Letters to Regulators

NCUA Member Business Loan Rule

August 25, 2004

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Re: National Credit Union Administration; Member Business Loans, 12 CFR Part 723

Dear Ms. Baker:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on the proposed rule by the National Credit Union Administration ("NCUA") that would amend the credit union Member Business Loan (MBL) rule. The proposed amendment would permit credit unions to make Small Business Administration (SBA) guaranteed loans under the SBA's less restrictive lending requirements instead of under the more restrictive lending requirements of the MBL rule. ICBA strongly opposes any relaxation of the MBL rule and urges the NCUA to retract the proposed rule.


Last year, NCUA amended its MBL rule and other rules related to business lending to enhance the ability of credit unions to engage in commercial lending. According to the NCUA, the agency received a number of comments when it proposed its MBL amendments last year, including suggestions that the MBL rule be "better aligned with lending programs offered by the SBA." As a result, NCUA began reviewing its regulations to determine a way that credit unions could more easily access SBA's 7(a) Loan Program.

On May 20, 2004, NCUA's Office of General Counsel issued a legal opinion stating that federal credit unions could make member business loans under the terms of the SBA's guaranteed loan programs to the extent the terms and conditions under which the guarantee is provided are consistent with the requirements and limitations in the MBL rule. Specifically, the opinion identified loan maturity limits, usury ceilings and prepayment penalties as terms of the SBA's guaranteed loan programs that a federal credit union could use in lieu of corresponding terms in NCUA's rules. The opinion explained though that the MBL rule expressly sets collateral requirements for MBLs, in the form of maximum loan-to-value requirements and that the collateral requirements of the SBA's guaranteed loan programs were not consistent with those of the current MBL rule and, therefore, could not be used.

NCUA is now proposing an amendment that would exempt SBA guaranteed loans from the MBL rule's collateral requirements. This proposal would apply to all federal and state credit unions subject to the MBL rule.

The Expansion of Credit Union Access to the SBA's 7(a) Guaranteed Loan Program is Unjustified

ICBA opposes the expansion of credit union access under the SBA's 7(a) guaranteed loan program. In a letter dated February 14, 2003, we stated to the SBA that expanding SBA loan program access to tax-exempt credit unions would "allow credit unions to shun commercial lending caps established by the Credit Union Membership Act of 1998 (CUMAA), increase their risk exposure, and directly diminish federal tax revenues." We pointed out in the letter that, at a time when all federal budget programs are pressured by deficits, "shifting 7(a) lending business to tax-exempt credit unions would have significant unfair negative revenue effects on tax receipts and tax burdens" particularly when the estimated taxpayer subsidy to the tax-exempt credit unions is costing the Treasury $7.7 billion in foregone tax receipts. We urged the SBA to reassess their apparent decision to significantly alter the established guaranteed loan programs without properly following the appropriate regulatory procedures under the Administrative Procedure Act.

The Expansion of Commercial Lending Powers by Credit Unions Is Contrary to the Intent of CUMAA

ICBA opposes any expansion of commercial lending powers by credit unions as contrary to the intent of CUMAA. These proposed amendments to the MLB rule will subject credit unions to greater lending risks and divert them from their central mission of serving the credit needs of low-and-moderate income consumers.

As we pointed out to the NCUA when it proposed changes to the MBL rule last year, there is nothing in CUMAA's legislative history to support the relaxation of the MBL rule. For instance, the report of the Senate Committee on Banking, Housing & Urban Affairs makes it clear that the MBL rule and its aggregate limit on business loans should be viewed as a limitation on credit union business lending to ensure that credit unions focus on their mission of serving the credit needs of consumers:

[T]he Committee has imposed substantial new restrictions on commercial business lending by insured credit unions. These restrictions are intended to ensure that credit unions continue to fulfill their specified mission of meeting the credit and savings needs of consumers, especially persons of modest means, through an emphasis on consumer rather than business loans. The Committee action will prevent significant amounts of credit union resources from being allocated in the future to large commercial loans that may present additional safety and soundness concerns for credit unions, and that could potentially increase the risk of taxpayers losses through the National Credit Union Share Insurance Fund.2

The additional views of Senators Hagel, Enzi and Reed reflect the fact that many in Congress thought that the new restrictions on commercial business lending were not strict enough and that even small amounts of business lending would be risky for credit unions. Senator Hagel said:

I am concerned that, as currently written, H.R. 1151 would have unintended negative consequences for credit union members and taxpayers. The legislation is risky for credit union members who rely on their credit union for small, consumer loans because it would allow credit unions to shift their focus from consumer service to large-scale commercial lending. Congress should place limits on commercial lending by credit unions-and those limits should be real.

It is a generally accepted notion that commercial lending is riskier than consumer lending. It is crucial for the regulator and the public to be aware of the risk profile of the loan portfolio of each and every credit union. All loans that go for supporting commercial ventures, no matter how small these loans are, should be counted as such.3

Senator Enzi also expressed misgivings about the new restrictions in CUMAA when he said:

Commercial lending has generally been considered riskier business than consumer lending. From this notion comes the premise of restricting the amount of lending that can be used for commercial purposes. Even though H.R. 1151 limits commercial ending activity, the restriction in my belief is dubious at best.4

The legislative history of CUMAA therefore expresses a clear concern that if there were no strict restrictions on commercial lending, credit unions might stray from their mission of meeting the credit needs of consumers. In addition, Congress wanted to impose these limits so that credit unions would not engage in these riskier lending activities that could put the National Credit Union Insurance Fund at risk.

The NCUA's proposal to relax the requirements of the MBL rule will expand credit unions' business lending powers and divert credit union resources away from consumer lending. Furthermore, since the guaranteed portion of SBA loans will not count towards the aggregate business loan limitation established by Congress,5 the relaxation of the collateral requirements will significantly expand the number of SBA loans be made by credit unions and will enable credit unions to circumvent the aggregate business loan cap.


NCUA's proposal to change the MBL rule to permit credit unions to make SBA guaranteed loans under the SBA's less restrictive lending requirements is counter to the Congressional intent and another instance of credit unions trying to expand their commercial lending powers. These changes will allow credit unions to evade the commercial lending limits established by CUMAA and divert them from their central mission of serving the credit needs of low-and-moderate income consumers. Furthermore, these changes will shift more 7(a) lending to tax-exempt credit unions, increasing the enormous tax advantage that credit unions now have over commercial banks and thrifts. ICBA urges the NCUA to retract the proposed rule.

If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.


Christopher Cole
Regulatory Counsel

1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to protecting the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. For more information, visit ICBA's website at www.icba.org.

2 Senate Report 105-193, pp..9 -10.

3 Senate Report 105-193, p. 24.

4 Senate Report 105-193, p. 28.

5 The aggregate business loan cap is 12.25 % of assets.

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