Commercial Lending and Member Business Lending

Many credit unions are involved in business lending whether it’s a vehicle loan for a local small business owner or a fleet of vehicles, or even other types of business loans such as commercial real estate.  We occasionally get questions about the statutory cap and the factors identified in NCUA’s regulations for determining whether a vehicle loan should be classified as a commercial loan or a member business loan.

Statutory Limits 

The member business lending statutory cap is set forth in §723.8 of NCUA’s regulations and provides as follows:

“The aggregate limit on a federally insured credit union's net member business loan balances is the lesser of 1.75 times the actual net worth of the credit union, or 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of the Federal Credit Union Act”

This means that a federally insured credit union’s total net business loan balances may not exceed 1.75 times the credit union’s actual net worth or 12.25% of assets.

Commercial Loans vs Member Business Loans

The definition of commercial loan is set forth under §723.2, and is:

“any loan, line of credit, or letter of credit (including any unfunded commitments), and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for personal expenditure purposes.”

There are several types of loans that are not treated as commercial loans and are specifically excluded within the commercial loan definition even if they involve lending to a business. These exclusions to the commercial loan definition include loans secured by a 1 to 4 family residential property, loans secured by vehicles made for household use, business loans to a borrower less than $50,000, loans fully secured by shares or deposits, loans made between credit unions, loans to a credit union service organization (CUSO), and loans issued under the Paycheck Protection Program administered by the Small Business Administration.

For purposes of this blog let’s focus on the exclusion above pertaining to “loans secured by a vehicle manufactured” for household use.” NCUA specifically defines it under §723.2 - it is as follows:

“Loan secured by a vehicle manufactured for household use means a loan that, at origination, is secured wholly or substantially by a lien on a new and used passenger car and other vehicle such as a minivan, sport-utility vehicle, pickup truck, and similar light truck or heavy-duty truck generally manufactured for personal, family, or household use and not used as a fleet vehicle or to carry fare-paying passengers, for which the lien is central to the extension of credit. A lien is central to the extension of credit if the borrower would not have extended credit in the same amount or on terms as favorable without the lien. A loan is wholly or substantially secured by a lien on a vehicle manufactured for household use if the estimated value of the collateral at origination (after deducting any senior liens held by others) is greater than 50 percent of the principal amount of the loan.”

So, “a vehicle manufactured for household use” refers to passenger vehicles - such as cars, minivans, sport utility vehicles and pickup trucks – generally manufactured for personal, family, or household transportation and are not used as fleet vehicles or to transport fare paying passengers. Therefore, loans that are secured by such vehicles are excluded from the definition of a commercial loan but may still qualify as member business loans and must be included in the statutory cap calculation.

For member business loans, there isn’t a standalone definition of the term “member business loan” in §723.2. However, for purposes of determining whether vehicles manufactured for household use qualify as member business loans, §723.8(c) provides the applicable guidance:

“Any loan secured by a vehicle manufactured for household use that will be used for a commercial, corporate, or other business investment property or venture, or agricultural purpose, is not a commercial loan but it is a member business loan (if the outstanding aggregate net member business loan balance is $50,000 or greater) and must be counted toward the aggregate limit on a federally insured credit union's member business loans.” (Emphasis added).

Therefore, it seems that even though such loans are excluded from the commercial loan definition they may still qualify as member business loans and must be included in the statutory cap – unless the credit union is already exempt from the statutory cap requirements (see §723.8(d)).

I hope this blog sheds a little more light on the vehicle exclusion in the commercial loan definition and how the nuances may impact whether a vehicle loan may or may not count toward the cap. As a resource, the commercial and member business loan section in NCUA online Examiner’s Guide is a great tool for untangling the complexities of business lending.