Treasury, ICBA Criticize Proposed CU Business Loan Rule
The U.S. Treasury Department this week took the unusual step of criticizing one of its fellow regulators. In a letter commenting on proposals made by the National Credit Union Administration (NCUA) to exempt certain kinds of business lending from the statutory cap on credit union business loans, Treasury assistant secretary Wayne Abernathy said the proposals "would undermine the intent of the congressional limitations on credit union business lending established in the Credit Union Membership Access Act of 1998 (CUMAA)" and would eliminate "key safeguards that effectively limited the credit risks associated with [business] loans."
CUMAA established an aggregate cap on credit union commercial lending of 12.25% of outstanding loans. The NCUA proposed that loan participations purchased by a credit union be excluded from the aggregate cap because they are not loans "made" by the credit union as defined under the statute. Noting that the NCUA previously rejected this position when the current rule was adopted, Treasury concluded that the NCUA had not adequately explained why loan participations should now be excluded. In Treasury's opinion, loan participations should be treated as loans and not as investments as the NCUA proposed. To do otherwise would set a harmful precedent and undermine the cap on member business lending established by CUMAA.
Treasury was equally critical of the NCUA's proposal to allow credit union service organizations (CUSOs) to originate business loans, sell them to credit unions and allow the credit unions to exclude them from the statutory cap. This would present another opportunity for credit unions to avoid the member business loan restrictions established by CUMAA, Treasury said.
To support its proposal for removing the personal guarantee requirement for member business loans, the NCUA cited a 2001 Treasury study that showed credit union member business lending was less risky than bank and thrift commercial lending. But, as the Treasury pointed out in its comment letter, the 2001 study reached that conclusion because member business loans generally require the personal guarantee of the borrower. By removing this requirement, the proposed rule would remove the core reasons why member business loans were less risky than bank and thrift commercial loans. The future credit loss experience of member business lending would be greater, as a result, raising serious safety and soundness concerns, Treasury said.
ICBA Denounces Proposal. ICBA also filed a comment letter with the NCUA denouncing the proposed changes to the member business loan rules as a way to circumvent congressional limitations on credit union business lending.
"Instead of making credit unions safer as the NCUA Board asserts, these changes will subject credit unions to greater lending risks and divert them from their central mission of serving the credit needs of consumers, contrary to congressional intent," ICBA chairman Rusty Cloutier wrote. "Any business loan, whether purchased or originated by a credit union, should be counted toward the overall limit on credit union business loans," ICBA said. Congress imposed the restriction to limit a credit union's total exposure to business lending. "That exposure is the same whether the business loans are originated or purchased by a credit union," ICBA wrote. "This exclusion [is] contrary to the very purpose for which these restrictions were adopted."
Like Treasury, ICBA also objected to proposals by the NCUA to loosen other restrictions on business lending, including allowing credit union service organizations (CUSOs) to originate business loans and sell them to credit unions. "If the proposal to exclude purchased participations is adopted and CUSOs are allowed to originate loans and then sell them, credit unions will be in a position to totally circumvent the member business loan restrictions," ICBA wrote.