Current through August, 2024
Section 1 Authority, Scope and Purpose
This regulation is promulgated pursuant to
8 V.S.A. §§
30203 and
32401 for the purpose
of setting guidelines for credit unions to make member business loans. This
regulation provides the basis for a system of member business lending that is
consistent with safe and sound credit union practices. The objective of this
regulation is to ensure that member business loans are made in such a way as to
minimize the controllable risks inherent in this type of
lending.
Section 2
Definitions
As used in this regulation:
(1) "Associated member" means any member of
the credit union with a common ownership, investment, or other pecuniary
interest in the business or commercial endeavor for which the business loan is
being made.
(2) "Construction or
development loan" means a financing arrangement for acquiring property or
rights to property, including land or structures, with the intent to use it for
or convert it to income producing property such as residential housing for
rental or sale; commercial use; industrial use or similar uses. A construction
or development loan also includes a financing arrangement for the major
renovation or development of property already owned by the member that will
convert the property to income producing property, that will convert the use of
income producing property to a different use, or that is a major expansion of
its current use. A construction and development loan does not include a loan to
finance maintenance, repairs, or improvements to an existing income producing
property that does not change its use.
The following examples illustrate when a loan is or is not a
construction or development loan:
Example 1. If a member borrows money to repair a roof on a
barn on an existing farming operation, this is a member business loan but is
not a construction or development loan. A construction or development loan does
not include a loan for routine maintenance of a member's existing business or a
loan to enhance or expand a member's existing business unless those renovations
convert the property to a different use or are so major as to be considered the
equivalent of converting the use of the property.
Example 2. A loan to convert a movie theater into a
restaurant is a construction or development loan. A loan to convert a large
Victorian home used for residential purposes into a six-room inn also would be
a construction or development loan. In both instances, the loans are for the
purpose of converting the use of the properties. By contrast, a loan to repair
the roof or replace the carpet and wallpaper of an operating inn would not be a
construction or development loan as it neither converts the use of the
property, nor is so major a renovation to be considered the equivalent of
converting the use of the property.
Example 3. A loan to expand the parking lot of a small strip
shopping center would not be a construction or development loan, but a loan to
renovate the small strip shopping center into a mega-mall would be a
construction or development loan as it would be viewed as a major renovation
that converts the use of the property.
Example 4. A hotel with a fair market value of $ 10 million
borrows $ 1 million to build an exercise facility in the hotel to enhance the
property. The loan amount is 10% of the fair market value of the property. This
is not a construction or development loan. It is a member business loan to
improve or renovate an existing income producing property, but it is not so
major a renovation as to be considered the equivalent of converting the use of
the property. In another scenario, a hotel with a fair market value of $ 10
million borrows $ 5 million to build a luxury health spa on the hotel grounds.
The loan amount is 50% of the fair market value of the property. This is a
construction or development loan, even if the use of the property has not been
converted, as the renovation is so major as to be considered the equivalent of
converting the use of the property.
(3) "Loan-to-value ratio" means the aggregate
amount of all sums borrowed including outstanding balances plus any unfunded
commitment or line of credit from all sources on an item of collateral divided
by the market value of the collateral.
(4) "Member business loan" means any loan,
line of credit, or letter of credit, (including any unfunded commitments) the
proceeds of which will be used by the member for any of the following purposes:
(a) commercial;
(b) corporate;
(c) agricultural; or
(d) other business investment property or
venture;
A member business loan also includes any interest a credit
union obtains in a loan made by another lender where the proceeds of the loan
will be or are used by the member for any of the purposes described in (a) -
(d) above.
Provided however, the following shall not be considered a
member business loan for the purposes of this regulation:
(i) A loan that is fully secured by a lien on
a 1 to 4 unit dwelling that is the member's primary residence.
(ii) A loan that is fully secured by shares
in the credit union or by perfected security interests in federally insured
deposits in other financial institutions.
(iii) A loan, the repayment of which is fully
guaranteed or fully insured by the federal government or by the state of
Vermont or any of its political subdivisions. A binding advance commitment to
purchase a member business loan in full by any such entity shall be considered
a guarantee for the purposes of this paragraph.
(iv) One or more business purpose loans as
described in (a) - (d) above (excluding loans described in (i), (ii), or (iii)
of this subsection
4
) to a member or associated members, which in the aggregate do not exceed $
50,000.00. The entire amount of such a loan that exceeds $ 50,000.00, or the
entire amount of the loan that causes the aggregate amount to exceed $
50,000.00, is a member business loan.
For purposes of any risk based net worth calculation, once a
loan is classified as a member business loan it remains a member business loan
until the loan is paid in full or otherwise discharged.
(5) "Net worth" means
retained earnings at quarter end as determined under Generally Accepted
Accounting Principles. Retained earnings normally include undivided earnings,
regular reserves and any other appropriations designated by management or
regulatory authorities. Only undivided earnings and appropriations of undivided
earnings are included in net worth. For low income designated credit unions,
net worth also includes secondary capital accounts that are uninsured and
subordinate to all other claims, including claims of creditors, shareholders,
and the National Credit Union Share Insurance Fund ("NCUSIF"). For any credit
union, net worth does not include the allowance for loan and lease losses
account.
Section 3 Policy
Requirements
A credit union that engages in the business of making member
business loans shall adopt specific member business loan policies, which shall
be reviewed at least annually. The member business loan policies shall be
consistent with safe and sound practices and shall be appropriate to the size
of the credit union and the nature and scope of its operations.
The credit union must utilize the services of personnel with
qualifications and experience (minimum of 5 years) with the type of lending in
which the credit union will engage. The qualifications and experience must
provide the credit union sufficient expertise given the complexity and risk
exposure of the loans in which the credit union intends to engage. Credit
unions do not have to hire staff to meet the requirements of this section,
however, the credit union must ensure that the expertise is available. A credit
union can meet the experience requirement through various approaches. For
example, a credit union can use the services of a credit union service
organization ("CUSO"), an employee of another credit union, an independent
contractor, or other third parties. However, the actual decision to grant,
purchase, or participate in a loan must reside with the credit union.
The member business loan policies, at a minimum, shall
address all of the following areas:
(1) Types of business loans to be
made.
(2) Trade area.
(3) The maximum amount of credit union
assets, relative to credit union net worth, that will be invested in member
business loans.
(4) The maximum
amount of credit union assets, relative to the credit union net worth, that
will be invested in a given category or type of business.
(5) The maximum amount of credit union
assets, relative to credit union net worth, that will be invested in a given
category or type of member business loan.
(6) The maximum amount of credit union
assets, relative to credit union net worth, that will be loaned to any one
member or associated members, subject to Section
4
of this regulation.
(7) The
qualifications and experience of personnel (minimum of 5 years) involved in
making and administering member business loans.
(8) Collateral requirements, which must
include all of the following:
(a)
Loan-to-value (LTV) ratios. The maximum loan-to-value ratio for all liens must
not exceed 80%, unless the value in excess of 80% is covered through private
mortgage insurance or equivalent type of insurance, or insured, guaranteed, or
subject to advance commitment to purchase by an agency of the federal
government, an agency of a state or any of its political subdivisions, but in
no case may the ratio exceed 95%. The credit union may make vehicle loans
without complying with this loan to value ratio, provided the vehicle is a car,
van, pick-up truck, or sports utility vehicle and is not part of a fleet of
vehicles;
(b) Determination of
value;
(c) Determination of
ownership, including title search and UCC searches;
(d) Insurance requirements;
(e) Environmental impact
assessments;
(f) Steps to be taken
to secure various types of collateral, including obtaining proper corporate
resolutions and security agreements authorizing the pledge of business
assets.
(g) How often the credit
union will reevaluate the value and the marketability of the
collateral.
(9) Analysis
and documentation of the member's ability to repay the loan consistent with, at
a minimum, the following underwriting requirements:
(a) Present financial status based on
documentation supporting each request for an extension of credit or an increase
in an existing loan or line of credit, which shall address all of the
following:
(i) A balance sheet, or its
equivalent if a sole proprietorship;
(ii) An income statement, or its equivalent
if a sole proprietorship;
(iii) A
cash flow analysis;
(iv) Tax
returns for the two most recent years;
(v) Analysis of debt-to-income and
loan-to-value ratios;
(vi) Personal
guarantees of the principals;
(vii)
Current credit report of the business and principals; and
(viii) The periodic updating of financial
statements, tax returns, and other documentation.
(b) Analysis of the member's initial and
ongoing financial capacity to repay the debt, including the review of at least
2 years of pro-forma financial statements and cash flow projections.
(c) A feasibility analysis of the project
considering local economic conditions and comparative industry trends for the
type of venture involved.
(d)
Capacity of the member to repay from assets not related to the venture in case
of failure.
(e) Certification by
the appropriately designated loan officer or credit committee that the loan
under consideration meets all applicable credit union and statutory
requirements.
(10) The
interest rates and maturities of member business loans, which shall be
consistent with the purpose, security, and creditworthiness of the borrower and
sound lending policies;
(11)
General loan procedures which include:
(a)
loan monitoring;
(b) servicing and
follow-up; and
(c)
collections.
(12)
Requirements for personal liability and guarantees of principals.
(13) Identification, by position, of the
officials and senior management employees who are prohibited from receiving
member business loans which, at a minimum, shall include individuals who
perform the following functions regardless of the title given to such person:
the credit union's chief executive officer, any assistant chief executive
officers, the chief financial officer, and any associated member, immediate
family member or household member of such persons.
(14) Guidelines for the purchase and sale of
member business loans and loan participations, if the credit union engages in
that activity.
Section 4
Loans to One Borrower
Subject to the limitations set forth in Section 7 hereof, the
aggregate amount of outstanding member business loans (including any unfunded
commitments) to any one member or group of associated members shall not exceed
15% of the credit union's net worth or $ 100,000.00, whichever is higher. If
any portion of a member business loan is secured by shares in the credit union
or deposits in another financial institution, or is fully or partially insured
or guaranteed by, or subject to an advance commitment to purchase by, any
agency of the Federal government or of a state or any of its political
subdivisions, such portion shall not be used in calculating the 15% limit or
the $ 100,000.00 limit, whichever is higher.
Section 5 Small Business Administration and
US Department of Agriculture Rural Development Loan Programs
A credit union authorized to make member business loans that
makes a loan as part of a Small Business Administration guaranteed loan program
or as part of a U.S. Department of Agriculture Rural Development guaranteed
loan program with loan requirements that are less restrictive than those
required by this regulation may follow the loan requirements of the relevant
Small Business Administration or U.S. Department of Agriculture Rural
Development guaranteed loan program to the extent they are consistent with this
regulation. The collateral and security requirements of Section
3(8)(a)
and Section
6 do not
apply to member business loans made as part of a Small Business Administration
or as part of a U.S. Department of Agriculture Rural Development guaranteed
loan program.
Section 6
Construction Loans
Construction and development of commercial or residential
property are subject to the following additional requirements:
(1) The aggregate of all construction and
development loans must not exceed 15% of the credit union's net worth. To
determine the aggregate, a credit union may exclude any portion of a loan:
(a) Secured by shares in the credit
union;
(b) Secured by federally
insured deposits in another financial institution;
(c) Fully or partially insured or guaranteed
by any agency of the federal government, state, or its political
subdivisions;
(d) Subject to an
advance commitment to purchase by an agency of the federal government, state,
or its political subdivisions; or
(e) To finance the construction of a single
family residence if a prospective homeowner has contracted to purchase the
property.
(2) The member
must have a minimum of 25% equity interest in the project being financed. This
minimum equity requirement shall not apply in the case of a loan made to
finance the construction of a single-family residence if a prospective
homeowner has contracted to purchase the property, however, the collateral
requirements of Section
3(8)
shall apply.
(3) The funds may be
released only after on-site, written inspections by qualified personnel and
according to a preapproved draw schedule and any other conditions as set forth
in the loan documentation.
(4) The
credit union must not make any construction and development loans unless it
utilizes the services of an individual with at least five years of direct
experience in construction and development lending.
Section 7 Member Business Loans Aggregate
Limit
Unless the Commissioner gives his or her prior consent, the
aggregate limit of a credit union's outstanding member business loans
(including any unfunded commitments) shall be the lesser of 1.75 times the
credit union's net worth or 12.25% of the credit union's total assets. Loans
that are exempt from the definition of member business loans shall not be used
in calculating the aggregate loan limit.
A credit union may submit a request to the Commissioner to
exceed the above aggregate member business loan limitation. An exception to the
aggregate member business loan limitation is not effective until it is
specifically approved in writing by the Commissioner. In no event may the
aggregate member business loan limitation exceed any limitation establish by
state law, federal law, or by applicable regulations (including regulations and
limitations established by the National Credit Union Administration ("NCUA") or
any successor thereto).
The request to increase the credit union's aggregate member
business loan amount must include:
(1)
A copy of the credit union's member business loan policy;
(2) The higher limit sought;
(3) An explanation of the need to raise the
limit;
(4) Documentation supporting
the credit union's ability to manage the increased member business loan
activity;
(5) An analysis of the
credit union's prior expertise making member business loans, including, at a
minimum:
(a) The history of loan losses and
loan delinquency;
(b) Volume and
cyclical or seasonal patterns;
(c)
Diversification of loan portfolio;
(d) Concentrations of credit to any member or
group of associated members in excess of 15% of net worth;
(e) Underwriting standards and
practices;
(f) Types of loans
grouped by purpose and collateral;
(g) The qualifications and experience of
personnel responsible for underwriting and administering member business loans;
and
(h) Such additional information
as the Commissioner may request.
The Commissioner may approve or deny the request in his or
her sole discretion. Federal regulations may require the approval of the NCUA
or its successor in addition to the Commissioner's approval.
Section 8 Prohibitions,
Unsecured Loans
(1) A credit union may not
grant a member business loan if any additional income received by the credit
union or senior management employees is tied to the profit or sale of the
business or commercial endeavor for which the loan is made.
(2) A credit union shall not make unsecured
member business loans, except the following:
(a) An unsecured loan made by a credit union
where the loan and the credit union meet each of the following criteria:
(i) The aggregate of unsecured member
business loans to any one member or group of associated members does not exceed
$ 100,000.00 or 2.5% of the credit union's net worth, whichever is less;
and
(ii) The aggregate of all
unsecured member business loans under this subsection (b) does not exceed 10%
of the credit union's net worth;
and
(b) Credit card line of credit programs
offered to non-natural persons that are limited to routine purposes normally
made available under such programs
Section 9 Loan Purchases and Loan
Participations
Any loan purchased and any loan participation held by a
credit union that would constitute a member business loan if made to a member
shall be considered a member business loan for purposes of this regulation.
Such purchased loan or loan participation is subject to all of the requirements
and limitations of this regulation, including underwriting requirements,
individual loan limits, and aggregate loan limits.
Section 10 Allowance for Loan Loss Account
An allowance for member business loan losses account shall be
established in accordance with Generally Accepted Accounting
Principles.
Section 11
Commissioner Approval
A credit union shall obtain the Commissioner's written
approval prior to engaging in the business of making member business loans. The
Commissioner may condition such approval upon review of the following:
(1) The written loan policy adopted by the
board of the credit union;
(2)
Sample copies of all loan and security documents to be used by the credit union
in connection with member business loans, including, without limitation, copies
of notes, loan agreements, securities agreements, and form corporate
resolutions.
(3) Written member
business loan monitoring and collection procedures to be employed by the credit
union;
(4) The qualifications and
experience of credit union personnel involved in the approval, closing, and
administering of member business loans on behalf of the credit union.
(5) The credit union is well capitalized
under the prompt corrective action guidelines of the National Credit Union
Administration.
(6) Such additional
matters as the Commissioner deems relevant.
The Commissioner may restrict a credit union's member
business loan activity to certain products, types, or categories of member
business loans.
A credit union that has made business loans under an
authorization under this regulation and that is not, as of its most recent
quarterly call report, well capitalized, may not make any member business
loans, until such time as the credit union becomes well capitalized, as
reflected in a subsequent quarterly call report, and obtains the approval of
the Commissioner.
Section
12 Record Keeping Requirements
Member business loans must be separately identified in the
credit union's records, and in the aggregate on the credit union's financial
reports.
Section 13
Effective Date
This regulation is effective May 15, 2012.
Section 14 Severability
If any provision of this regulation, or the application of it
to any person or circumstance, is determined to be invalid by a court of
competent jurisdiction, such invalidity shall not affect other provisions of
this regulation which can be given effect without the invalid provision or
application, and to that end the provisions of this regulation are
severable.
