Some credit unions didn’t get the news they wanted regarding recent changes by the National Credit Union Association (NCUA) to the Member Business Lending (MBL) regulations. The announcement included the removal of the requirement for personal guarantees from business loan borrowers. What the announcement didn’t include, to the chagrin of some credit unions, was the removal of the so-called “MBL cap.” If you aren’t familiar with this part of the regulation, Section 723.16(a) states “The aggregate limit on a credit union's net member business loan balances is the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets.”
The MBL cap has long been a regulatory sore spot with some credit unions and some government officials. As far back as 2010, there were U.S. Congressmen sponsoring legislation to increase the MBL cap. Even as recent as May 2016, there were Congressional leaders expressing their desire to see the cap increased to encourage credit unions to expand lending to small business owners. (1) But the reality is that raising the cap would only positively impact a small number of credit unions. Credit Union Journal pointed out that of the 5,954 federally insured credit unions, only 106 credit unions were relatively close to the cap. (2)
Why then is the MBL cap such a “hot button” for some credit unions, especially when there are several ways, other than new legislation, to work around the cap?
SOLUTION 1: LICU (Low Income Credit Union designation) – reduce the MBL cap threat
Under NCUA regulations, any credit union that qualifies for the low income designation effectively has no MBL cap. Of course that means that the credit union has to qualify for the LICU designation. This is done during the credit union’s regularly scheduled NCUA exam where the credit union’s field of membership is compared to census track data to determine if a majority (50+%) of members are within low-income guidelines. But if a credit union does qualify, the MBL cap is all but eliminated.
SOLUTION 2: Share the wealth – reduce the MBL cap threat
As the credit union comes closer to the MBL cap, it should consider participating some of its future loans out. By selling off portions of each commercial loan, the credit union gets to maintain the member relationship and earn any servicing fees, while diversifying the commercial loan portfolio. Keep in mind that federal credit unions have to retain 10% of any participation sold and state-chartered credit unions have to retain 5%.
SOLUTION 3: Leverage referral relationships – work around the MBL cap threat
If the credit union is so close to the MBL cap that it can’t even retain its required regulatory portion, establishing a referral relationship with other lenders is an excellent way to help the member while retaining some portion of the relationship. These other lenders could be in the form of other credit unions or even alternative lenders. Through such agreements a credit union can avoid declining a member’s loan, while earning a referral fee and capturing the business’ deposits.
MBL Cap Doesn’t Need to be a Problem
Hearing calls for the NCUA to reduce or eliminate a regulatory guideline like the MBL cap before it is really a problem is a waste of effort. Instead, credit unions need to make strategic decisions about the future of their business services offerings and how to best continue serving their members.
- 1 Credit Union Journal, “More House Leaders Support Legislation to Raise MBL Cap” May 2016
- 2 Credit Union Journal, “Should Changing the Cap on MBLs Remain a Priority” June 2016
Jonathan Patrick is a Strategic Initiatives Analyst with Jack Henry & Associates, Inc.® where he covers the credit union and fintech industries. Prior to joining Jack Henry & Associates, Jonathan was Senior Vice President/Chief Lending Officer at UT Federal Credit Union in Knoxville, TN where he and the credit union won multiple awards for innovation. Earlier in his career, he was a commercial lender with a regional bank where he was party to over $500M in commercial loans. Jonathan has a startup background as an advisor, founder and investor.