Agency outlines rule changes to accommodate PPP loans from credit unions

Changes to various lending and risk-based capital requirements at credit unions under various emergency programs developed to combat the financial impact of the coronavirus crisis are outlined and summarized in a letter from the federal credit union regulator released Tuesday.

The National Credit Union Administration’s (NCUA) Letter to Credit Unions 20-CU-11 notes the changes the agency has made as a result of such new programs as the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) lending, the Federal Reserve’s PPP Lending Facility (PPPLF, developed to bolster the PPP program by providing term financing backed by PPP loans), including treatment of such lending in calculating net worth.

Among the key points:

PPP loans: The loans are not subject to the agency’s enhanced underwriting and monitoring requirements for commercial loans. In addition, the loans are not included in a credit union’s net member business loan calculation for purposes of determining compliance with the statutory member business loan limit.

PPP loans to officials: According to NCUA, the SBA’s rule on the loan program “appears to clarify that a credit union can extend a PPP loan to a small business owned, in part or in whole, by a member of the credit union’s board of directors if the small business meets PPP eligibility requirements, provided the director is not a key employee or officer of the credit union.” However, the agency also noted that credit unions considering making PPP loans to a business owned in part, or in whole, by a member of the board of directors should ensure the credit union complies with agency regulations, which place certain restrictions on loans and lines of credit to officials.

PPP loans to non-members: Federally chartered credit unions (FCUs), the agency noted, are prohibited by law from originating loans to non-members. “If a potential borrower is not a current member, the credit union must ensure the borrower becomes a member by the time of loan closing,” the agency stated.

Treatment of PPPLF-pledged loans for net worth ratios: A change to NCUA rules in calculating a credit union’s net worth ratio allows the financial institutions to exclude PPP loans pledged as collateral for a non-recourse loan that is provided as part of the PPPLF from the calculation of total assets for the purpose of calculating its net worth ratio. NCUA said that this change, in effect, neutralizes the regulatory capital effects of PPP loans pledged to the PPPLF. However, the agency noted that only PPP loans pledged to the PPPLF will be excluded from the net worth ratio calculation. “Unpledged PPP loans will still be included in total assets for purposes of calculating the net worth ratio, but all PPP loans will continue to receive a 0% risk weight for purposes of risk based net worth,” the agency stated.

NCUA LTCU 20-CU-11: Regulatory Treatment for Paycheck Protection Program Loans