| (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 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
Cont'd... |
