Credit union professionals engaged in commercial lending must navigate a complex landscape of regulations to ensure compliance while meeting the needs of their business members. Central to this regulatory framework is Part 723 of the National Credit Union Administration (NCUA) regulations, which outlines the rules governing member business lending (MBL).
Overview of NCUA Regulations
The NCUA's Part 723 is designed to provide a structured yet flexible approach to commercial lending by credit unions. This regulation sets the guidelines for the management of commercial lending risks and establishes a cap on the amount of business lending a credit union can undertake.
Key Components of Part 723
- Loan Cap: Traditionally, credit unions are limited to lending no more than 12.25% of their assets to small businesses. However, certain loans, such as one-to-four unit, non-owner-occupied residential loans, have been reclassified to not count against this cap, offering some relief and flexibility for credit unions.
- Principle-Based Approach: The 2016 revisions to Part 723 shifted from a prescriptive to a principle-based methodology. This change allows credit unions greater autonomy in their lending practices but demands robust risk management practices. This principle-based approach requires credit unions to develop and adhere to sound commercial lending policies and procedures.
- Board Oversight: The regulation emphasizes the role of credit union boards in overseeing commercial lending activities. Boards must ensure their credit unions have the necessary policies and procedures in place to manage lending risks effectively and comply with all regulatory requirements.
- Risk Management: Credit unions are required to maintain a comprehensive risk management framework tailored to their commercial lending activities. This includes detailed risk assessments, regular monitoring, and stringent internal controls to mitigate potential risks associated with business loans.
- Personal Guarantees: One notable change in the updated regulation is the elimination of the personal guarantee requirement. This move provides credit unions with more flexibility in structuring their loans while still ensuring adequate safeguards are in place.
Ensuring Compliance and Meeting Member Needs
To ensure compliance with NCUA regulations while effectively serving business members, credit union professionals should focus on the following strategies:
- Develop Robust Policies: Establish comprehensive lending policies that align with NCUA's principle-based approach. These policies should detail the procedures for assessing, approving, and monitoring commercial loans.
- Invest in Training: Continuous education and training for staff involved in commercial lending are crucial. Understanding the nuances of Part 723 and staying updated on regulatory changes can help avoid compliance pitfalls and enhance service delivery.
- Leverage Technology: Utilize advanced lending and risk management software to streamline processes, improve accuracy, and ensure compliance. Technology can aid in the efficient handling of loan applications, risk assessments, and reporting requirements.
- Board Engagement: Engage the board in the oversight of commercial lending activities. Regular updates and reports to the board can ensure that the credit union’s commercial lending practices remain aligned with regulatory expectations and strategic goals.
- Member Communication: Maintain transparent and open communication with business members. Clearly explain the lending process, requirements, and the credit union’s commitment to meeting their financial needs within the regulatory framework.
Attending Collections & Bankruptcy School this September will equip credit union professionals with essential knowledge and skills to effectively navigate NCUA regulations. The event covers a comprehensive curriculum, including the fundamentals of collections, advanced practices, and the legalities of handling bankruptcies. By participating, attendees will gain insights into best practices for managing risk, maximizing recovery, and ensuring regulatory compliance.
By adhering to these strategies, credit unions can navigate the complexities of NCUA regulations effectively, ensuring compliance while continuing to provide valuable lending services to their business members.