| (G) loan documentation standards including enabling
the credit union to make informed lending decisions and assess risk,
as necessary, on an ongoing basis; identifying the purpose of each
loan and source(s) of repayment; assessing the ability of each borrower
to repay the indebtedness in a timely manner; ensuring that any claim
against a borrower is legally enforceable; and demonstrating appropriate
administration and monitoring of each loan.
(2) Qualified Staff. A credit union must ensure that
it is appropriately staffed with qualified personnel with relevant
and necessary expertise and experience for the types of commercial
lending in which the credit union is engaged, including appropriate
experience in underwriting, processing, overseeing and evaluating
the performance of a commercial loan portfolio, including rating and
quantifying risk through a credit risk rating system and collections
and loss mitigation activities for the types of commercial lending
in which the credit union is engaged. At a minimum, a credit union
making, purchasing, or holding any commercial loans must internally
have a senior management employee that has a thorough understanding
of the role of commercial lending in the credit union's overall business
model and establish risk management processes and controls necessary
to safely conduct commercial lending as provided by subsection (d)
of this section.
(3) Use of Third-Party Experience. A third party may
provide the requisite expertise and experience necessary for a credit
union to safely conduct commercial lending if:
(A) the third party has no affiliation or contractual
relationship with the borrower;
(B) the third party is independent from the commercial
loan transaction and does not have a participation interest in a loan
or an interest in any collateral securing a loan that the third party
is responsible for reviewing, or an expectation of receiving compensation
of any sort that is contingent on the closing of the loan, with the
following exceptions:
(i) the third party may provide a service to the credit
union that is related to the transaction, such as loan servicing;
(ii) the third party may provide the requisite experience
to a credit union and purchase a loan or a participation interest
in a loan originated by the credit union that the third party reviewed;
and
(iii) the third party is a credit union service organization
and the credit union has a controlling financial interest in the credit
union service organization as determined under generally accepted
accounting principles.
(C) the actual decision to grant a commercial loan
resides with the credit union; and
(D) qualified credit union staff exercise ongoing oversight
over the third party by regularly evaluating the quality of any work
the third party performs for the credit union.
(4) De Minimis Exception. The responsibilities and
operational requirements described in paragraphs (1) and (2) of this
subsection do not apply to a credit union if it meets all of the following
conditions:
(A) the credit union's total assets are less than $250
million;
(B) the credit union's aggregate amount of outstanding
commercial loan balances (including any unfunded commitments, any
outstanding commercial loan balances and unfunded commitments of participations
sold, and any outstanding commercial loan balances and unfunded commitments
sold and serviced by the credit union) total less than fifteen (15)
percent of the credit union's net worth; and
(C) in a given calendar year, the amount of originated
and sold commercial loans and the amount of originated and sold commercial
loans the credit union does not continue to service, total fifteen
(15) percent or less of the credit union's net worth.
(D) A credit union that relies on this de minimis exception
is prohibited from engaging in any acts or practices that have the
effect of evading the requirements of this subsection.
(d) Commercial Loan Risk Management Systems.
(1) Risk Management Processes. A credit union's risk
management process must be commensurate with the size, scope and complexity
of the credit union's commercial lending activities and borrowing
relationships. The processes must, at a minimum, address the following:
(A) use of loan covenants, if appropriate, including
frequency of borrower and guarantor financial reporting;
(B) periodic loan review, consistent with loan covenants
and sufficient to conduct portfolio risk management, which, based
upon current market conditions and trends, loan risk, and collateral
conditions, must include a periodic reevaluation of the value and
marketability of any collateral, and an updated loan-to-value ratio
for collateral calculation;
(C) a credit risk rating system under paragraph (2)
of this subsection; and
(D) a process to identify, report, and monitor commercial
loans that are approved by the credit union as exceptions to the credit
union's loan policies.
(2) Credit Risk Rating System. The credit risk rating
system must be a formal process that identifies and assigns a relative
credit risk rating to each commercial loan in a credit union's portfolio,
using ordinal ratings to represent the degree of risk. The credit
risk score must be determined through an evaluation of quantitative
factors based on the financial performance of each commercial loan
and qualitative factors based on the credit union's management, operational,
market, and business environment factors. A credit risk rating must
be assigned to each commercial loan at the inception of the loan.
A credit risk rating must be reviewed as frequently as necessary to
satisfy the credit union's risk monitoring and reporting policies,
and to ensure adequate reserves as required by generally accepted
accounting principles.
(3) Independent Review. Periodic independent reviews
should be conducted by a person who is both qualified to conduct such
a review and independent of the function being reviewed. The review
should provide an objective assessment of the overall commercial loan
portfolio quality and verify the accuracy of ratings and the operational
effectiveness of the credit union's risk management processes. A credit
union is not required to hire an outside third party to conduct this
independent review, if it can be done in-house by a competent person
that is considered unconnected to the function being reviewed.
(e) Collateral and Security for Commercial Loans.
(1) Collateral. A commercial loan must be secured by
collateral commensurate with the level of risk associated with the
size and type of the commercial loan. The collateral must be sufficient
to ensure the credit union is protected by a prudent loan-to-value
ratio for collateral along with appropriate risk sharing with the
borrower and principal(s). A credit union making an unsecured commercial
loan must determine and document in the loan file that mitigating
factors sufficiently offset the relevant risk of making an unsecured
loan.
(2) Personal Guarantees. A credit union that does not
require the full and unconditional personal guarantee from all principals
of the borrower who have a controlling interest, as defined by subsection
(a)(3) of this section, in the borrower must determine and document
in the loan file that mitigating factors sufficiently offset the relevant
risk.
(f) Construction and Development Loans.
(1) Terms. In this subsection:
(A) "construction or development loan" means any financing
arrangement to enable the borrower to acquire property or rights to
property, including land or structures, with the intent to construct
or renovate an income producing property, such as residential housing
for rental or sale, or a commercial building, that may be used for
commercial, agricultural, industrial, or other similar purposes. It
also means a financing arrangement for the construction, major expansion
or renovation of the property types referenced in this subsection.
The collateral valuation for securing a construction or development
loan depends on the satisfactory completion of the proposed construction
or renovation where the loan proceeds are disbursed in increments
as the work is completed. A loan to finance maintenance, repairs,
or other improvements to an existing income-producing property that
does not change the property's use or does not materially impact the
property is not a construction or development loan.
(B) "cost to complete" means the sum of all qualifying
costs necessary to complete a construction project and documented
in an approved construction budget. Qualifying costs generally include
on- or off-site improvements; building construction; other reasonable
and customary costs paid to construct or improve a project, including
a general contractor's fees; other expenses normally included in a
construction contract such as bonding and contractor insurance; the
value of the land, determined as the sum of the cost of any improvements
to the land and the lesser of appraised market value or purchase price;
interest as provided by this subparagraph; project costs as provided
by this subparagraph; a Cont'd... |
