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NCUA proposes to permit more SBA lending through credit unions

June 24, 2004, Alexandria, Va. -- The National Credit Union Administration Board issued a proposal today to amend the agency’s member business loan (MBL) rule to enable credit unions to participate more fully in Small Business Administration (SBA) guaranteed loan programs.

“ Through this rule, credit unions will be in a greater position to extend access for credit and capital to America’s small businesses,” said NCUA Chairman JoAnn Johnson. “By continuing our close working relationship with the SBA, we have been able to ensure significant improvements in regulations. Today’s action will help facilitate and expand safe and sound member business lending programs. This is a ‘win-win’ for credit unions and small businesses across America.”

“This rule will complete a comprehensive two-year effort to remove barriers that were preventing credit unions from making more SBA loans,” explained Debbie Matz, the NCUA Board’s liaison to SBA. “At our Partnering and Leadership Successes (PALS) workshops on member business lending, we heard that many of the barriers were due to differences in our regulations. We have responded by authorizing waivers, changing our legal interpretations, and now amending our rule to allow qualified credit unions to participate in SBA programs that can meet virtually every need of small business owners across America. Credit unions will have millions of new opportunities to lend to small business owners they could not have approved alone, and share the risks by partnering with SBA.”

“Today’s announcement by the National Credit Union Administration is great news for America’s 25 million small business owners,” SBA Administrator Hector V. Barreto said. “Contradictory regulations that once stood as roadblocks to small business lending have now been made simple and consistent. This proposal means that credit unions will be able to help more small businesses continue to grow and create jobs.”

SBA removed the first barrier in February of 2003, by opening its eligibility rules to allow all credit unions to partner with SBA. Since then, credit union partnerships with SBA have almost doubled. Yet out of more than 1,600 credit unions making MBLs today, still only about 150 credit unions are making SBA loans.

To accommodate additional SBA loan participation, the proposed amendments would permit federally insured credit unions to follow the less restrictive collateral and security requirements
of the relevant Small Business Administration guaranteed loan program, with the proviso that state-chartered credit unions have the necessary authority under state law as determined by their state supervisory authority.

Matz and Johnson co-hosted two PALS workshops that brought NCUA and SBA officials together with credit union leaders who wanted to make more MBLs. At the latest workshop this past March, they discussed differences between NCUA and SBA regulations that made it difficult, if not impossible, for credit unions to make certain types of SBA loans.

NCUA began resolving these differences the very next month. In April, directors of NCUA’s five regional offices were encouraged to consider waivers for credit unions to make SBA 504 loans, which are guaranteed by community-based non-profit organizations. Waivers from loan-to-value limits will allow credit unions to:

• fully fund 504 loans;
• reduce loan turnaround time; and
• better serve small business owners who need to buy real estate, machinery or equipment to expand or modernize their businesses

In May, NCUA issued a legal opinion letter with new interpretations to make several MBL terms consistent with SBA’s 7(a) program – SBA’s primary program to guarantee loans for a wide range of business needs. For example, the opinion letter allows credit unions to:

• provide more small businesses with working capital, furniture and fixtures, machinery and equipment, land and buildings, and leasehold improvements;
• extend MBLs beyond 12 years for small business owners investing in fixed assets; and
• prepare to sell SBA loans to the secondary market.

Today’s proposed rule would amend NCUA’s collateral and security requirements so that credit unions could make construction and development loans under the safety and soundness standards established by SBA. The proposed amendments would permit federally insured credit unions to follow the less restrictive loan requirements of the relevant SBA-guaranteed loan program, with the proviso that state-chartered credit unions have the necessary authority under state law.

Based on recommendations made during last year’s MBL rule revision, NCUA reviewed applicable SBA loan programs and determined they provide reasonable criteria for credit union participation and compliance within the bounds of safety and soundness. What more, these SBA programs are ideally suited to the mission of many credit unions to satisfy their members’ business loan needs.

The National Credit Union Administration is the independent federal agency that regulates, charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 82 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions.