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Collateral, LTV, Guarantees in New MBL Rule
Monday, May 8, 2017 6:25 AM

NCUA’s member business lending rule has been in effect for more than 5 months now, and credit unions are still working on implementing the rule’s changes. This month’s compliance feature in Credit Union Magazine examines new collateral and security requirements in section 723.5 of the regulation.

The new rule allows credit unions to make their own risk-based decisions, as opposed to the strict loan-to-value limits and personal guarantee requirements. From an operation perspective, this means credit unions should focus on:

  • Collateral: Sufficient capital is required, but the new rule states that collateral alone shouldn’t be the sole basis for granting a loan. The creditworthiness of the borrower and the marketability of the collateral determine the amount of collateral needed for each loan, and credit unions must establish standards, policies, and procedures to confirm, value, manage, and control collateral;
  • LTV limits: Rather than specific ratios for each type of collateral, NCUA expects credit unions to set their own LTV ratio limits. These should be based on internal risk management analysis and accepted financial industry standards; and
  • Personal guarantee: While the personal guarantee requirement has been removed, NCUA expects a personal guarantee in most cases. Credit unions should waive the requirement for a personal guarantee only when the credit union has a strong credit risk management program, and the ability to properly mitigate the additional risk, to meet the needs of a “financially strong” borrower.

NCUA examiners likely will approach the exam process as more of a “risk review” than a loan review. This means credit unions need to ensure they understand the risk they’re assuming in making each commercial lending decision, and document any deviation from accepted industry standards.

For additional detail, see the feature in Credit Union Magazine, and follow CUNA’s CompBlog for additional updates.