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

Carolwakefield@verizon.net

Thank You

“There – now I’ve taught you everything I know about splitting rocks.”