MBL Proposal Will Only Be as Good as Its Guidance
The blog is going on its summer hiatus. I could say that I am using the upcoming week to help get the kids ready for school, but the truth is that with two fantasy football drafts to prepare for I need to take a break from analyzing credit union news and regulations to ponder really important questions like: Who will Green Bay’s primary receiver be this year? Are there any running backs worth drafting in the first round? And just how many weeks will Tom Brady miss?
But before I get started I wanted to remind you of NCUA’s proposed MBL amendments and why they are even more important than they appear to be.
In case you missed it, NCUA is proposing to give credit unions greater flexibility in making MBL loans. It is moving to what it describes as a principles-based approach under which the existing detailed mandates will be replaced with a requirement that credit unions actively engaged in making MBL loans, or that are over $200 million in assets, design and implement a broad range of policies and procedures addressing MBL lending. For example, the existing requirement that a credit union have at least one person with two years of experience underwriting its MBL loans would be replaced with a requirement that staff have experience directly related to the specific types of commercial lending in which the credit union is engaged. This is including, but not limited to, demonstrated experience in conducting commercial credit analysis and evaluating the risk of a borrowing relationship using a credit risk rating system.
Credit unions will be evaluated on the basis of “supervisory guidance to examiners, which would be shared with credit unions, to provide more extensive discussion of expectations in relation to the revised rule.” Which brings me to why this proposal is even more important than meets the eye: it will give both credit unions and the NCUA the opportunity to hash out once and for all the difference between supervisory guidance and regulations. Based on my reading of the case law-and keeping in mind this is my opinion- from a compliance standpoint there is no practical distinction between an agency’s interpretation of its regulation and a regulation itself.
For example, earlier this year the Supreme Court upheld the right of the DOL to issue an interpretation making mortgage originators nonexempt employees eligible for overtime. (Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1212, 191 L. Ed. 2d 186 (2015). The mortgage bankers argued that this “interpretation” was an amendment to a rule which could only be changed after notice and comment. The Supreme Court said that a regulation is only amended when language is changed. As Justice Scalia commented in a concurring opinion “[a]gencies may now use these rules not just to advise the public, but also to bind them. After all, if an interpretive rule gets deference, the people are bound to obey it on pain of sanction, no less surely than they are bound to obey substantive rules, which are accorded similar deference. Interpretive rules that command deference do have the force of law.”
Also remember that even when an agency interpretation is intended to give a credit union greater flexibility that same guidance gives examiners greater flexibility to determine if a credit union is acting properly.
Now don’t get me wrong. I’m not saying that NCUA isn’t genuinely interested in giving CUs greater flexibility. It is, and it deserves a tremendous pat on the back for its willingness to do so. But because the new MBL framework will only be as useful as NCUA’s guidance and examiner oversight, an ongoing dialogue with the agency is crucial. Everyone needs to be on the same page.
That’s why industry stakeholders, including the New York Credit Union Association, are urging NCUA to submit its MBL guidance to a formal notice and comment period. Doing so will help everyone understand just how much additional flexibility they have to make MBL loans. In addition, everyone has to understand that there will be bumps along the road. Adults have to be willing to sit around a table and talk out their differences.
On that note – see you next Tuesday as the blog marks its fourth anniversary.