NCUA’s recent rule casts doubt on the classification of certain loans.
The Economic Growth Act signed by President Trump on May 24, 2018, provided credit unions with some regulatory relief. The National Credit Union Administration followed this up by removing certain loans from the definition of a “member business loan.” While this is good news for credit unions desiring an expansion of the MBL cap, NCUA’s June 2018 final rule creates a legal/regulatory limbo for non-owner-occupied residential rental properties.
Prior to EGA, the Federal Credit Union Act defined an MBL as “any loan, line of credit, or letter of credit, the proceeds of which will be used for a commercial, corporate or other business investment property or venture, or agricultural purpose but does not include an extension of credit that is fully secured by a lien on a 1-to 4-family dwelling that is the primary residence of a member.” [Emphasis added] Under this definition, non-owner-occupied rental properties were deemed to be MBLs.
Interestingly, commenters to the NCUA’s March 2016 final MBL rule supported this definition because they “indicated they would experience significant regulatory relief [as] certain MBLs, such as loans secured by a 1- to 4-family residential property that is not the member’s primary residence, will no longer be subject to full commercial lending safety and soundness requirements.” But I digress.
The EGA removed the words “primary residence of a member” from the definition, and provided that nothing would “preclude the National Credit Union Administration from treating an extension of credit that is fully secured by a lien on a 1- to 4-family dwelling that is not the primary residence of a member as a member business loan.”
Instead, NCUA issued a final rule amending Part 723 to exclude “all [Emphasis added] extensions of credit that are fully secured by a lien on a 1- to 4- family dwelling regardless of the borrower’s occupancy status.” What NCUA failed to do, however, was amend the definition of a “commercial loan,” which still excludes “…loans secured by a 1- to 4-family residential property (whether or not it is the borrower's primary residence)…” So how are rental property loans classified and underwritten if they are now neither commercial loans or MBLs?
Regulation Z provides some guidance, but it is not complete.
Regulation Z applies to most consumer credit transactions. Section 1026.3(a) excludes “business, commercial, agricultural, or organizational credit” from coverage, defined as “an extension of credit primarily for a business, commercial or agricultural purpose.”
Pursuant to the Commentary to §1026.3(a)(5), if a property is one unit and the owner intends to occupy the rental property for more than 14 days in the coming year, the property is considered occupied, and any credit is extended “to acquire, improve, or maintain [the] rental property that is or will be owner-occupied within the coming year” will be considered consumer credit. EGA closed the gap between what you may have considered an MBL because it may not have been treated as a “primary residence.” Now, under both regulations, these loans would be considered consumer loans requiring the TILA-RESPA Integrated Loan Disclosures (loan estimate and closing disclosure).
However, the Commentary to §1026.3(a)(4) provides that non-owner-occupied rental property, regardless of the number of housing units, is deemed to be for a business purpose. Prior to EGA, this was consistent with the MBL rule, which also classified such loans as MBLs (subject to the MBL cap) because it was not the primary residence of the member. Now, neither Regulation Z nor the MBL rule will apply. I have seen it written that the advantage to this is credit unions can now write these as residential loans, as banks have done for small businesses, but these are not residential loans.
How should non-owner-occupied loans secured by a 1- to 4- family residential property used for investment purposes be classified in your credit union’s loan portfolio if they are not MBLs or commercial loans under the NCUA definitions, but classified as commercial loans under Regulation Z? How are these types of loans to be included in a policy or underwritten?
These types of loans resemble commercial loans rather than residential ones. We won’t know for sure what examiners will expect until NCUA does something to re-write either the definition of a commercial loan or the treatment of an MBL. Until then, examiners will likely see a lot of inconsistencies in credit union practices, with no clear guidance as to how these loans should be treated.
Veronica Madsen is CEO at ESTEE Compliance, LLC in the Detroit area. NOTE: The information and opinions provided on this blog are not intended to be legal advice. No attorney-client relationship is formed, nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney that is licensed in your jurisdiction. No article may be republished without the express written permission of ESTEE Compliance, LLC. © 2018