What is the Real MBL Cap?

June 16, 2015 at 8:45 am 1 comment

At the Association’s Annual Convention the man who stole the show was none other than NCUA’s newest board member, J. Mark McWatters. Usually, attendees listen in respectful silence as the board member du jour explains how he feels the pain of being over-regulated while in the next breath explaining the need for additional regulation.

But in McWatters, we have at least one board member who sincerely believes the fewer regulations, the better. And, he seems to believe that when regulations are necessary they should be focused as narrowly as possible on the issue they seek to address. I’ve never seen any audience respond so well to a lawyer in my life, especially one who feels the need to mention he’s a lawyer about once every thirty seconds. His message was like catnip in a room full of kittens.

I also drank a good bit of his Kool-Aid. The part of his speech that got me the most intrigued was when he raised the possibility that NCUA could, if it wanted to, raise the MBL cap, at least for larger credit unions, without additional legislation. This is not a theoretical discussion. At its Board Meeting this Thursday, NCUA will be unveiling proposed MBL reforms and McWatters urged the audience to scrutinize and comment on this proposal.

First, a quick primer. The Federal Credit Union Act does not explicitly cap Member Business Loans (MBL) at 12.25% of a credit union’s assets. Instead, it caps MBLs at the lesser of 1.75 x the actual net worth of the credit union or 1.75 x the minimum net worth required for a credit union to be well-capitalized. Since credit unions have to have at least a 7% net worth to be well-capitalized, we have all gotten used to assuming that the MBL cap is 12.25%. However, take a closer look at the statute, as McWatters urges, and here is where it gets interesting.

As we all know from NCUA’s Risk-Based Capital proposal, NCUA feels it has the authority to define when complex credit unions, which it is seeking to define as those with $100 million or more in assets, are well-capitalized. If NCUA has its way, such credit unions will be well-capitalized only if they have a minimum Risk-Based Capital ratio of 10%. An argument can be made that based on a plain reading of the statute, these credit unions’ MBL cap would be 17.5%. Intriguing, isn’t it?

Of course, as NCUA has made abundantly clear, reasonable minds can differ about what constraint the Act actually places on credit unions. Still this interpretation is certainly supported by the statute and deserves to be given serious consideration by the entire Board.

Entry filed under: Compliance, Regulatory. Tags: , , , , .

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1 Comment Add your own

  • 1. Keith Leggett  |  June 22, 2015 at 11:27 am


    You need to remember that the risk-based capital denominator is risk weighted assets.

    So, 1.75 times risk weighted assets not to exceed 10 percent could be less than 12.25 percent of assets.

    This type of creative thinking by NCUA will cause your member institutions to switch to a bank charter.


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Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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