Removing the Member Business Lending Cap Barrier: Exemption Pathways for Credit Unions Ready to Grow

The member business lending (MBL) cap remains one of the most cited regulatory frustrations in the credit union industry. Under Section 723.8 of NCUA regulations, a federally insured credit union's aggregate net member business loan balance is capped at the lesser of 1.75 times its net worth or 12.25% of total assets. For credit unions that have elected into the Complex Credit Union Leverage Ratio (CCULR), the cap rises to 15.75% of assets, but a low net worth ratio still drags it lower for everyone else.

While legislative efforts to raise the cap have circulated since 2010, only a small fraction of credit unions sit close enough to the ceiling for that fight to matter. The more practical question is how to operate as if the cap were not there. NCUA's own statutory exemptions, paired with a recent precedent shift on de novo charters, offer three concrete paths to do exactly that.

In this article, we'll cover:

• How the MBL cap works and what is excluded from it
• Why a Low-Income Designation effectively eliminates the cap
• How CDFI Certification delivers the same exemption while opening grant funding
• A newly available de novo charter strategy for permanent exemption
• Considerations for credit unions weighing each path
• The MBL Cap and Its Exemptions

Section 723.8 defines which loans count toward the aggregate limit and which do not. Loans fully insured or guaranteed by a federal or state agency, non-member commercial loans and participations, and loans fully secured by a 1- to 4-family dwelling are excluded from the calculation. Other business-purpose loans are also kept off the books when fully backed by shares or deposits or when the remaining balance falls under $50,000.

Statutory exemptions go further. According to 723.8(d), a federally insured credit union is exempt from the aggregate MBL limit if it holds a Low-Income Designation, participates in the CDFI program, was chartered for the purpose of making member business loans, or had a history of primarily making commercial loans as of the date of enactment of the Credit Union Membership Access Act of 1998. The pre-1998 exemption is permanent. The others can be retained or lost depending on how a credit union manages its designation.

Strategy 1: Obtain a Low-Income Designation

A Low-Income Designation (LID) is the most accessible route around the cap. Once a credit union qualifies, the MBL cap effectively disappears. Qualification typically happens during a regularly scheduled NCUA exam, where a credit union's field of membership is compared against census tract data to determine whether more than 50% of members fall within the low-income definition.

Beyond lifting the business lending cap, LID gives credit unions the ability to accept secondary capital that counts toward their net worth ratio, raise non-member deposits up to the greater of $3 million or 50% of total shares, and tap into Community Development Revolving Loan Fund (CDRLF) grants and low-cost loans through NCUA. Federal community charters can also expand membership through associational paths, including volunteers and association participants.

Three routes to LID exist. The most common is AIRES data analysis, which matches member data to LID geographies. Federal community charters can use a presumed low-income community pathway based on total potential membership. A select few qualify through loan portfolio analysis, demonstrating that a majority of lending serves low-income borrowers. CUCollaborate has guided clients to a 100% success rate in LID designations, with 30 designations achieved since 2020 and 46 active LID clients in 2024.

Strategy 2: Pursue CDFI Certification

Community Development Financial Institution (CDFI) Certification provides the same MBL cap exemption as LID, with the added benefit of unlocking CDFI Fund grants for technology, infrastructure, operational efficiency, and lending expansion. CUCollaborate clients have secured more than $27 million in CDFI grants with a 65% win rate, well above industry norms.

Certification is not a one-time achievement. It requires meeting a 60% Target Market lending threshold, satisfying Target Market accountability requirements, providing development services, and submitting annual data reporting. Credit unions can drift below the threshold without realizing it, which puts certification at risk and, by extension, the MBL exemption that comes with it.

One often overlooked compliance lever is the Custom Investment Area. Many credit unions appear to fall below the 60% Target Market lending requirement because lending in certain census tracts does not qualify under standard Investment Area definitions. By defining a geographically contiguous Custom Investment Area that meets the CDFI Fund's economic distress criteria at the aggregate level, loans in previously non-qualifying tracts can be included in the Target Market calculation. That single optimization can move a credit union above the 60% threshold and stabilize its certification status.

Strategy 3: Charter a De Novo Credit Union for Business Lending

The third path is the most permanent. CUCollaborate recently appealed to the NCUA board and secured a reversal of long-standing precedent around the MBL cap exemption for credit unions chartered for the purpose of making member business loans. NCUA had previously interpreted that exemption to apply only to credit unions that were already over the cap when the rule came into effect. Now, NCUA agrees that a credit union chartered for the purpose of business lending is exempt from the cap as a function of its charter.

That changes the strategic math. When chartering a new credit union, leaders can specify that it is being chartered for the purpose of business lending. Once granted, the exemption is permanent and cannot be lost the way LID or CDFI status can. A credit union pursuing this path could run business loans through a new de novo institution or even merge an existing credit union into the new charter to inherit the exemption.

This is not a small project. For most credit unions, retaining LID or CDFI status will be easier and less expensive than chartering a new institution. But for credit unions whose long-term business lending strategy demands certainty, the de novo path is the only way to secure a permanent exemption that does not depend on annual compliance metrics or examiner findings.

Beyond the Cap: Tactical Workarounds

Even credit unions that are not ready to pursue exemption can stretch their available cap room through portfolio management. Loan participations let a credit union sell off portions of commercial loans while maintaining the member relationship and earning servicing fees. Federal credit unions must retain 10% of any participation sold, and state-chartered credit unions must retain 5%.

Referral relationships are another option for credit unions that cannot retain even the required regulatory portion. By partnering with other credit unions or alternative lenders, a credit union can avoid declining a member's loan request, earn a referral fee, and capture the deposits of the business. These tactics extend runway, but they do not solve the underlying constraint.

Choosing the Right Path for Your Credit Union

Each strategy carries different trade-offs:

The Low-Income Designation is the fastest path for credit unions whose membership demographics support the designation. It also unlocks secondary capital, non-member deposits, and CDRLF grant access. The exemption can be lost if the credit union no longer meets the membership composition requirement.

CDFI Certification is the right fit for credit unions ready to commit to ongoing Target Market reporting and accountability requirements. It pairs the MBL exemption with substantial grant opportunity but requires consistent compliance management.

De novo chartering for business lending is the most resource intensive, but it produces a permanent exemption that does not depend on annual metrics or examiner discretion.

Most credit unions will find that LID or CDFI gets them where they need to go. The de novo strategy is reserved for situations where business lending is central enough to the institution's strategy that a permanent, charter-level exemption justifies the effort.

Final Thoughts

Raising the statutory MBL cap is unlikely to happen quickly, and even if it did, the increase would only matter for the small number of credit unions already pressing against it. The more productive conversation is about exemption pathways that already exist in regulation and that, with the right approach, can be put to work today.

CUCollaborate helps credit unions evaluate which path fits their charter, membership, and strategic goals, whether that means securing LID, building toward CDFI Certification, or exploring a de novo charter for permanent exemption. If business lending is a growth lever you want to pull harder, let's start the conversation.