------------

    \40\ See 64 FR 28721, 28726 (May 27, 1999).
---------------------------------------------------------------------------

    Finally, the proposal established the method for calculating a 
credit union's net member business loan balances for the purpose of 
complying with the statutory cap and reporting on NCUA Call Report Form 
5300. The proposed method was consistent with the current rule but, as 
noted above, the requirements for calculating the net member business 
loan balances were moved from the definitions section in current Sec.  
723.21 to proposed Sec.  723.8 for greater ease of reference and 
improved readability.
Statutory Limit
    A number of commenters asked for an increase to the aggregate MBL 
limit, arguing that the current limit is too restrictive and 
significantly impedes credit union business lending. One commenter 
recommended the rule be changed from ``the lesser'' to ``the greater'' 
of 1.75 times actual net worth or 1.75 times the minimum net worth 
required to be well capitalized. The Board cannot make these amendments 
under current law, because raising the statutory MBL limit would 
require a legislative change.
    Most commenters were strongly supportive of presenting the 
statutory limit as a multiple of net worth rather than a percentage of 
assets. Commenters generally agreed the rule should be in closer 
conformity with the statute. Commenters also said the amendment was a 
useful clarification and not an increase in the cap nor a circumvention 
of congressional intent. One commenter noted the 12.25 percent 
shorthand reference is not required by the FCU Act and is an 
unnecessary provision.
    Some commenters, however, were opposed to removing the 12.25 
percentage of assets reference from the regulatory expression of the 
statutory cap. Opposing commenters contended such a change is contrary 
to the FCU Act and constitutes an improper attempt by NCUA to raise the 
cap without congressional approval. Those

[[Page 13548]]

commenters alleged that if both the proposed MBL and risk-based capital 
(RBC) \41\ rules are adopted as proposed, in effect the statutory cap 
will nearly double. They argued the proposal would thus render the cap 
meaningless.
---------------------------------------------------------------------------

    \41\ A final RBC rule was issued by the Board on October 15, 
2015. See 80 FR 66626 (Oct. 29, 2015).
---------------------------------------------------------------------------

    The Board disagrees with these opposing comments. The proposal 
incorporated the statutory language essentially verbatim. As such, the 
removal of the 12.25 percentage of assets reference is not only fully 
consistent with the FCU Act, it is in fact more faithful to the 
statute. The 12.25 percent expression of the cap was established 
through regulation, not statutorily mandated. The Board maintains that 
the elimination of the unnecessary 12.25 percentage reference improves 
clarity and more accurately incorporates the statutory language 
contained in the FCU Act. Accordingly, the Board is finalizing Sec.  
723.8(a) as proposed.
    Several commenters asked for clarification about how the RBC rule, 
as finalized, will impact the statutory MBL limit. As noted above, the 
language in the FCU Act establishes the aggregate MBL limit as the 
lesser of 1.75 times the actual net worth of the credit union or 1.75 
times the amount to be well capitalized under prompt corrective action 
rules. The recently finalized RBC rule establishes the amount to be 
well capitalized under prompt corrective action to be greater of 7 
percent of total assets (leverage ratio) or the amount required by the 
risk-based net worth requirement. The final RBC rule changes the risk-
based requirement to be 10 percent of risk-weighted assets. Thus, where 
actual net worth is greater than the minimum to be well capitalized, 
the limit on MBLs is 1.75 times the greater of the following 
calculations:
    1. Calculate the minimum amount of capital (in dollars) required by 
the leverage ratio, which is 7 percent times total assets.
    2. Calculate the minimum amount of capital (in dollars) required by 
the risk-based capital ratio, which is 10 percent times total risk-
weighted assets, and solve for the minimum amount of net worth needed 
after accounting for other forms of qualifying capital allowed under 
the final RBC rule.\42\
---------------------------------------------------------------------------

    \42\ For those credit unions subject to the risk-based 
requirement; that is, those credit unions with assets greater than 
$100 million.
---------------------------------------------------------------------------

MBL Definition
    Several commenters suggested changes to the MBL definition and its 
exceptions. The FCU Act defines the term ``member business loan'' and 
the exclusions from that term. The Board does not have authority to 
amend the MBL definition through regulation. The proposed rule 
incorporated the MBL definition and its exceptions as specifically 
mandated by statute, and the Board adopts these provisions, unchanged, 
in the final rule.
Non-Member Loan Participations
    As noted above, under the current MBL rule, participation interests 
in member business loans and member business loans purchased from other 
lenders count against a credit union's aggregate limit on net member 
business loan balances. Non-member business loans and non-member 
participation interests \43\ in business loans are currently excluded 
from the aggregate MBL limit, but credit unions are subject to a 
regulatory requirement to seek prior approval from NCUA for their non-
member business loan balances to exceed the lesser of 1.75 times the 
credit union's net worth or 12.25 percent of the credit union's total 
assets.\44\
---------------------------------------------------------------------------

    \43\ Federally insured credit unions are authorized to purchase 
participation interests in loans made by other lenders to credit 
union members. 12 U.S.C. 1757(5)(E); 12 CFR 701.22. The borrower 
need not be a member of the purchasing credit union, only a member 
of one of the participating credit unions. 12 CFR 701.22(b)(4). 
Additionally, federal credit unions generally may purchase eligible 
obligations of its members from any source if the loans are those 
the FCU is empowered to grant. 12 U.S.C. 1757(13); 12 CFR 701.23(b). 
Certain well capitalized federal credit unions may also purchase 
whole loans from other federally insured credit unions, including 
commercial loans, without regard to whether they are obligations of 
their members. 12 CFR 701.23(b)(2).
    \44\ 12 CFR 723.16.
---------------------------------------------------------------------------

    Commenters were divided on the proposal to eliminate the current 
rule's requirement to apply for prior approval from the NCUA Regional 
Director for a credit union's non-member commercial loans or 
participation interests in non-member commercial loans made by another 
lender to exceed the lesser of 1.75 times the credit union's net worth 
or 12.25 percent of the credit union's total assets. Some commenters 
argued that continuing the current approach of excluding loan 
participations from the statutory MBL limit could create an opportunity 
for abuse; cause bad loans to be syndicated broadly; result in unsafe 
concentrations in loan participations; or create a loophole to the MBL 
cap. Opposing commenters also objected to the elimination of regulatory 
oversight of the concentrations of these loans by way of the current 
application requirement for NCUA approval. One commenter said that 
eliminating the application requirement could encourage credit unions 
to have unhealthy concentrations that would be devastating during a 
down economic cycle.
    On the other hand, numerous commenters supported the continued 
exclusion of non-member loan participations from the statutory limit, 
noting that loan participations are an important tool for credit unions 
to manage loan concentrations, liquidity, and overall risk.
    Commenters indicated that the current approach to non-member loan 
participations fosters collaboration within the credit union industry 
and allows credit unions to better serve their members while managing 
their statutory cap and overall balance sheet. Commenters also noted 
that the current exclusion of non-member participation loans from the 
MBL cap provides credit unions an opportunity to add geographic and 
asset class diversification to their MBL portfolio; provides a healthy 
strategy for balance sheet management; and results in better credit 
quality. Several commenters argued that counting non-member 
participations against the statutory MBL limit would unnecessarily 
suppress the amount of a credit union's loanable capital, to the 
detriment of its members. Some commenters were also supportive of 
eliminating the requirement to apply for NCUA approval for non-member 
loan balances to exceed the regulatory cap. Several commenters noted 
that the current application requirement is not statutorily mandated, 
overly burdensome, and unnecessary.
    The Board emphasizes that NCUA's current approach with respect to 
MBL loan participations has been unchanged since 2003. In its April 
2003 proposed rule, the Board stated:

    The Federal Credit Union Act expressly requires a credit union 
to include only MBLs it makes to its members in calculating its 
statutory aggregate MBL limit. . . . . Participation interests 
purchased by a credit union from an originating eligible 
organization are not loans made by the participating credit union. 
The Board, therefore, proposes that these loans need not be included 
in calculating the participating credit union's aggregate loan 
limits.\45\
---------------------------------------------------------------------------

    \45\ 68 FR 16450, 16451 (April 4, 2003).

    In its October 2003 final rule, the Board clarified that business 
purpose loans to members are included in the aggregate limit whether 
the loan is made by the credit union or purchased from another lender, 
but non-member loans and non-member participation interests are 
excluded from the aggregate limit. The Board also established a 
regulatory framework for credit unions to seek prior approval from NCUA 
for their

[[Page 13549]]

non-member business loan balances to exceed the lesser of 1.75 times 
the credit union's net worth or 12.25 percent of the credit union's 
total assets. In support of its position with respect to non-member 
---------------------------------------------------------------------------
loans and participation interests, the Board noted:

    The statutory language establishing the aggregate limit provides 
that ``no insured credit union may make any member business loan 
that would result in the total amount of such loans outstanding'' in 
excess of the limit (citation omitted). The Board believes that this 
language lends itself to several possible interpretations. The 
narrowest interpretation would apply the limit only to loans made by 
a credit union to its members and not to loans and loan interests 
purchased from another lender. . . . In the proposed rule, the Board 
requested comment on [this] least constraining interpretation of the 
aggregate limit on MBLs. . . . The Board believes this proposal is 
consistent with the plain language of the Federal Credit Union Act 
establishing a limit on member business loans made by a FICU. The 
Board also believes the proposal is consistent with the 
congressional intent that credit unions not make business loans at 
the expense of the consumer loan needs of members and that the 
credit union system not take on undue risk as a result of over-
concentration of MBLs (citation omitted). In the proposal . . . the 
Board noted that a credit union's member-elected board of directors 
would meet its own members' loan demands first and purchase loans 
made by other lenders only as a means of placing excess funds to 
maximize returns to their member shareholders.\46\
---------------------------------------------------------------------------

    \46\ 68 FR 56537, 56543 (Oct. 1, 2003) (emphasis added).

    The Board further elaborated on its rationale for adopting the 
---------------------------------------------------------------------------
current approach, concluding as follows:

    [P]urchases of nonmember loans and participation interests, as 
authorized under certain conditions in NCUA's rules and some state 
laws and rules, do not involve the provision of member loan 
services, and the acquired loan assets are not MBLs. The Board 
continues to believe that these purchases will be made only as a 
productive method of placing excess funds after member loan demands 
are met, and that they need not count against the purchasing credit 
union's aggregate MBL limit. The Board believes it is important to 
avoid unnecessary interference with the ability of credit unions to 
place their excess funds in the manner that best serves the credit 
union, its members, and the credit union system.\47\
---------------------------------------------------------------------------

    \47\ Id.

    After careful consideration of the public comments on this issue, 
the Board continues to subscribe to the views articulated in 2003 and 
has determined to adopt the proposed approach without change. The 
current approach of excluding non-member loans and participation 
interests from the statutory limit provides for an important balance 
sheet management tool and is essential for certain credit unions to 
meet member demand for business loans while adhering to the statutory 
cap. The Board continues to maintain that a plain reading of the FCU 
Act requires a credit union to include only loans it makes to its 
members in calculating its aggregate MBL limit. Participation interests 
purchased by credit unions from other originating lenders are not loans 
``made'' by the participating credit union. Furthermore, purchases of 
non-member loans and participation interests do not involve the 
provision of member loan services, and the acquired interests are not 
``member'' business loans. Thus, consistent with the current rule, non-
member commercial loan participations are not included in calculating 
the participating credit union's aggregate MBL limit under the final 
rule.
    As the Board noted in 2003, CUMAA's legislative history supports 
this interpretation as consistent with the congressional goal that 
credit unions fulfill their mission of meeting the credit and savings 
needs of their members. Selling MBL participations permits an 
originating credit union to obtain additional liquidity, enabling it to 
meet loan demand for both consumer and small business members. A credit 
union that purchases participation interests in business loans from 
other originating lenders does so as a means of investing its excess 
funds. Because they are member-owned and controlled, credit unions 
generally purchase participation interests only after member loan 
demands are met. In addition, participations diversify the risk of MBLs 
within the credit union system, ultimately making credit unions safer 
and better able to meet the needs of individual consumer and small 
business members. The Board notes that the portion of a participated 
business loan that is retained by the originating credit union is 
counted against its aggregate MBL limit. Also, participation interests 
in member business loans count against a credit union's aggregate limit 
on net member business loan balances.
    Consistent with the proposal, the final rule removes the current 
requirement for credit unions to seek prior approval from NCUA for 
their non-member business loan balances to exceed the lesser of 1.75 
times the credit union's net worth or 12.25 percent of the credit 
union's total assets. As discussed in the proposed rule, the current 
rule's application requirement was driven in part by safety and 
soundness concerns. Under this final rule, however, rather than 
continuing to impose the requirement that the total of a credit union's 
non-member loan balances may not exceed the lesser of 1.75 times the 
credit union's net worth or 12.25 percent of the credit union's total 
assets unless it receives prior NCUA approval, the final rule focuses 
on the risks associated with that balance and how the credit union 
should manage the risks. The application requirement in the current 
rule was also intended to address concerns that the MBL rule's 
treatment of participation interests could create a loophole to the 
statutory limit, and that some credit unions may use the authority to 
purchase non-member loans and non-member participation interests as a 
device to swap loans and evade the aggregate limit. To preserve the 
existing safeguard against evasion, the final rule retains in substance 
the current rule's stipulation that, for the exclusion to apply, a 
credit union must acquire the non-member loan or non-member 
participation interest in compliance with applicable laws and 
regulations and it must not be swapping or trading MBLs with other 
credit unions to circumvent the statutory aggregate limit. Attempts to 
circumvent the statutory aggregate limit will not be tolerated and will 
be treated as a violation of this final rule. A credit union that 
demonstrates a pattern or practice of evading the MBL cap, as with any 
other regulatory violation, will be subject to commensurate supervisory 
action.
    Finally, participation interests in member business loans and 
member business loans purchased from other lenders continue to count 
against a credit union's aggregate limit on net member business loan 
balances.
Exceptions and Exemptions
    A number of commenters suggested the Board revisit its 
interpretation of the statutory exemptions from the aggregate MBL limit 
for those credit unions with a ``history of primarily making MBLs'' or 
``chartered for the purpose of making MBLs'' to allow more credit 
unions to benefit from those exemptions. Several commenters also 
suggested that the ``chartered for the purpose'' exemption should allow 
existing credit unions operating near the statutory cap to apply for 
this charter or a similar charter designation. Other commenters stated 
generally that the Board should not liberalize or expand any of the 
statutory exemptions.
    As noted in the proposed rule, NCUA continues to apply the 
``history of primarily making'' exemption by reference to the date of 
CUMAA's enactment. Commenters did not express

[[Page 13550]]

concerns about the removal of the outdated provisions in the current 
rule that relate to the evidentiary documentation necessary to 
demonstrate a credit union's qualification for the exception. 
Therefore, the provision is finalized as proposed.
    In addition, the Board clarifies that the ``chartered for the 
purpose of making MBLs'' exemption is only applicable to new charters, 
and not to existing federal credit unions. State-chartered credit 
unions wishing to convert to a federal charter, or vice versa, may also 
qualify for the exemption.
Calculation for Net MBL Balance
    Consistent with the current rule, the proposal provided that a 
federally insured credit union's net member business loan balance is 
determined by calculating the outstanding loan balance plus any 
unfunded commitments, reduced by any portion of the loan that is 
secured by shares in the credit union, or by shares or deposits in 
other financial institutions, or by a lien on the member's primary 
residence, or insured or guaranteed by any agency of the federal 
government, a state or any political subdivision of such state, or 
subject to an advance commitment to purchase by any agency of the 
federal government, a state or any political subdivision of such state, 
or sold as a participation interest without recourse and qualifying for 
true sales accounting under GAAP.
    A number of commenters expressed concern that the rule implies a 
CPA or legal true sale opinion is required for every transaction. 
Commenters noted that true sales opinions are extremely cumbersome, 
expensive, and difficult to obtain. The Board clarifies that the 
current rule does not require a true sale opinion and the final rule 
does not alter this current approach.

Sec.  723.9--Transitional Provisions

    Proposed Sec.  723.9 was intended to implement the transition from 
the current prescriptive rule to the proposed principles-based rule for 
those credit unions currently operating under a waiver or an 
enforcement action.
    Commenters did not raise any significant concerns about the 
proposed transition provisions, and the Board adopts them in this final 
rule without change. Accordingly, consistent with the proposal, the 
final rule provides that any waiver previously issued by NCUA 
concerning any aspect of the current rule becomes moot upon the 
effective date of the final rule except waivers that were granted for a 
single borrower or borrowing relationship to exceed the limits set 
forth in Sec.  723.8 of the current rule, or for federally insured 
state-chartered credit unions in states that have grandfathered rules 
where NCUA is required to concur with a waiver to the state's rule. 
Waivers granted to credit unions for single borrowing relationships 
will remain in effect until the aggregate balance of the loans 
outstanding associated with the relationship is reduced and in 
compliance with the requirements of Sec.  723.4(c) of the final rule. 
Additionally, all blanket waivers granted to credit unions for current 
Sec.  723.8 will terminate on the effective date of this final rule.
    Any constraints imposed on a credit union in connection with its 
commercial lending program, such as may be contained in a Letter of 
Understanding and Agreement, will survive the adoption of the final 
rule and remain intact. The rule specifies that any particular 
enforcement measure to which a credit union may uniquely be subject 
takes precedence over the more general application of the regulation. A 
constraint may take the form of a limitation or other condition that is 
actually imposed as part of a waiver. In such cases, the constraint 
will survive the adoption of this final rule.

Sec.  723.10--State Regulation of Business Lending

    The Board has long held that while it may authorize a state 
supervisory authority (SSA) to play a role in the regulation of 
business lending, that role is necessarily limited. Congress granted 
the Board the sole authority to interpret the MBL provisions of the FCU 
Act and to promulgate implementing regulations, and FCUs and federally 
insured, state-chartered credit unions (FISCUs) alike are subject to 
them.\48\ An SSA does not have independent ability to interpret the FCU 
Act, but under the current rule may make its case to the Board that its 
proposed state rule is consistent with NCUA's interpretation of the FCU 
Act and Part 723. To date, the Board has chosen to delegate authority 
to SSAs to administer a state MBL regulation under the conditions 
outlined in current Sec.  723.20. In making this delegation in any 
given case, the Board has been focused on whether the state regulation 
contains comparable risk management requirements and properly applies 
the statutory limit on MBLs. There are, at present, seven states in 
which the Board has approved the state rule.\49\
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1757a.
    \49\ The seven states currently operating with NCUA Board-
approved MBL rules are Connecticut, Illinois, Maryland, Oregon, 
Texas, Washington, and Wisconsin.
---------------------------------------------------------------------------

    The proposed rule solicited public comment on three approaches to 
the issue of state regulation of business lending. The first approach, 
Option A, would be to allow SSAs that currently administer a state MBL 
rule to preserve their rules in their current format, thus allowing 
FISCUs in those states to continue to operate in compliance with the 
pertinent state rule. However, no other SSA would be permitted to 
submit a rule for NCUA consideration and approval. The second approach, 
Option B, would be for NCUA to require SSAs currently operating with 
NCUA Board-approved MBL rules to make conforming amendments to their 
rules and resubmit them to NCUA for an updated approval. For these SSAs 
(and any other SSA that seeks to implement its own rule), the new state 
MBL rules would need to reflect the same principles and incorporate the 
guidance contained in any final rule, but could be more restrictive if 
the state so chose. The third approach, Option C, would permit SSAs 
that currently administer a state MBL rule to preserve their rules in 
their current format. Option C would also permit SSAs to submit their 
own state rules for NCUA consideration and approval, as long as certain 
conditions are met.
    Most commenters that provided input on this aspect of the proposal 
favored Option C, or otherwise supported maximum flexibility for states 
to adopt or maintain state-specific MBL rules. Option B also garnered 
significant support.
    Specific comments regarding the state regulation of business 
lending included the following: A number of commenters expressed 
general support for the dual chartering system. Commenters said states 
should be allowed to maintain and preserve their own unique rules, and 
SSAs should have ample flexibility to maintain existing state 
regulatory schemes. Commenters said NCUA should continue to respect the 
role of the states and adopt a final rule permitting state-specific 
rules. At least one commenter indicated SSAs should continue to be 
viewed as equal partners with NCUA, with the ability to continue their 
own regulatory efforts. Another commenter contended that state 
regulators are more familiar with the intricacies of each credit union 
within their state and should be permitted to adopt their own 
regulatory framework.

[[Page 13551]]

A few commenters observed that all credit unions benefit from the 
innovation that is possible under a dual regulatory scheme. Another 
commenter argued that state rules give NCUA unique testing environments 
and the current regime has allowed for many advances in member business 
lending and for improvements in NCUA's MBL rule. One commenter observed 
that any state-to-state variations in the regulation of business 
lending have not proven to be an issue under the current rule. Overall, 
most commenters recommended that the final rule incorporate provisions 
similar to current Sec.  723.20 and current Sec.  741.203, such that 
the existing regime allowing for state-specific MBL rules be retained.
    As noted above, NCUA's longstanding position is that NCUA has the 
exclusive authority to administer the provisions of the FCU Act 
concerning member business loans, and all FISCUs are subject to part 
723 unless the Board has specifically delegated authority to an SSA to 
administer a comparable state version of the rule.\50\ FISCUs in states 
with an NCUA-approved state rule may comply with the state rule and 
need not comply with Part 723. The general premise for this current 
convention is that part 723 imposes certain restrictions and 
requirements which all FISCUs must follow, but a state may elect to 
impose comparable restrictions in its own rule, thereby retaining a 
measure of oversight over its institutions. Under the existing regime, 
an SSA with an approved rule may rescind its state rule without first 
having to obtain NCUA's approval,\51\ but it must seek NCUA Board 
approval to adopt any variances from those rules the Board previously 
approved.\52\ The Board has also employed an expedited review process 
for states whose rule had already been approved once and which were 
simply being updated to conform to NCUA's rule amendment. Thus, as an 
insurer, NCUA has been primarily concerned with reviewing and approving 
any state rule amendments to ensure any deviations in the state rule 
accomplish the overall objectives of NCUA's rule and, at a minimum, 
meet the requirements of NCUA's rule.
---------------------------------------------------------------------------

    \50\ See 64 FR 28721, 28728 (May 27, 1999).
    \51\ 70 FR 75719, 75721 (Dec. 21, 2005).
    \52\ 68 FR 56537, 56546 (Oct. 1, 2003).
---------------------------------------------------------------------------

    In a similar vein, the Board has determined in this final rule to 
delegate authority to SSAs to administer a state MBL regulation that is 
at least as stringent as NCUA's rule. Specifically, in the final rule, 
the Board is essentially adopting Option C, which was the approach 
recommended by most commenters who chose one of the three proposed 
options. Under new Sec.  723.10 and amended Sec.  741.203 of the final 
rule, the seven SSAs that currently administer a state-specific MBL 
rule may preserve their rules in their current format. Further, any SSA 
that wishes to adopt its own state-specific rule for federally insured 
credit unions chartered in that state may do so provided the state rule 
covers at least all of the provisions in part 723 and is no less 
restrictive, upon determination by NCUA.\53\ Federally insured state-
chartered credit unions in such states will not be subject to the 
provisions in Part 723.
---------------------------------------------------------------------------

    \53\ All such state rules must be consistent with the MBL 
provisions in the FCU Act. That is, the definition of a member 
business loan, the exemptions from the definition of a member 
business loan, the aggregate loan limit, and the state's 
interpretation of the exceptions from the aggregate loan limit must 
adhere to the statute.
---------------------------------------------------------------------------

    Since the final rule shifts from a prescriptive to a principles-
based approach, the Board views the requirements of this final rule as 
generally less stringent or less restrictive than its current MBL rule. 
So, it is appropriate to view the seven state-specific prescriptive 
rules as already meeting, or as more restrictive than, this principles-
based final rule. The final rule therefore allows for the 
grandfathering of existing state rules approved by NCUA. SSAs with 
grandfathered state rules may continue to administer their NCUA-
approved rules in their current format, and FISCUs in such states will 
continue to be exempt from Part 723. However, any amendment or 
modification to an existing NCUA-approved state rule must be consistent 
with this rule, but modification of one part of an existing NCUA-
approved state rule will not cause other parts of that rule to lose 
their grandfathered status.
Amendments to the Loan Participation Rule
    As discussed above, the proposed rule amended the definition of 
``associated member'' in the current MBL rule to be more consistent 
with the combination rules applicable to banks by introducing the 
concepts of direct benefit, common enterprise, and control.\54\
---------------------------------------------------------------------------

    \54\ 12 CFR 32.5.
---------------------------------------------------------------------------

    NCUA's loan participation rule contains a similar definition for 
``associated borrower,'' \55\ which was amended by the Board in 2013 to 
track closely with the definition in the MBL rule.\56\ In order to 
maintain that consistency, the proposed rule also made parallel 
amendments to Sec.  701.22(a) to the loan participation rule.
---------------------------------------------------------------------------

    \55\ 12 CFR 701.22(a).
    \56\ 78 FR 37946 (June 25, 2013).
---------------------------------------------------------------------------

    NCUA did not receive any comments regarding the proposed changes to 
its loan participation rule. Therefore, the Board is adopting parallel 
amendments to Sec.  701.22 to reflect this final rule's definitions of 
``associated borrower,'' ``common enterprise,'' ``control,'' and 
``direct benefit.''

III. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a rulemaking, an agency prepare and make available for 
public comment a regulatory flexibility analysis that describes the 
impact of a rule on small entities. A regulatory flexibility analysis 
is not required, however, if the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities (defined for purposes of the RFA to include credit unions with 
assets less than $100 million) and publishes its certification and a 
short, explanatory statement in the Federal Register together with the 
rule.
    As of September 2015, of the 4,588 federally insured credit unions 
with total assets less than $100 million, 976 credit unions hold 
business loans on their balance sheets, including both member and non-
member loans. Among the 976 credit unions, 379 credit unions have 
business loans less than 15 percent of net worth and are not regularly 
originating and selling or participating out business loans. Therefore, 
they are exempt from Sec.  723.3 (board of directors and management 
responsibilities) and Sec.  723.4 (commercial loan policy) under the 
final rule--where the incremental paperwork burden associated with the 
transition for this rule stems from.
    The remaining 597 credit unions with assets less than $100 million 
are subject to Sec.  723.3 and Sec.  723.4 under the rule because their 
level of activity in commercial lending is material to their financial 
and operational safety and soundness. However, the revised definition 
of commercial loan generally excludes loans secured by vehicles 
manufactured for household use and 1- to 4-family non-owner occupied 
residential property that trigger the safety and soundness provisions 
of the current rule. The average member business loan balance per loan 
for credit unions with less than $100 million in assets is only 
$96,894. Thus, it is likely many of the outstanding member business 
loans currently held by small credit unions, and subject to the current

[[Page 13552]]

rule, are exempt under the final rule. Thus, NCUA anticipates fewer 
than 597 small credit unions will actually be subject to the final rule 
(except for Sec.  723.8--the statutory limit provisions). The 597 
credit unions only represent 13 percent of total credit unions with 
assets less than $100 million.\57\ They hold approximately $1,788 
million in business loans in aggregate, which represents 3 percent of 
the total business loans in the credit union industry.
---------------------------------------------------------------------------

    \57\ These credit unions hold $28.4 billion in total assets and 
$3.2 billion in total net worth, which account for 2.4 percent of 
total assets and 2.5 percent of total net worth in the credit union 
industry, respectively.

------------------------------------------------------------------------
                                                  September 2015
                                         -------------------------------
                                             Number of      Percent of
                                           credit unions       total
------------------------------------------------------------------------
Credit unions with total assets below              4,588             100
 $100 million...........................
Credit unions with total assets below                976              21
 $100 million and with MBLs.............
Credit unions with total assets below                379               8
 $100 million, with MBLs, and are
 exempted from Sec.   723.3 and Sec.
 723.4..................................
Credit unions with total assets below                597              13
 $100 million, with MBLs, and are not
 exempted from Sec.   723.3 and Sec.
 723.4..................................
------------------------------------------------------------------------

    The amendments will provide federally insured credit unions with 
significant regulatory relief via greater flexibility and individual 
autonomy in safely and soundly providing commercial and business loans. 
This is achieved by eliminating the current rule's prescriptive 
underwriting criteria, various limits on the composition of the 
commercial loan portfolio, the limit on participations in non-member 
business loans, and the associated waiver requirements. What remains in 
the final rule is largely consistent with existing fundamental 
regulatory requirements and supervisory expectations for commercial 
lending, and therefore not a significant impact on the operation of 
these institutions. NCUA has determined and certifies that this final 
rule will not have a significant economic impact on a substantial 
number of small credit unions within the meaning of the RFA.\58\
---------------------------------------------------------------------------

    \58\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\59\ For purposes of the PRA, a 
paperwork burden may take the form of either a reporting or a 
recordkeeping requirement, both referred to as information collections. 
The final rule requires credit unions to comply with certain 
requirements that constitute an information collection within the 
meaning of the PRA. Under the rule, credit unions that are engaged in 
business lending activities and not exempted from Sec. Sec.  723.3 and 
723.4 will need to ensure their loan policies and procedures cohere to 
these requirements, including a formal credit risk rating system to 
identify and quantify the level of risk within their commercial loan 
portfolios. However, by replacing the prescriptive requirements in the 
current rule with a principles-based regulatory approach, the rule also 
relieves credit unions from the current requirement to obtain MBL 
related waivers and provides a high degree of flexibility in designing 
and operating their commercial loan programs.
---------------------------------------------------------------------------

    \59\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

    Currently, NCUA receives a significant number of MBL-related waiver 
requests each year. NCUA processed 336 and 225 MBL related waiver 
requests, in 2014 and 2015 respectively. The average number of hours 
for a credit union to prepare a waiver request is an estimated 17 
hours. Accordingly, NCUA expects that the final rule will provide an 
estimated total of 4,777 hours of relief to credit unions, on an annual 
basis.
    Eliminating the waiver requirement.
    Total number of MBL related waivers requested by FICUs annually: 
281.
    Frequency of response: Annually.
    Number of hours to prepare 1 waiver request: 17.
    Total number of hours of relief: 17 hours x 281 = 4,777.
    Under the final rule, credit unions that are engaged in business 
lending activities and not exempted from Sec. Sec.  723.3 and 723.4 may 
need to revise their loan policies and procedures. As of September 
2015, there were a total of 1,532 federally insured credit unions that 
may need to revise their policies. For purposes of this analysis, NCUA 
estimates that it will take roughly 16 hours on average for a credit 
union to meet this requirement. Using these estimates, information 
collection obligations imposed by this aspect of the rule are analyzed 
below:
    Revising commercial loan policies and procedures.
    FICUs that are engaged in business lending and are not exempted 
from Sec. Sec.  723.3 and 723.4: 1,532.
    Frequency of response: One-time.
    Initial hour burden: 16.
    16 hour x 1,532 = 24,512.
    The final rule also requires credit unions that are engaged in 
business lending activities and not exempted from Sec. Sec.  723.3 and 
723.4 to have a formal risk rating system to quantify and manage risks 
associated with their business lending activities. The majority of 
credit unions already have risk rating systems in place. Based on a 
survey of NCUA field staff, NCUA estimates that a total of 139 
federally insured credit unions do not currently have a formal risk 
rating system. The information collection obligations imposed by this 
aspect of the rule are analyzed below.
    Number of FICUs developing a risk rating system: 139.
    Frequency of response: One-time.
    Initial hour burden: 160.
    139 hour x 160 = 22,240.
    The total estimated one-time net paperwork burden for this proposal 
is 46,752 hours, with annual recurring paperwork burden reduction of 
4,777 hours. In accordance with the requirements of the PRA, NCUA will 
submit a copy of the rule to the Office of Management and Budget for 
its review and approval.

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to adhere to 
fundamental federalism principles. The final rule also applies to 
federally insured, state-chartered credit unions. By law, these 
institutions are already subject to numerous provisions of NCUA's 
rules, based on the agency's role as the insurer of member share 
accounts and the significant interest

[[Page 13553]]

NCUA has in the safety and soundness of their operations. The final 
rule may have an occasional direct effect on the states, the 
relationship between the national government and the states, or on the 
distribution of power and responsibilities among the various levels of 
government. The final rule may supersede provisions of state law, 
regulation, or approvals. The final rule could lead to conflicts 
between the NCUA and state financial institution regulators on 
occasion. Accordingly, the proposed rule requested comment on ways to 
eliminate, or at least minimize, potential conflicts in this area. NCUA 
solicited specific comment on how best to approach the issue of state 
regulation of business lending, as well as recommendations on the 
potential use of delegated authority, cooperative decision-making 
responsibilities, certification processes of federal standards, 
adoption of comparable programs by states requesting an exemption for 
their regulated institutions, or other ways of meeting the intent of 
the Executive Order. Based on the public comments received, the Board 
has made adjustments in the final rule to preserve existing state 
rights in the regulation of credit union business lending. For example, 
the final rule includes provisions to grandfather existing state-
specific commercial and member business loan rules, and to allow state 
supervisory authorities to administer a state commercial and member 
business loan rule that is no less restrictive than the provisions in 
NCUA's rule.

D. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act of 1999.\60\
---------------------------------------------------------------------------

    \60\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 723

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on February 
18, 2016.
Gerard S. Poliquin,
Secretary of the Board.

    For the reasons discussed above, NCUA amends 12 CFR parts 701, 723, 
and 741 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority:  12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 
1787, 1789; Title V, Pub. L. 109-351, 120 Stat. 1966.


0
2. Amend Sec.  701.22 by revising the definition of ``associated 
borrower'' and adding definitions of ``common enterprise,'' 
``control,'' and ``direct benefit'' to read as follows:


Sec.  701.22  Loan participations.

* * * * *
    (a) * * *
    Associated borrower means any other person or entity with a shared 
ownership, investment, or other pecuniary interest in a business or 
commercial endeavor with the borrower. This means any person or entity 
named as a borrower or debtor in a loan or extension of credit, or any 
other person or entity, such as a drawer, endorser, or guarantor, 
engaged in a common enterprise with the borrower, or deriving a direct 
benefit from the loan to the borrower. Exceptions to this definition 
for partnerships, joint ventures and associations are as follows:
    (1) If the borrower is a partnership, joint venture or association, 
and the other person with a shared ownership, investment, or other 
pecuniary interest in a business or commercial endeavor with the 
borrower is a member or partner of the borrower, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    (2) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other entity with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is the partnership, joint venture, or 
association and the borrower is a limited partner of that other entity, 
and by the terms of a partnership or membership agreement valid under 
applicable law, the borrower is not held generally liable for the debts 
or actions of that other entity, such other entity is not an associated 
borrower.
    (3) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other person with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is another member or partner of the 
partnership, joint venture, or association, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    Common enterprise means:
    (1) The expected source of repayment for each loan or extension of 
credit is the same for each borrower and no individual borrower has 
another source of income from which the loan (together with the 
borrower's other obligations) may be fully repaid. An employer will not 
be treated as a source of repayment because of wages and salaries paid 
to an employee, unless the standards described in paragraph (2) are 
met;
    (2) Loans or extensions of credit are made:
    (i) To borrowers who are related directly or indirectly through 
common control, including where one borrower is directly or indirectly 
controlled by another borrower; and
    (ii) Substantial financial interdependence exists between or among 
the borrowers. Substantial financial interdependence means 50 percent 
or more of one borrower's gross receipts or gross expenditures (on an 
annual basis) are derived from transactions with another borrower. 
Gross receipts and expenditures include gross revenues or expenses, 
intercompany loans, dividends, capital contributions, and similar 
receipts or payments; or
    (3) Separate borrowers obtain loans or extensions of credit to 
acquire a business enterprise of which those borrowers will own more 
than 50 percent of the voting securities or voting interests.
    Control means a person or entity directly or indirectly, or acting 
through or together with one or more persons or entities:
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person or entity;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person or entity; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person or entity.
* * * * *
    Direct benefit means the proceeds of a loan or extension of credit 
to a borrower, or assets purchased with those proceeds, that are 
transferred to another person or entity, other than in a bona fide 
arm's-length transaction where the proceeds are used to acquire 
property, goods, or services.
* * * * *

PART 723--MEMBER BUSINESS LOANS; COMMERCIAL LENDING

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

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


[[Page 13554]]



0
4. Effective May 13, 2016, Sec.  723.7 is amended by adding paragraph 
(f) to read as follows:


Sec.  723.7  What are the collateral and security requirements?

* * * * *
    (f) 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.

0
5. Revise part 723 to read as follows:

PART 723--MEMBER BUSINESS LOANS; COMMERCIAL LENDING

Sec.
723.1 Purpose and scope.
723.2 Definitions.
723.3 Board of directors and management responsibilities.
723.4 Commercial loan policy.
723.5 Collateral and security.
723.6 Construction and development loans.
723.7 Prohibited activities.
723.8 Aggregate member business loan limit; exclusions and 
exceptions.
723.9 Transitional provisions.
723.10 State regulation of business lending.

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


Sec.  723.1  Purpose and scope.

    (a) Purpose. This part is intended to accomplish two broad 
objectives. First, it sets out policy and program responsibilities that 
a federally insured credit union must adopt and implement as part of a 
safe and sound commercial lending program. Second, it incorporates the 
statutory limit on the aggregate amount of member business loans that a 
federally insured credit union may make pursuant to Section 107A of the 
Federal Credit Union Act. The rule distinguishes between these two 
distinct objectives.
    (b) Credit unions and loans covered by this part. (1) This part 
applies to federally insured natural person credit unions. However, a 
federally insured natural person credit union is not subject to Sec.  
723.3 and Sec.  723.4 of this part if it meets all of the following 
conditions:
    (i) The credit union's total assets are less than $250 million.
    (ii) The credit union's 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.
    (iii) 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 percent of the credit union's net worth.
    (2) This part does not apply to loans:
    (i) Made by a corporate credit union, as defined in part 704 of 
this chapter;
    (ii) Made by a federally insured credit union to another federally 
insured credit union;
    (iii) Made by a federally insured credit union to a credit union 
service organization, as defined in part 712 and Sec.  741.222 of this 
chapter; or
    (iv) Fully secured by a lien on a 1- to 4-family residential 
property that is a member's primary residence.
    (c) Other regulations that apply. (1) For federal credit unions, 
the requirements of Sec.  701.21(a) through (g) of this chapter apply 
to commercial loans granted by a federal credit union to the extent 
they are consistent with this part. As required by Sec.  741.203 of 
this chapter, a federally insured, state-chartered credit union must 
comply with Sec.  701.21(c)(8) of this chapter concerning prohibited 
fees, and Sec.  701.21(d)(5) of this chapter concerning non-
preferential loans.
    (2) If a Federal credit union makes a commercial loan through a 
program in which a federal or state agency (or its political 
subdivision) insures repayment, guarantees repayment, or provides an 
advance commitment to purchase the loan in full, and that program has 
requirements that are less restrictive than those required by this 
rule, then the Federal credit union may follow the loan requirements of 
the relevant guaranteed loan program. A federally insured, state-
chartered credit union that is subject to this part and that makes a 
commercial loan as part of a loan program in which a federal or state 
agency (or its political subdivision) insures repayment, guarantees 
repayment, or provides an advance commitment to purchase the loan in 
full, and that program has requirements that are less restrictive than 
those required by this rule, then the federally insured, state-
chartered credit union may follow the loan requirements of the relevant 
guaranteed loan program, provided that its state supervisory authority 
has determined that it has authority to do so under state law.
    (3) The requirements of Sec.  701.23 of this chapter apply to a 
Federal credit union's purchase, sale, or pledge of a commercial loan 
as an eligible obligation.
    (4) The requirements of Sec.  701.22 of this chapter apply to a 
federally insured credit union's purchase of a participation interest 
in a commercial loan.


Sec.  723.2  Definitions.

    For purposes of this part, the following definitions apply:
    Associated borrower means any other person or entity with a shared 
ownership, investment, or other pecuniary interest in a business or 
commercial endeavor with the borrower. This means any person or entity 
named as a borrower or debtor in a loan or extension of credit, or any 
other person or entity, such as a drawer, endorser, or guarantor, 
engaged in a common enterprise with the borrower, or deriving a direct 
benefit from the loan to the borrower. Exceptions to this definition 
for partnerships, joint ventures and associations are as follows:
    (1) If the borrower is a partnership, joint venture or association, 
and the other person with a shared ownership, investment, or other 
pecuniary interest in a business or commercial endeavor with the 
borrower is a member or partner of the borrower, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    (2) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other entity with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is the partnership, joint venture, or 
association and the borrower is a limited partner of that other entity, 
and by the terms of a partnership or membership agreement valid under 
applicable law, the borrower is not held generally liable for the debts 
or actions of that other entity, such other entity is not an associated 
borrower.
    (3) If the borrower is a member or partner of a partnership, joint 
venture, or association, and the other person with a shared ownership, 
investment, or other pecuniary interest in a business or commercial 
endeavor with the borrower is another member or partner of the 
partnership, joint venture, or association, and neither a direct 
benefit nor a common enterprise exists, such other person is not an 
associated borrower.
    Commercial loan means any loan, line of credit, or letter of credit 
(including any unfunded commitments), and any interest a credit union 
obtains in such loans made by another lender, to individuals, sole 
proprietorships,

[[Page 13555]]

partnerships, corporations, or other business enterprises for 
commercial, industrial, agricultural, or professional purposes, but not 
for personal expenditure purposes. Excluded from this definition are 
loans made by a corporate credit union; loans made by a federally 
insured credit union to another federally insured credit union; loans 
made by a federally insured credit union to a credit union service 
organization; loans secured by a 1- to 4-family residential property 
(whether or not it is the borrower's primary residence); loans fully 
secured by shares in the credit union making the extension of credit or 
deposits in other financial institutions; loans secured by a vehicle 
manufactured for household use; and loans that would otherwise meet the 
definition of commercial loan and which, when the aggregate outstanding 
balances plus unfunded commitments less any portion secured by shares 
in the credit union to a borrower or an associated borrower, are equal 
to less than $50,000.
    Common enterprise means:
    (1) The expected source of repayment for each loan or extension of 
credit is the same for each borrower and no individual borrower has 
another source of income from which the loan (together with the 
borrower's other obligations) may be fully repaid. An employer will not 
be treated as a source of repayment because of wages and salaries paid 
to an employee, unless the standards described in paragraph (2) of this 
definition are met;
    (2) Loans or extensions of credit are made:
    (i) To borrowers who are related directly or indirectly through 
common control, including where one borrower is directly or indirectly 
controlled by another borrower; and
    (ii) Substantial financial interdependence exists between or among 
the borrowers. Substantial financial interdependence means 50 percent 
or more of one borrower's gross receipts or gross expenditures (on an 
annual basis) are derived from transactions with another borrower. 
Gross receipts and expenditures include gross revenues or expenses, 
intercompany loans, dividends, capital contributions, and similar 
receipts or payments; or
    (3) Separate borrowers obtain loans or extensions of credit to 
acquire a business enterprise of which those borrowers will own more 
than 50 percent of the voting securities or voting interests.
    Control means a person or entity directly or indirectly, or acting 
through or together with one or more persons or entities:
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person or entity;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person or entity; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person or entity.
    Credit risk rating system means a formal process that identifies 
and assigns a relative credit risk score to each commercial loan in a 
federally insured credit union's portfolio, using ordinal ratings to 
represent the degree of risk. The credit risk score is determined 
through an evaluation of quantitative factors based on financial 
performance and qualitative factors based on management, operational, 
market, and business environmental factors.
    Direct benefit means the proceeds of a loan or extension of credit 
to a borrower, or assets purchased with those proceeds, that are 
transferred to another person or entity, other than in a bona fide 
arm's-length transaction where the proceeds are used to acquire 
property, goods, or services.
    Immediate family member means a spouse or other family member 
living in the same household.
    Loan secured by a 1- to 4-family residential property means a loan 
that, at origination, is secured wholly or substantially by a lien on a 
1- to 4-family residential property for which the lien is central to 
the extension of the credit; that is, the borrower would not have been 
extended credit in the same amount or on terms as favorable without the 
lien. A loan is wholly or substantially secured by a lien on a 1- to 4-
family residential property if the estimated value of the real estate 
collateral at origination (after deducting any senior liens held by 
others) is greater than 50 percent of the principal amount of the loan.
    Loan secured by a vehicle manufactured for household use means a 
loan that, at origination, is secured wholly or substantially by a lien 
on a new and used passenger car and other vehicle such as a minivan, 
sport-utility vehicle, pickup truck, and similar light truck or heavy-
duty truck generally manufactured for personal, family, or household 
use and not used as a fleet vehicle or to carry fare-paying passengers, 
for which the lien is central to the extension of credit. A lien is 
central to the extension of credit if the borrower would not have been 
extended credit in the same amount or on terms as favorable without the 
lien. A loan is wholly or substantially secured by a lien on a vehicle 
manufactured for household use if the estimated value of the collateral 
at origination (after deducting any senior liens held by others) is 
greater than 50 percent of the principal amount of the loan.
    Loan-to-value ratio means, with respect to any item of collateral, 
the aggregate amount of all sums borrowed and secured by that 
collateral, including outstanding balances plus any unfunded commitment 
or line of credit from another lender that is senior to the federally 
insured credit union's lien position, divided by the current collateral 
value. The current collateral value must be established by prudent and 
accepted commercial lending practices and comply with all regulatory 
requirements. For a construction and development loan, the collateral 
value is the lesser of cost to complete or prospective market value, as 
determined in accordance with Sec.  723.6 of this part.
    Net worth means a federally insured credit union's net worth, as 
defined in part 702 of this chapter.
    Readily marketable collateral means a financial instrument or 
bullion that is salable under ordinary market conditions with 
reasonable promptness at a fair market value determined by quotations 
based upon actual transactions on an auction or similarly available 
daily bid and ask price market.
    Residential property means a house, condominium unit, cooperative 
unit, manufactured home (whether completed or under construction), or 
unimproved land zoned for 1- to 4-family residential use. A boat or 
motor home, even if used as a primary residence, or timeshare property 
is not residential property.


Sec.  723.3  Board of directors and management responsibilities.

    Prior to engaging in commercial lending, a federally insured credit 
union must address the following board responsibilities and operational 
requirements:
    (a) Board of directors. A federally insured credit union's board of 
directors, at a minimum, must:
    (1) Approve a commercial loan policy that complies with Sec.  723.4 
of this part. The board must review its policy on an annual basis, 
prior to any material change in the federally insured credit union's 
commercial lending program or related organizational structure, and in 
response to any material change in portfolio performance or economic

[[Page 13556]]

conditions, and update it when warranted.
    (2) Ensure the federally insured credit union appropriately staffs 
its commercial lending program in compliance with paragraph (b) of this 
section.
    (3) Understand and remain informed, through periodic briefings from 
responsible staff and other methods, about the nature and level of risk 
in the federally insured credit union's commercial loan portfolio, 
including its potential impact on the federally insured credit union's 
earnings and net worth.
    (b) Required expertise and experience. A federally insured credit 
union making, purchasing, or holding any commercial loan must 
internally possess the following experience and competencies:
    (1) Senior executive officers. A federally insured credit union's 
senior executive officers overseeing the commercial lending function 
must understand the federally insured credit union's commercial lending 
activities. At a minimum, senior executive officers must have a 
comprehensive understanding of the role of commercial lending in the 
federally insured credit union's overall business model and establish 
risk management processes and controls necessary to safely conduct 
commercial lending.
    (2) Qualified lending personnel. A federally insured credit union 
must employ qualified staff with experience in the following areas:
    (i) Underwriting and processing for the type(s) of commercial 
lending in which the federally insured credit union is engaged;
    (ii) Overseeing and evaluating the performance of a commercial loan 
portfolio, including rating and quantifying risk through a credit risk 
rating system; and
    (iii) Conducting collection and loss mitigation activities for the 
type(s) of commercial lending in which the federally insured credit 
union is engaged.
    (3) Options to meet the required experience. A federally insured 
credit union may meet the experience requirements in paragraphs (b)(1) 
and (2) of this section by conducting internal training and 
development, hiring qualified individuals, or using a third-party, such 
as an independent contractor or a credit union service organization. 
However, with respect to the qualified lending personnel requirements 
in paragraph (b)(2) of this section, use of a third-party is 
permissible only if the following conditions are met:
    (i) The third-party has no affiliation or contractual relationship 
with the borrower or any associated borrowers;
    (ii) The actual decision to grant a loan must reside with the 
federally insured credit union;
    (iii) Qualified federally insured credit union staff exercises 
ongoing oversight over the third party by regularly evaluating the 
quality of any work the third party performs for the federally insured 
credit union; and
    (iv) The third-party arrangement must otherwise comply with Sec.  
723.7 of this part.


Sec.  723.4  Commercial loan policy.

    Prior to engaging in commercial lending, a federally insured 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 federally insured 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:
    (a) Type(s) of commercial loans permitted.
    (b) Trade area.
    (c) 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. The policy must specify that the aggregate dollar 
amount of commercial loans to any one borrower or group of associated 
borrowers may not exceed the greater of 15 percent of the federally 
insured credit union's net worth or $100,000, plus an additional 10 
percent of the credit union's net worth if the amount that exceeds the 
credit union's 15 percent general limit is fully secured at all times 
with a perfected security interest by readily marketable collateral as 
defined in Sec.  723.2 of this part. Any insured or guaranteed portion 
of a commercial loan made through a program in which a federal or state 
agency (or its political subdivision) insures repayment, guarantees 
repayment, or provides an advance commitment to purchase the loan in 
full, is excluded from this limit.
    (d) Qualifications and experience requirements for personnel 
involved in underwriting, processing, approving, administering, and 
collecting commercial loans.
    (e) 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 federally insured credit union.
    (f) 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:
    (1) 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;
    (2) 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;
    (3) 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;
    (4) The financial statement quality and the degree of verification 
sufficient to support an accurate financial analysis and risk 
assessment;
    (5) 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
    (6) Other appropriate risk assessment including analysis of the 
impact of current market conditions on the borrower and associated 
borrowers.
    (g) Risk management processes commensurate with the size, scope and 
complexity of the federally insured credit union's commercial lending 
activities and borrowing relationships. These processes must, at a 
minimum, address the following:
    (1) Use of loan covenants, if appropriate, including frequency of 
borrower and guarantor financial reporting;
    (2) Periodic loan review, consistent with loan covenants and 
sufficient to

[[Page 13557]]

conduct portfolio risk management. This review must include a periodic 
reevaluation of the value and marketability of any collateral;
    (3) 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
    (4) A process to identify, report, and monitor loans approved as 
exceptions to the credit union's loan policy.


Sec.  723.5  Collateral and security.

    (a) A federally insured 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 federally insured credit union 
making an unsecured loan must determine and document in the loan file 
that mitigating factors sufficiently offset the relevant risk.
    (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.
    (2) [Reserved].


Sec.  723.6  Construction and development loans.

    In addition to the foregoing, the following requirements apply to a 
construction and development loan made by any federally insured credit 
union.
    (a) For the purposes of this section, a construction or development 
loan means any financing arrangement to enable the borrower to acquire 
property or rights to property, including land or structures, with the 
intent to construct or renovate an income producing property, such as 
residential housing for rental or sale, or a commercial building, such 
as may be used for commercial, agricultural, industrial, or other 
similar purposes. It also means a financing arrangement for the 
construction, major expansion or renovation of the property types 
referenced in this section. The collateral valuation for securing a 
construction or development loan depends on the satisfactory completion 
of the proposed construction or renovation where the loan proceeds are 
disbursed in increments as the work is completed. A loan to finance 
maintenance, repairs, or improvements to an existing income producing 
property that does not change its use or materially impact the property 
is not a construction or development loan.
    (b) A federally insured credit union that elects to make a 
construction or development loan must ensure that its commercial loan 
policy includes adequate provisions by which the collateral value 
associated with the project is properly determined and established. For 
a construction or development loan, collateral value is the lesser of 
the project's cost to complete or its prospective market value.
    (1) For the purposes of this section, cost to complete means the 
sum of all qualifying costs necessary to complete a construction 
project and documented in an approved construction budget. Qualifying 
costs generally include on- or off-site improvements, building 
construction, other reasonable and customary costs paid to construct or 
improve a project, including general contractor's fees, and other 
expenses normally included in a construction contract such as bonding 
and contractor insurance. Qualifying costs include the value of the 
land, determined as the lesser of appraised market value or purchase 
price plus the cost of any improvements. Qualifying costs also include 
interest, a contingency account to fund unanticipated overruns, and 
other development costs such as fees and related pre-development 
expenses. Interest expense is a qualifying cost only to the extent it 
is included in the construction budget and is calculated based on the 
projected changes in the loan balance up to the expected ``as-
complete'' date for owner-occupied non-income producing commercial real 
estate or the ``as-stabilized'' date for income producing real estate. 
Project costs for related parties, such as developer fees, leasing 
expenses, brokerage commissions, and management fees, are included in 
qualifying costs only if reasonable in comparison to the cost of 
similar services from a third party. Qualifying costs exclude interest 
or preferred returns payable to equity partners or subordinated debt 
holders, the developer's general corporate overhead, and selling costs 
to be funded out of sales proceeds such as brokerage commissions and 
other closing costs.
    (2) For the purposes of this section, prospective market value 
means the market value opinion determined by an independent appraiser 
in compliance with the relevant standards set forth in the Uniform 
Standards of Professional Appraisal Practice. Prospective value 
opinions are intended to reflect the current expectations and 
perceptions of market participants, based on available data. Two 
prospective value opinions may be required to reflect the time frame 
during which development, construction, and occupancy occur. The 
prospective market value ``as-completed'' reflects the property's 
market value as of the time that development is to be completed. The 
prospective market value ``as-stabilized'' reflects the property's 
market value as of the time the property is projected to achieve 
stabilized occupancy. For an income producing property, stabilized 
occupancy is the occupancy level that a property is expected to achieve 
after the property is exposed to the market for lease over a reasonable 
period of time and at comparable terms and conditions to other similar 
properties.
    (c) A federally insured credit union that elects to make a 
construction and development loan must also assure its commercial loan 
policy meets the following conditions:
    (1) Qualified personnel representing the interests of the federally 
insured credit union must conduct a review and approval of any line 
item construction budget prior to closing the loan;
    (2) A credit union approved requisition and loan disbursement 
process is established;
    (3) Release or disbursement of loan funds occurs only after on-site 
inspections, documented in a written report by qualified personnel 
representing the interests of the federally insured credit union, 
certifying that the work requisitioned for payment has been 
satisfactorily completed, and the remaining funds available to be 
disbursed from the construction and development loan is sufficient to 
complete the project; and
    (4) Each loan disbursement is subject to confirmation that no 
intervening liens have been filed.


Sec.  723.7  Prohibited activities.

    (a) Ineligible borrowers. A federally insured credit union may not 
grant a commercial loan to the following:

[[Page 13558]]

    (1) Any senior management employee directly or indirectly involved 
in the credit union's commercial loan underwriting, servicing, and 
collection process, and any of their immediate family members;
    (2) Any person meeting the definition of an associated borrower 
with respect to persons identified in paragraph (a)(1) of this section; 
or
    (3) Any compensated director, unless the federally insured credit 
union's board of directors approves granting the loan and the 
compensated director was recused from the board's decision making 
process.
    (b) Equity agreements/joint ventures. A federally insured credit 
union may not grant a commercial loan if any additional income received 
by the federally insured credit union or its senior management 
employees is tied to the profit or sale of any business or commercial 
endeavor that benefits from the proceeds of the loan.
    (c) Conflicts of interest. Any third party used by a federally 
insured credit union to meet the requirements of this part must be 
independent from the commercial loan transaction and may not have a 
participation interest in a loan or an interest in any collateral 
securing a loan that the third party is responsible for reviewing, or 
an expectation of receiving compensation of any sort that is contingent 
on the closing of the loan, with the following exceptions:
    (1) A third party may provide a service to the federally insured 
credit union that is related to the transaction, such as loan 
servicing.
    (2) The third party may provide the requisite experience to a 
federally insured credit union and purchase a loan or a participation 
interest in a loan originated by the federally insured credit union 
that the third party reviewed.
    (3) A federally insured credit union may use the services of a 
credit union service organization that otherwise meets the requirements 
of Sec.  723.3(b)(3) of this part even if the credit union service 
organization is not independent from the transaction, provided the 
federally insured credit union has a controlling financial interest in 
the credit union service organization as determined under GAAP.


Sec.  723.8  Aggregate member business loan limit; exclusions and 
exceptions.

    This section incorporates the statutory limits on the aggregate 
amount of member business loans that may be held by a federally insured 
credit union and establishes the method for calculating a federally 
insured credit union's net member business loan balance for purposes of 
the statutory limits and NCUA form 5300 reporting.
    (a) Statutory limits. The aggregate limit on a federally insured 
credit union's net member business loan balances is the lesser of 1.75 
times the actual net worth of the credit union, or 1.75 times the 
minimum net worth required under section 1790d(c)(1)(A) of the Federal 
Credit Union Act.
    (b) Definition. For the purposes of this section, member business 
loan means any commercial loan as defined in 723.2 of this part, except 
that the following commercial loans are not member business loans and 
are not counted toward the aggregate limit on a federally insured 
credit union's member business loans:
    (1) Any loan in which a federal or state agency (or its political 
subdivision) fully insures repayment, fully guarantees repayment, or 
provides an advance commitment to purchase the loan in full; and
    (2) Any non-member commercial loan or non-member participation 
interest in a commercial loan made by another lender, provided the 
federally insured credit union acquired the non-member loans and 
participation interests in compliance with all relevant laws and 
regulations and it is not, in conjunction with one or more other credit 
unions, trading member business loans to circumvent the aggregate 
limit.
    (c) Exceptions. Any loan secured by a lien on a 1- to 4-family 
residential property that is not a member's primary residence, and any 
loan secured by a vehicle manufactured for household use that will be 
used for a commercial, corporate, or other business investment property 
or venture, or agricultural purpose, is not a commercial loan but it is 
a member business loan (if the outstanding aggregate net member 
business loan balance is $50,000 or greater) and must be counted toward 
the aggregate limit on a federally insured credit union's member 
business loans.
    (d) Statutory exemptions. A federally insured credit union that has 
a low-income designation, or participates in the Community Development 
Financial Institutions program, or was chartered for the purpose of 
making member business loans, or which as of the date of enactment of 
the Credit Union Membership Access Act of 1998 had a history of 
primarily making commercial loans, is exempt from compliance with the 
aggregate member business loan limits in this section.
    (e) Method of calculation for net member business loan balance. For 
the purposes of NCUA form 5300 reporting, a federally insured credit 
union's net member business loan balance is determined by calculating 
the outstanding loan balance plus any unfunded commitments, reduced by 
any portion of the loan that is secured by shares in the credit union, 
or by shares or deposits in other financial institutions, or by a lien 
on a member's primary residence, or insured or guaranteed by any agency 
of the federal government, a state or any political subdivision of such 
state, or subject to an advance commitment to purchase by any agency of 
the Federal Government, a state or any political subdivision of such 
state, or sold as a participation interest without recourse and 
qualifying for true sales accounting under generally accepted 
accounting principles.


Sec.  723.9  Transitional provisions.

    This section governs circumstances in which, as of January 1, 2017, 
a federally insured credit union is operating in accordance with an 
approved waiver from NCUA or is subject to any enforcement constraint 
relative to its commercial lending activities.
    (a) Waivers. As of January 1, 2017, any waiver approved by NCUA 
concerning a federally insured credit union's commercial lending 
activity is rendered moot except for waivers granted for borrowing 
relationship limits. Borrowing relationships granted a waiver will be 
grandfathered however the debt associated with those relationships may 
not be increased.
    (b) Enforcement constraints. Limitations or other conditions 
imposed on a federally insured credit union in any written directive 
from NCUA, including but not limited to items specified in any Document 
of Resolution, any published or unpublished Letter of Understanding and 
Agreement, Regional Director Letter, Preliminary Warning Letter, or 
formal enforcement action, are unaffected by the adoption of this part. 
Included within this paragraph are any constraints or conditions 
embedded within any waiver issued by NCUA. As of January 1, 2017, all 
such limitations or other conditions remain in place until such time as 
they are modified by NCUA.


Sec.  723.10  State regulation of business lending.

    (a) State rules. Federally insured state chartered credit unions in 
a given state are exempted from compliance with this part if the state 
supervisory authority administers a state commercial and member 
business loan rule for use by federally insured credit unions chartered 
in that state, provided the

[[Page 13559]]

state rule at least covers all the provisions in this part and is no 
less restrictive, upon determination by NCUA.
    (b) Grandfathering of NCUA-approved state rules. A state 
supervisory authority that administers a state commercial and member 
business loan rule previously approved by NCUA may continue to 
administer that rule in its current NCUA-approved format. Any 
modification of that rule must be consistent with this rule, but 
modification of one part of an existing NCUA-approved state rule will 
not cause other parts of that rule to lose their grandfathered status.

PART 741--REQUIREMENTS FOR INSURANCE

0
6. The authority citation for part 741 continues to read as follows:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

Subpart B--Regulations Codified Elsewhere in NCUA's Regulations as 
Applying to Federal Credit Unions That Also Apply to Federally 
Insured State-Chartered Credit Unions

0
7. Amend Sec.  741.203 by revising paragraph (a) to read as follows:


Sec.  741.203  Minimum loan policy requirements.

* * * * *
    (a) Adhere to the requirements stated in part 723 of this chapter 
concerning commercial lending and member business loans, Sec.  
701.21(c)(8) of this chapter concerning prohibited fees, and Sec.  
701.21(d)(5) of this chapter concerning non-preferential loans. 
Federally insured state chartered credit unions in a given state are 
exempt from these requirements if the state supervisory authority for 
that state adopts substantially equivalent regulations as determined by 
the NCUA Board or, in the case of the commercial lending and member 
business loan requirements, if the state supervisory authority 
administers a state commercial and member business loan rule for use by 
federally insured credit unions chartered in that state that at least 
covers all the provisions in part 723 of this chapter and is no less 
restrictive, upon determination by NCUA. In nonexempt states, all 
required NCUA reviews and approvals will be handled in coordination 
with the state credit union supervisory authority; and
* * * * *
[FR Doc. 2016-03955 Filed 3-11-16; 8:45 am]
BILLING CODE 7535-01-P