What’s Not To Like About NCUA’s MBL Reforms
On paper, the NCUA’s proposed shift away from a prescriptive MBL framework to a principles-based framework is everything credit unions could have hoped for and more. It does away with mandates like the two-year experience requirement and instead requires that credit unions that have $250 million or more in assets or that actively engage in MBL lending have detailed policies and procedures. But my guess is that while many credit unions will find the changes a welcome relief from certain aspects of compliance; others will soon be longing for the good old days of detailed MBL regulations. Here is why.
- Most importantly, with great power comes great responsibility. The changes give responsible credit unions greater flexibility on the assumption that credit union boards and senior management have the expertise to properly administer complex MBL programs. On a practical level, your credit union should maintain many of the constraints existing regulations already impose on them. All that NCUA is allowing you to do is responsibly modify those policies to reflect the unique attributes of your credit union.
- Credit unions really won’t know how much flexibility they have until they start seeing the guidance from NCUA that will be used as the basis for future examinations. Take a look at some previous guidance issued by the NCUA and you will soon realize that they can be just as prescriptive as regulations but without the benefit of having gone through a comment period as is required of proposed amendments.
- Examiners will also have more flexibility. One of the most common refrains of credit unions is that there is too much inconsistency among examiners. A principles-based system could produce even more confusion. If the system works properly, examiners will justifiably ask tough questions to assess a credit union’s due diligence. For example, it is appropriate for an examiner to ask what criteria they use in assuring that their MBL staff is qualified. It is not appropriate for an examiner to confuse his or her beliefs as to what constitutes the “best criteria” with the only safe and sound way of making MBL loans.
- Principles-based regulation is not without its risks. Whereas your erstwhile compliance officer can now go to her erstwhile CEO and say “You can’t make that loan because it violates an NCUA regulation,” under the principles-based approach she can only say “You shouldn’t make that loan because it violates our lending policies.” When times are good, bending of the rules won’t matter; but if we learned anything from 2007-08 it’s that we usually won’t know that the good times have ended until it’s too late.
- The proposal hastens the divide between big and small credit unions. Credit unions with $250 million or more in assets will have to implement detailed policies. Those with less than $250 million in assets that are not regularly originating MBL loans will not. On a policy level, this makes sense. But in the name of mandate relief, the industry is willingly going along with proposals that divide big and small credit unions more effectively than bankers ever could. Every time the industry agrees to further divisions along asset lines, it is making it that much easier for Congress to one day tax larger credit unions.