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Understanding MBL Regulations
 

Understanding MBL Regulations

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    Understanding MBL Regulations Understanding MBL Regulations Presentation Transcript

    • 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.com ALL 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
        • 3 rd 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 property
        • Total 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
          • 1 st 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 Sheshunoff
      • www.sheshunoff.com /Credit Unions/Lending
      • NCUA website: www.ncua.gov/Rules
      • Carol Wakefield
      • 310 699 5336
      • [email_address]
      Thank You “ There – now I’ve taught you everything I know about splitting rocks.”