Understanding MBL Regulations
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Understanding MBL Regulations Presentation Transcript

  • 1. UNDERSTANDING MBL REGULATIONS Presented by Carol Wakefield, Consultant
  • 2. Agenda
    • NCUA Regulations
    • State DFI Regulations
    • Other Rules & Regulations
    • Best Practices
    Cartoons as seen in the New Yorker Magazine http://wwwcartoonbank.com ALL RIGHTS RESERVED “ These new regulations will fundamentally change the way we get around them.”
  • 3. 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
  • 4. 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.
  • 5. 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?”
  • 6. 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.
  • 7. What Type of Loans?
    • The type of business loans you can make
      • Loans
      • Letters of Credit
        • Stand-by
        • Commercial
    “ Where’d you get that?”
  • 8. 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
  • 9. 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.”
  • 10. 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
  • 11. 723.5 Implementing MBL Program
    • Directors adopt specific MBL policy.
    • To be reviewed annually
    • Experienced personnel in types of loans granted
      • 3 rd Party Consultant or CUSO
  • 12. How Experienced is Your Staff
    • The qualifications and experience of personnel involved in making and administering business loans
    “ Any experience?”
  • 13. 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
  • 14. 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?”
  • 15. 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.”
  • 16. 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
  • 17. 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
  • 18. 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.”
  • 19. 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
  • 20. 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 property
      • Total Income – Vacancy Factor – Total Expenses + Depreciation + Interest = Amount available for debt coverage. Divide by amount required for debt coverage.
  • 21. 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
  • 22. 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.”
  • 23. Collateral Requirements
    • Appraisal Requirements
      • Over $250,000 State Certified Appraiser
    • Title and Insurance Requirements
      • Real estate collateral
        • 1 st position D/T
      • Non-real estate collateral
        • UCC filings
  • 24. 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
  • 25. 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.”
  • 26. 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.”
  • 27. 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)
  • 28. 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?”
  • 29. 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?”
  • 30. 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.”
  • 31. 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.”
  • 32. 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
  • 33. 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
  • 34. 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.”
  • 35. 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
  • 36. 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.”
  • 37. 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
  • 38. 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.”
  • 39. 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.”
  • 40. Risk Management
    • Careful implementation of policy and procedures
    • Immediate recognition of problems
    • Loan Review
    • Audits
    • Examinations
  • 41. MBL Procedures
    • General loan procedures
    • Lending processes
      • Loan monitoring
      • Servicing and follow-up
      • Collections
      • Workout
    “ You have to know how to work the machine.”
  • 42. Loan Grading System
    • Must include
      • Pass
      • Watch List
      • Sub Standard
      • Doubtful
      • Loss
    “ First rule – what happens in accounting stays in accounting.”
  • 43. 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.”
  • 44. Environmental Policy
    • Loan Officer Responsibility
    • On Loans over $500,000 where contamination is suspected :
      • Phase 1 Environmental Assessment
      • Phase 2 Environmental Assessment
  • 45. Best Practices
    • Anything not specifically stated
    • Contributes to strength and integrity of loan portfolio
    “ Don’t embarrass me again, spell-checker.”
  • 46. 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.
  • 47. Additional Resource
    • “ Credit Union Guide to Member Business Lending” published by Sheshunoff
    • www.sheshunoff.com /Credit Unions/Lending
    • NCUA website: www.ncua.gov/Rules
  • 48.
    • Carol Wakefield
    • 310 699 5336
    • [email_address]
    Thank You “ There – now I’ve taught you everything I know about splitting rocks.”