Does Risk-Based Capital Signal MBL Reform is On the Way?

January 28, 2015 at 8:39 am Leave a comment

In addition to telling credit unions to take a deep breath and a serious look at NCUA’s RBC 2 proposal, there’s one other aspect of the new approach to Risk-Based Capital that deserves serious consideration. Specifically, by creating a separate category of commercial loans and distinguishing these types of loans from traditional Member Business Loans, NCUA may be signaling that it is going to use its regulatory powers to consider granting credit unions greater flexibility from MBL cap constraints.

For example, as NCUA explained in a December 28, 2004 opinion letter (Exception to MBL Definition Letter), it has been the agency’s position since the early 1990s that even though loans secured by a member’s primary residence are not considered MBLs, a credit union must determine whether property is or will be the principle residence of the member borrower. In other words, that vacation home is an MBL loan. In contrast, the NCUA explains on page 228 of the preamble to RBC 2 that its proposed definition of a commercial loan would include all commercial purpose loans, regardless of dollar amount but exclude 1-4 family non-owner occupied first-lien real estate loans, which would instead be weighted as residential real estate. This change makes sense from a policy standpoint – after all, the member’s second home in Florida really isn’t a business investment.

A similar change would be made with regard to vehicle loans. For example, a loan to finance a fleet of vehicles would understandably be considered a commercial loan. In contrast, a consumer loan for risk rating purposes would be defined to include any loans secured by vehicles generally manufactured for personal, family or household use regardless of the purpose of the loan.

I’ve heard some credit unions complain that this proposal will create confusion by creating a commercial loan category distinct from MBLs. But remember, the commercial loan/MBL distinction only applies to the Risk-Based Capital framework. In addition, if NCUA decides to use it as a template for giving credit unions greater flexibility to make MBLs in the future, then I – for one – believe that a little more complexity is a price well worth paying.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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