The as Yet Unforeseen Consequence of Excluding Veteran Loans as MBLs

On November 12, 2019, the U.S. Senate introduced S.2834 that would amend the Federal Credit Union Act (FCUA) to exclude loans to veterans from the definition of a member business loan (MBL). The U.S. House reintroduced a similar bill, H.R. 2305, in an effort to provide greater access to loans that may be inaccessible due to a credit union’s MBL cap. Both bills have obtained bipartisan support, increasing the odds of passage.
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Both bills have been widely praised by the industry and credit union trade associations. However, this bill could have the unforeseen consequence of impacting access to veteran loans if a number of credit unions have as yet avoided implementing a costly commercial loan program, or impose new loan program and compliance expenses 180 days after the enactment of the FCUA amendment to provide a needed service to veteran members.

If veteran loans are excluded from the MBL definition, business loans to veterans would naturally become commercial loans under the law. The National Credit Union Administration (NCUA) would be required to amend the definition of “commercial loan” under Part 723.1 to include veteran loans, without the ability to provide the flexibility to include them as MBLs.

[As an aside, the NCUA should take the opportunity to fix the mistake made after the passage of the 2018 Economic Growth Act where non-occupied, investment property loans were excluded as MBLs, but not included as commercial loans (see ESTEE Compliance Blog dated 6/11/2018).]

Part 723.4 imposes a number of commercial loan program requirements for business loans that fall outside the MBL definition. However §723.1(b) excludes credit unions from the commercial loan policy, and the board and management requirements of the rule if all of the following conditions are met:   

• Less than $250 million in assets;
• A commercial loan portfolio plus commercial loans sold but serviced less than 15 percent of total net worth; and
• In any given calendar year has originated and sold and no longer services commercial loans that in aggregate are less than 15 percent of net worth

At the time Part 723 was revised in February 2016, NCUA MLB Final Rule Summary estimated 660 smaller credit unions, representing 30 percent of credit unions with MBLs, would receive this exemption. According to the NCUA’s Industry at a Glance, as of March 31, 2019, the average credit union asset size is $283 million, which represents a likely reduction in the number of these exemptions since the passage of the 2016 MBL rule revision.
Some credit unions falling outside this exemption without the proper resources or staff experience have decided not to write commercial loans to avoid the expense and compliance burdens associated with a commercial loan program. These bills may force their hand or risk a reduction in access to business loans for veterans.

Before the celebration of removing veteran loans from the MBL cap begins, there are some questions to be answered:

• Will an NCUA regulation require credit unions to inquire about veteran status at the application stage?
• How will this amendment impact existing commercial loan policies (e.g., trade area, concentration, underwriting, risk ratings, etc.)?
• Will this FCUA amendment require a commercial loan program to write veteran business loans?
• Will an NCUA regulation include penalties for evading the commercial loan requirements if the loans continue to be written as MBLs?
• If a commercial loan program would be required, is there a sufficient demand for business loans from veterans that would justify the added expense and compliance risk?
• If a commercial loan program would be required, and your credit union cannot or does not want to invest the resources, is your credit union willing to take the reputation risk of having to say: “We don’t write commercial loans; we write MBLs, but you don’t qualify for one as a veteran”?

Now is the time to consider the implications of an FCUA amendment and begin preparations that may impact your staff and budget for 2020 – despite the drama and many distractions occurring in Congress that will likely delay passage of this bipartisan legislation – to ensure our veterans receive the services they need from the industry. 

Veronica Madsen
 
PLEASE NOTE: The information and opinions provided on this blog are not intended to be legal advice. No attorney-client relationship is formed, nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney that is licensed in your jurisdiction. No article may be republished without the express written permission of ESTEE Compliance, LLC. © 2019