On April 27, the National Credit Union Association (“NCUA”) issued an interim final rule updating several existing regulations (12 C.F.R. Parts 702 and 723) to conform to changes made by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Paycheck Protection Program (“PPP”). Specifically, the interim final rule amends the definitions of “low-risk assets” and “total assets” for purposes of calculating risk–based net worth requirements for certain credit unions. The interim final rule also clarifies the definition of “commercial loan” for purposes of determining member business loan and commercial lending requirements.
To reflect the PPP’s requirement that PPP loans receive a zero percent risk weight, the interim final rule amends 12 CFR § 702.104 to explicitly state that PPP loans are low-risk assets (i.e., cash on hand) that receive a zero percent risk weight under NCUA’s risk-based capital rules.
In addition, the interim final rule amends the definition of “total assets” in 12 CFR § 702.2 to allow credit unions to negate any regulatory capital effects of PPP loans pledged to a Federal Reserve Bank as part of the PPP Lending Facility. The PPP Lending Facility allows Federal Reserve Banks to extend non-recourse loans to eligible financial institutions to fund PPP loans. Due to the non-recourse nature of the Federal Reserve’s extension of credit, NCUA believes credit unions are not exposed to credit or market risks for potential default of qualifying PPP loans.
Finally, the interim final rule amends 12 CFR § 723.2 to exclude PPP loans from the definition of “commercial loans.” This change effectively prevents credit unions from triggering additional commercial lending program requirements and limits on the amount of member business loans that otherwise would not be triggered if they did not make PPP loans.
Overall, the interim final rule makes it easier for credit unions to participate as lenders in the PPP. Although the rule went into effect on April 27, NCUA is considering comments submitted before May 27, 2020.