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UNDERSTANDING MBL REGULATIONS
Presented by Carol Wakefield, Consultant
Agenda NCUA Regulations State DFI
Regulations Other Rules &
Regulations Best Practices
Cartoons as seen in the
New Yorker Magazine http://wwwcartoonbank.comALL RIGHTS RESERVED
“These new regulations will fundamentally change the way we get around them.”
NCUA Rules Member Business Loans 723.1-21 Loans and Lines of Credit to
Members 701.21 C-4 15 year maturity
Loan participation 701.22 Appraisals 722 Credit Union Service Organizations
712
Other Rules & Regulations Federal Credit Union Act UCC Title 9 State DFI Rules and Regulations Bank Secrecy Act
Note: Consumer regulations do not apply to business loans.
NCUA 723.1 What is an MBL
Any loan, line of credit or letter of credit, the proceeds of which will be used for a commercial, corporate, business investment property or venture or agricultural purpose.
“I’m happy to give you innovative thinking. What are the guidelines?”
These Loans are Not MBL Loans fully secured by a lien on an
owner occupied 1-4-unit dwelling Loans fully secured by Deposits in CU Loans whose aggregate amount is less
than $50,000 (for reporting purposes) Loans guaranteed by an agency of the
federal, state or local government.
What Type of Loans? The type of
business loans you can make Loans Letters of Credit
Stand-by Commercial
“Where’d you get that?”
These are MBL’s Unsecured Lines of Credit Secured Lines of Credit
Contracts and Accounts Receivable Secured Term Loans
Real estate including income property and commercial property
Equipment Construction and Development
25% minimum equity in project Onsite, written inspection with pre-approved draw schedule Notice of Completion
Rule 723.2 Prohibited Loans made to a
compensated director
Loans to President, CEO or other Primary Officer of the Credit Union
“You know, maybe he’s not the small-business man he claims to be.”
Rule 723.3 Construction & Development Loans Aggregate C & D loans not to
exceed 15% of CU net worth. Borrower must have 25% equity in
project. On-site written inspection prior to
each draw of a preapproved draw schedule.
Notice of Completion
723.5 Implementing MBL Program
Directors adopt specific MBL policy.
To be reviewed annually Experienced personnel in types of
loans granted 3rd Party Consultant or CUSO
How Experienced is Your Staff
The qualifications and experience of personnel involved in making and administering business loans “Any experience?”
The Loan Policy – 723.6 Primary means whereby Senior Management
and Board guide lending activities Written in compliance with NCUA Rule 723
and other Federal Rules & Regulations Written in compliance with State Regulations Includes requirement of analysis and
documentation – applies to participation loans also
Definition of MBL Policy Quality control of
major earning assets Purpose to protect
the integrity of credit union’s loan portfolio
Loan Procedures an accompanying document, provides details of process “I’m looking to hire a
C.F.O., anyone interested?”
Describe Your Trade Area Your trade
area Included in
your By-Laws
“For Father’s Day, I’m giving my dad an hour of free tech support.”
Define Membership in Your CU Describe how the business
qualifies to be a member SEG based For Community based – books and
records of the business in your community
Maximum Loans in Each Category
Percentage of unsecured loans in relation to CU assets
Percentage of loans secured by real estate to CU assets
Percentage of all other business loans
Percentage of miscellaneous business loans
Underwriting Due Diligence How you analyze and
document the ability of the borrower to repay
Your underwriting process and due diligence standards
The need for periodic financial statements, credit reports, and other data
“Sorry – that’s the screen saver.”
Credit Analysis Periodic financial statements
Balance sheet/income statement analysis Cash flow analysis
Credit reports Dun & Bradstreet
Borrower’s history and experience Business plan
Environmental impact assessment Comparison to industry
Cash flow Calculated from personal tax return
Cash flow ratio Calculated from business income and
expense Debt service ratio
Calculated from rent roll or P&L on propertyTotal Income – Vacancy Factor – Total Expenses +
Depreciation + Interest = Amount available for debt coverage. Divide by amount required for debt coverage.
The Loan Application Business loan application signed by each
person who is a party to the loan and liable for repayment
Last 3 years business financial statements Current balance sheet Year-to-date income statement 2-years minimum personal and business tax
returns Personal financial statement A business plan
723.7 Collateral & Security Maximum loan to
value – 80% except autos.
Unsecured – maximum $100,000 to 1 borrower
Total unsecured loans not to exceed 10% of CU net worth
“This one allows release of your information to a sitcom.”
Collateral Requirements Appraisal Requirements
Over $250,000 State Certified Appraiser Title and Insurance Requirements
Real estate collateral 1st position D/T
Non-real estate collateral UCC filings
NCUA 722 - Appraisals Title XI Financial Institutions
Reform, Recovery and Enforcement Act of 1989 -FIRREA
Commercial property appraisals – State Certified Appraiser for all loans over $250,000
Summary Report
Appraisals Must be
addressed to the credit union as requesting party
3 value approach Cost Income Comparable sales
“It’s an O.K. phone, but it takes great pictures.”
Maximum to One Borrower The maximum
amount -15% of CU Net Worth or $100,000 whichever is greater
“I lost all my Facebook friends after I asked them to lend me some money.”
723.16
Aggregate limit of MBL is the lesser of 1.75x CU net worth or 12.25% of CU total assets.
Participation business loans are included in cap unless you get a waiver.
(Note how to obtain a waiver documented in 723)
723.19 Record Keeping Identify MBL in
your records and in the aggregate on your financial reports.
Separate accounting for MBLs
“Look, they say sit, you sit. They say roll over, you roll over. Where’s the problem?”
Who is Responsible Director’s
Supervisory Committee
Internal Auditor CEO Senior Lender is
the Loan Administrator
Individual Loan Officer
“Miss Durban, is there anything C.E.O.-ish for me to do?”
State Rules
Your State Website, Department of Financial Institutions
Trend is to follow NCUA 723 very closely “This one’s too hard to
type on while I’m driving.”
Loans & Lines of Credit 701.21
Overdraft policy Set a $ cap Time limit –
maximum 45 days Establish fee and
interest rate Loan maturity
maximum of 15 years
“There’s your problem.”
Interest Rates Interest rate floor and ceilings Fixed rate - under what conditions Loans attached to the Prime Rate
Describe Index Points in lieu of fees
Describe what points include
Loan Participations 701.22 Maximum 10% of CU net worth to one
borrower Written master participation agreement Originating lender to retain 10% of loan Requires same underwriting standards. Participate only in loans empowered to
grant. Board approval or investment committee
prior to disbursement
Other Rules and Regulations
UCC Federal law governing
all collateral other than real estate
GAAP and FASB Generally accepted
accounting principals Financial accounting
standards board Independent board responsible for
establishing and interpreting GAAP
“They moved my bowl.”
UCC Uniform Commercial Code Article 9 – liens against or taking a
security interest in business collateral
UCC filing in conjunction with the security Agreement – gives the lender all of the rights and protections under the UCC
3 More Environmental
Laws both State and Federal
Bank Secrecy Act Small Business
Administration “Just because you work at a bad bank doesn’t make you a bad banker.”
SBA New: Small Business Lending
Improvement Act of 2007 Enhanced 7(a) for rural areas with 85%
guarantee for loans under $250,000 New: America’s Recovery Capital
No interest, deferred payment lines of credit, for any business purpose
100% SBA guarantee
Loan Approval Authority Board of Directors CEO Member Business
Loan Committee Senior MBL Lender Member Business
Loan Officer
“Interesting, but we can never forget that you got your MBA online.”
The Loan Committee
Should review or approve all loan requests
The make up of the committee
The limit over which there must be Board approval “Never, ever think
outside the box.”
Risk Management Careful implementation of policy
and procedures Immediate recognition of problems Loan Review Audits Examinations
MBL Procedures General loan
procedures Lending
processes Loan monitoring Servicing and
follow-up Collections Workout
“You have to know how to work the machine.”
Loan Grading System Must include
Pass Watch List Sub
Standard Doubtful Loss
“First rule – what happens in accounting stays in accounting.”
Allowance for Loan Losses Reserve 10%
for Sub Standard
Reserve 50% for Doubtful
Reserve 100% for Loss
“Well, get some new numbers or I’m getting a new numbers guy.”
Environmental Policy Loan Officer Responsibility On Loans over $500,000 where
contamination is suspected: Phase 1 Environmental Assessment Phase 2 Environmental Assessment
Best Practices Anything not
specifically stated Contributes to
strength and integrity of loan portfolio
“Don’t embarrass me again, spell-checker.”
CUSOs 712 CU investment in CUSO limited to
1% of net worth. List of activities and services CUSO
may engage in. Activities that are prohibited.
Additional Resource“Credit Union Guide to Member Business
Lending” published by Sheshunoffwww.sheshunoff.com/Credit Unions/Lending
NCUA website: www.ncua.gov/Rules
Carol Wakefield 310 699 5336
Thank You
“There – now I’ve taught you everything I know about splitting rocks.”