Credit union regulator gives PPP loans 0% risk weight – and the loans won’t count against business lending cap

Loans made through the paycheck protection program will receive a 0% risk weight under regulatory risk-based net worth requirements, the federal credit union regulator said Wednesday, and will not be counted toward the credit union business lending cap.

The action by the National Credit Union Administration (NCUA) Board amends both the agency’s capital adequacy and member business loans and commercial lending regulations. The board took the action Wednesday by notation vote, according to a release from NCUA.

NCUA noted that last month’s Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – which created the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) – requires that PPP loans made by federally insured credit unions receive a 0% risk weighting under the agency’s risk-based capital requirements.

The agency also said that under a conforming change to the definition of a commercial loan under the agency’s member business loans and commercial lending rule, the interim final rule excludes PPP loans from the definition of a commercial loan “because the unique nature of these loans mitigates the need for enhanced commercial underwriting.”

The PPP is intended to provide low-interest loans to businesses to help them ensure they may continue to meet their payrolls during the economic chaos rendered by the coronavirus crisis. Under the provisions of the program, the loans may become grants if borrowers keep all of their employees, rather than lay them off (or close the business’s doors).

The credit union regulator also noted that the interim final rule allows that, if a loan is pledged as collateral for a non-recourse loan provided through the Federal Reserve System’s PPP Lending Facility (PPPLF), the covered loan can be excluded from a credit union’s calculation of total assets for the purpose of calculating its net worth ratio. “This ensures that credit unions can neutralize the regulatory capital effects of PPP loans pledged to the facility,” the agency said.

(The PPP Facility was set up by the Fed April 6 to extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.)

NCUA Board Approves Changes to Capital; Business Lending Regulations

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