Chartered for the Purpose of Making Member Business Loans

The National Credit Union Administration's Office of Consumer Financial Protection and Access is providing guidance to insured credit unions on the eligibility and qualifications for being chartered for the purpose of making member business loans.

The Federal Credit Union Act provides an exemption from the member business loan (MBL) aggregate cap of 12.25 percent of assets to an insured credit union chartered for the purpose of making member business loans to its members, as determined by the NCUA Board.

According to the document, new federal credit unions, new federally insured state credit unions (FISCUs), FISCUs converting to a federal charter, federal charters converting to a FISCU, and all credit unions considering a spin-off of their field of membership may be eligible for this exemption of being chartered for the purpose of making business loans to its members.

To qualify, the insured credit union must

• submit plans showing one or more discrete groups within its field of membership with unique commercial or business financing needs;
• demonstrate a commitment to investing in the infrastructure to safely originate, service, and administer the anticipated business loan volume; and
• ensure that management meets the experience and governance requirements currently outlined in NCUA's regulations.

Finally, the NCUA states that financial projections must reflect sufficient loan originations to support the exemption. However, the document notes that "a credit union seeking the exception is not required to demonstrate or propose that its MBL portfolio will be its only lending component, or even an overwhelming majority of total loans or new loan volume."

While I understand how a de novo could be chartered for the purpose of making business loans, I find it troubling that a credit union, which flips its charter from a state to federal charter or vice-a-versa, could all of a sudden become chartered for the purpose of making member business loans. These credit unions are ongoing institutions. Their purpose has not changed.

It seems to me that the National Credit Union Administration is allowing existing credit unions to game the system so as to evade the member business loan cap of 12.25 percent of assets.

Read the document.