What Dustin Johnson Teaches Us About The MBL Rule

June 23, 2015 at 10:08 am Leave a comment

There are two approaches to being a caddy of a professional golfer.  One time I went to the Woman’s US Open on Long Island and was surprised by how involved some of the caddies were, not only in picking out clubs but in helping to position some of the world’s best players before they shot.  They did everything but swing.   This is a prescriptive approach to caddying:  intricately lay out every step taken to insure the best results.

Then there is a principles-based approach.  The caddy recognizes that he is simply assisting someone who already knows what he is doing.  He hands out the proper club and might suggest a putting line but you hardly seem him in the picture.  His goal is to stay out of the way of his charge’s proper execution.

On Thursday, the NCUA not only proposed radical revision to its Member Business Loan (MBL) regulations, but also a radical revision of how it regulates MBL activities.  Specifically, NCUA is proposing to shift from a prescriptive approach to a principles-based approach.  This means that many of the nettlesome provisions of the MBL loan process will be eliminated.  Those credit unions most actively involved in MBL loans will instead have to have detailed policies and procedures that are unique to their membership and lending practices.  Examiners will judge these practices against guidance developed by NCUA.  (http://www.ncua.gov/about/Documents/Agenda%20Items/AG20150618Item6b.pdf)

For the record, I think it’s a great and original idea that is well worth trying, but whether it ultimately has a positive or negative impact will vary widely based on the competency of individual credit unions and how much flexibility credit unions in general are given by examiners.  Some credit unions will relish the increased flexibility; others will find the lack of specific bright line rules less helpful.  In today’s blog, I’m going to go over the positives of the proposal and in tomorrow’s I will outline the potential negatives.

Just how radical is this proposal? The amendments clarify that the MBL cap is a multiple of a credit union’s net worth requirements, not a fixed percentage of assets. Another part of the proposal that could provide MBL cap relief has to do with the introduction of a commercial loan category.  Commercial loans are loans that wouldn’t be counted against a credit union’s MBL cap.  For example, under existing regulations a mortgage to purchase a second home that is not the borrower’s primary residence is an MBL (assuming the mortgage is for at least $50,000).  Such loans would be classified as commercial loans and not counted against the MBL cap.  The idea closely tracks NCUA’s Risk-Based Capital proposal.

But wait . . . there’s more.  Currently, there is a host of concentration limits placed on MBL loans and a corresponding list of available waivers.  The proposal would do away with seven such limits and waivers. This means, for example, that credit unions would no longer have to get personal guarantees for their loans; would no longer be subject to a specific loan to value ratio and would no longer have to have someone with at least two years of experience overseeing your MBL program.

If you participate out portions of your MBLs, another change has to do with the definition of “associational borrowers.”  Current regulations limit how much money can be lent to any one such borrower and by proposing a narrower definition your credit union will have greater flexibility in making and selling loans.

Okay, you ask, so what is the catch?  In place of the existing prescriptive regulations, credit unions will have to have detailed policies explaining why they structure their MBL programs the way they do.

The good news is that you no longer have a regulatory requirement to get personal guarantees when you make MBL loans. The bad news is that your policies and procedures better explain the circumstances under which the credit union grants such loans.  The good news is your credit union will no longer have to have someone with two years of MBL experience.  The bad news is it will need policies and procedures outlining the minimum qualifications of its MBL employees.  Examiners will be the ultimate arbitrators of your efforts.

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 would be exempted from creating and implementing these more involved procedures. Still this new approach means big responsibilities for larger credit unions and their boards.  More on that tomorrow.





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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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