| contingency account to fund unanticipated
overruns; and other development costs such as fees and related pre-development
expenses. Interest expense is a qualifying cost only to the extent
it is included in the construction budget and is calculated based
on the projected changes in the loan balance up to the expected "as-complete"
date for owner-occupied non-income-producing commercial real property
or the "as stabilized" date for income-producing real estate. Project
costs for related parties, such as developer fees, leasing expenses,
brokerage commissions and management fees, are included in qualifying
costs only if reasonable in comparison to the cost of similar services
from a third party. Qualifying costs exclude interest or preferred
returns payable to equity partners or subordinated debt holders, the
developer's general corporate overhead, and selling costs to be funded
out of sales proceeds such as brokerage commissions and other closing
costs.
(C) "prospective market value" means the market value
opinion determined by an independent appraiser in compliance with
the relevant standards set forth in the Uniform Standards of Professional
Appraisal Practice. Prospective value opinions are intended to reflect
the current expectations and perceptions of market participants, based
on available data. Two (2) prospective value opinions may be required
to reflect the time frame during which development, construction,
or occupancy occur. The prospective market value "as-completed" reflects
the real property's market value as of the time that development is
to be completed. The prospective market value "as-stabilized" reflects
the real property's market value as of the time the real property
is projected to achieve stabilized occupancy. For an income producing
property, stabilized occupancy is the occupancy level that a property
is expected to achieve after the real property is exposed to the market
for lease over a reasonable period of time and at comparable terms
and conditions to other similar real properties.
(2) Policies. A credit union that elects to make a
construction or development loan must ensure that its commercial loan
policies under subsection (c) of this section meets the following
conditions:
(A) qualified personnel representing the interest of
the credit union must conduct a review and approval of any line item
construction budget prior to closing the loan;
(B) a requisition and loan disbursement process approved
by the credit union is established;
(C) release or disbursement of loan funds occurs only
after on-site inspections which are documented in a written report
by qualified personnel who represents the interest of the credit union
and certifies that the work requisitioned for payment has been satisfactorily
completed, and the remaining funds available to be disbursed from
the construction and development loan is sufficient to complete the
project; and
(D) each loan disbursement is subject to confirmation
that no intervening liens have been filed.
(3) Establishing Collateral Values. The current collateral
value must be established by prudent and accepted commercial loan
practices and comply with all regulatory requirements. The collateral
value depends on the satisfactory completion of the proposed construction
or renovation where the loan proceeds are disbursed in increments
as the work is completed and is the lesser of the project's cost to
complete or its prospective market value.
(4) Controls and Processes for Loan Advances. A credit
union that elects to make a construction and development loan must
have effective commercial loan control procedures in place to ensure
sound loan advances and that liens are paid and released in a timely
manner. Effective controls should include segregation of duties, delegation
of duties to appropriate qualified personnel, and dual approval of
loan disbursements.
(g) Commercial Loan Prohibitions.
(1) Ineligible borrowers. A credit union may not grant
a commercial loan to the following:
(A) any senior management employee directly or indirectly
involved in the credit union's commercial loan underwriting, servicing,
and collection process, and any of their immediate family members;
(B) any person meeting the requirements of subsection
(i) of this section concerning aggregations and attribution for commercial
loans, with respect to persons identified in subparagraph (A) of this
paragraph; or
(C) any director, unless the credit union's board of
directors approves granting the loan and the borrowing director was
recused from the board's decision making process.
(2) Equity Agreements and Joint Ventures. A credit
union may not grant a commercial loan if any additional income received
by the credit union or its senior management employees is tied to
the profit or sale of any business or commercial endeavor that benefits
from the proceeds of the loan.
(3) Fees. No director, committee member, volunteer
official, or senior management employee of a credit union, or immediate
family member of such director, committee member, volunteer official,
or senior management employee, may receive, directly or indirectly,
any commission, fee, or other compensation in connection with any
commercial loan made by the credit union. Employees, other than senior
management, may be partially compensated on a commission or performance
based incentive, provided the compensation is governed by a written
policy and internal controls established by the board of directors.
The board must review the policies and controls at least annually
to ensure that such compensation is not excessive or expose the credit
union to inappropriate risks that could lead to material financial
loss. Loan origination employees are prohibited from receiving, in
connection with any commercial loan made by the credit union, any
compensation from any source other than the credit union. For the
purposes of this paragraph, compensation includes non-monetary items
and anything reasonably regarded as pecuniary gain or pecuniary advantage,
including a benefit to any other person in whose welfare the beneficiary
has a direct and substantial interest, but compensation does not include
nonmonetary items of nominal value.
(h) Aggregate Member Business Loan Limit.
(1) Limits. The aggregate limit on a 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 12 U.S.C. Section 1790d(c)(1)(A). For purposes
of this calculation, member business loan means any commercial loan,
except that the following commercial loans are not member business
loans and are not counted toward the aggregate limit on member business
loans:
(A) any loan in which a federal or state agency (or
its political subdivision) fully insures repayment, fully guarantees
repayment, or provides an advance commitment to purchase the loan
in full;
(B) any non-member commercial loan or non-member participation
interest in a commercial loan made by another lender, provided the
credit union acquired the non-member loans or participation interest
in compliance with applicable laws and the credit union is not, in
conjunction with one or more other credit unions, trading member business
loans to circumvent the aggregate limit under this subsection; and
(C) any loan that is fully secured by a lien on a 1-
to 4-family dwelling.
(2) Exceptions. Any loan secured by a lien on a vehicle
manufactured for household use that will be used for commercial, corporate,
or other business investment property or venture, and any other loan
for an agricultural purpose are not commercial loans (if the outstanding
aggregate net member business loan balance is $50,000 or greater),
and must be counted toward the aggregate limit on a credit union's
member business loans under this subsection.
(3) Exemption. A credit union that has a federal low-income
designation, or participates in the federal Community Development
Financial Institution program, or was chartered for the purpose of
making member business loans, or which as of the date of the Credit
Union Membership Access Act of 1998 had a history of primarily making
commercial loans, is exempt from compliance with the aggregate member
business loan limits in paragraph (1) of this subsection.
(4) Method of Calculation for Net Member Business Loan
Balance. For the purposes of NCUA form 5300 reporting (call report),
a credit union's net member business loan balance is determined by
calculating the sum of the outstanding loan balance plus any unfunded
commitments and reducing that sum by any portion of the loan that
is: secured by shares in the credit union, by shares or deposits in
other financial institutions, or by a lien on a borrower's primary
residence; insured or guaranteed by any agency of the federal government,
a state, or any political subdivision of a state; or subject to an
advance commitment to purchase by any agency of the federal government,
a state, or any political subdivision of a state; or sold as a participation
interest without recourse and qualifying for true sales accounting
under generally accepted accounting principles.
Cont'd... |
