How MBL Changes will Impact Your CU
NCUA completed the first stage of arguably its most radical proposal in at least a decade yesterday when it finalized a rule that, when fully implemented, eliminates many of the MBL restrictions placed on federally insured credit unions.
In a nutshell, if all goes according to plan, smaller federally insured credit unions that make the occasional MBL loan will get substantial relief since many MBL requirements are being eliminated. Larger credit unions, and smaller ones that actively engage in MBL lending, will have greater flexibility to customize their MBL programs, but in return for this flexibility they must implement detailed policies and procedures that satisfy safety and soundness concerns.
There is much to be happy about for all credit unions. For example, currently, absent a waiver, credit unions are required to get personal guarantees on all MBL loans. This nettlesome requirement is eliminated 60 days after this rule is published in the Federal Register. (The rest of the changes kick in January 2017) In its place, credit unions will have to document the mitigating factors which justify, on a case by case basis, not requiring a member’s personal guarantee.
One of the dumbest quirks of MBL regulation is the one mandating that mortgages on second homes be classified as MBL loans since they are not a member’s primary residence. Credit unions can’t offer vacation home mortgages unless they comply with MBL requirements. Well, common sense is finally prevailing and these loans will no longer be classified as business loans.
For many credit unions that only do the occasional loan, the time and effort it would take to develop and implement these MBL policies and procedures wouldn’t be worth it. More good news is that the new policy requirements don’t apply to credit unions that have less than $250 million in assets, have commercial loan portfolios plus commercial loans sold but serviced less than 15 percent of their total net worth, and, in any given calendar year, have originated and sold no commercial loans that in the aggregate are less than 15 percent of its net worth.
The potentially radical part of the changes is the elimination of the specific prescriptions mandated under the current MBL framework and replacing them with a requirement for active MBL credit unions to demonstrate how their programs are safe and sound. These credit unions will have more flexibility to design their own MBL programs but will need detailed policies and procedures commensurate with the sophistication of their lending.
The development of policies and procedures are ultimately the responsibility of credit union boards which are explicitly responsible for receiving updates on MBL activity. Policies and procedures will have to address, among other things, the hiring of qualified staff, the types of loans the credit union makes, its collateral requirements and the circumstances under which it will make exceptions to these requirements.
My concern is that just as these changes give credit unions greater flexibility in designing MBL programs, examiners will have greater discretion in determining if a given MBL program is safe and sound. NCUA isn’t going away for the weekend and leaving the kids in charge. Examiner guidance will be drafted explaining the parameters of credit union flexibility. In a worst case scenario, an overly prescriptive MBL regulation will be replaced with an overly cautious examiner overseeing your MBL program. This is not NCUA’s goal. Staff stressed yesterday that examiners are going to be extensively trained over the next year, but bumps in the road are inevitable. This new approach will only be truly effective if examiners give credit unions increased flexibility and if credit unions take their obligation for increased oversight of their MBL programs seriously.
Here is a link to a rule summary. Enjoy your weekend.