Raising the MBL Cap to 17.5 Percent?

There is a lot of wishful thinking in the credit union community that the National Credit Union Administration (NCUA) through regulatory fiat can raise the member business loan (MBL) cap to 17.5 percent for credit unions with more than $100 million in assets.

According to the Federal Credit Union Act (FCUA), the MBL cap is equal to the lesser of—
(1) 1.75 times the actual net worth of the credit union; or
(2) 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of this title for a credit union to be well capitalized.

The minimum net worth ratio to be well capitalized is 7 percent of assets. Seven percent of assets multiplied by 1.75 equals 12.25 percent of assets.

So, where does the 17.5 percent number come from?

Here is where the wishful thinking occurs.

According to the FCUA, complex credit unions are also subject to a risk-based net worth requirement.

However, NCUA is proposing to replace its risk-based net worth requirement with a risk-based capital requirement. The agency will require a complex credit union to have at least a risk-based capital ratio of 10 percent to be well capitalized. Also, NCUA is proposing to define a complex credit union as an institution with more than $100 million in assets.

According to industry advocates, 1.75 times 10 percent translates into a MBL cap of 17.5 percent.

But there are flies in the ointment with regard to this wishful thinking.

The FCUA links the MBL cap to net worth, not capital. Section 1790d(c)(1)(A) of the FCUA talks about risk-based net worth requirements, not risk-based capital requirements. Furthermore, the components in the numerator of the risk-based capital ratio proposal do not align with the statutory definition of net worth. So, there does not appear to be a legal foundation to use the proposed risk-based capital requirement to determine the MBL cap.

But even if you assume NCUA goes forward, there is still a fly in this ointment. The 10 percent risk-based capital requirement is based upon risk weighted assets, not total assets. So, to be consistent, the MBL limit would equal 17.5 percent of risk weighted assets. As a general rule, risk weighted assets are less than total assets. So, it is likely the 12.25 percent MBL cap would still be binding for most, if not all, complex credit unions.

As I said, this is just wishful thinking on the part of credit unions.