Understanding MBL Regulations


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Understanding MBL Regulations

  1. 1. UNDERSTANDING MBL REGULATIONS Presented by Carol Wakefield, Consultant
  2. 2. Agenda <ul><li>NCUA Regulations </li></ul><ul><li>State DFI Regulations </li></ul><ul><li>Other Rules & Regulations </li></ul><ul><li>Best Practices </li></ul>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. 3. NCUA Rules <ul><li>Member Business Loans 723.1-21 </li></ul><ul><li>Loans and Lines of Credit to Members 701.21 </li></ul><ul><ul><li>C-4 15 year maturity </li></ul></ul><ul><li>Loan participation 701.22 </li></ul><ul><li>Appraisals 722 </li></ul><ul><li>Credit Union Service Organizations 712 </li></ul>
  4. 4. Other Rules & Regulations <ul><li>Federal Credit Union Act </li></ul><ul><li>UCC Title 9 </li></ul><ul><li>State DFI Rules and Regulations </li></ul><ul><li>Bank Secrecy Act </li></ul><ul><li>Note: Consumer regulations do not apply to business loans. </li></ul>
  5. 5. NCUA 723.1 What is an MBL <ul><li>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. </li></ul>“ I’m happy to give you innovative thinking. What are the guidelines?”
  6. 6. These Loans are Not MBL <ul><li>Loans fully secured by a lien on an owner occupied 1-4-unit dwelling </li></ul><ul><li>Loans fully secured by Deposits in CU </li></ul><ul><li>Loans whose aggregate amount is less than $50,000 (for reporting purposes) </li></ul><ul><li>Loans guaranteed by an agency of the federal, state or local government. </li></ul>
  7. 7. What Type of Loans? <ul><li>The type of business loans you can make </li></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Letters of Credit </li></ul></ul><ul><ul><ul><li>Stand-by </li></ul></ul></ul><ul><ul><ul><li>Commercial </li></ul></ul></ul>“ Where’d you get that?”
  8. 8. These are MBL’s <ul><li>Unsecured Lines of Credit </li></ul><ul><li>Secured Lines of Credit </li></ul><ul><ul><li>Contracts and Accounts Receivable </li></ul></ul><ul><li>Secured Term Loans </li></ul><ul><ul><li>Real estate including income property and commercial property </li></ul></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Construction and Development </li></ul></ul><ul><ul><ul><li>25% minimum equity in project </li></ul></ul></ul><ul><ul><ul><li>Onsite, written inspection with pre-approved draw schedule </li></ul></ul></ul><ul><ul><ul><li>Notice of Completion </li></ul></ul></ul>
  9. 9. Rule 723.2 Prohibited <ul><li>Loans made to a compensated director </li></ul><ul><li>Loans to President, CEO or other Primary Officer of the Credit Union </li></ul>“ You know, maybe he’s not the small-business man he claims to be.”
  10. 10. Rule 723.3 Construction & Development Loans <ul><li>Aggregate C & D loans not to exceed 15% of CU net worth. </li></ul><ul><li>Borrower must have 25% equity in project. </li></ul><ul><li>On-site written inspection prior to each draw of a preapproved draw schedule. </li></ul><ul><li>Notice of Completion </li></ul>
  11. 11. 723.5 Implementing MBL Program <ul><li>Directors adopt specific MBL policy. </li></ul><ul><li>To be reviewed annually </li></ul><ul><li>Experienced personnel in types of loans granted </li></ul><ul><ul><li>3 rd Party Consultant or CUSO </li></ul></ul>
  12. 12. How Experienced is Your Staff <ul><li>The qualifications and experience of personnel involved in making and administering business loans </li></ul>“ Any experience?”
  13. 13. The Loan Policy – 723.6 <ul><li>Primary means whereby Senior Management and Board guide lending activities </li></ul><ul><li>Written in compliance with NCUA Rule 723 and other Federal Rules & Regulations </li></ul><ul><li>Written in compliance with State Regulations </li></ul><ul><li>Includes requirement of analysis and documentation – applies to participation loans also </li></ul>
  14. 14. Definition of MBL Policy <ul><li>Quality control of major earning assets </li></ul><ul><li>Purpose to protect the integrity of credit union’s loan portfolio </li></ul><ul><li>Loan Procedures an accompanying document, provides details of process </li></ul>“ I’m looking to hire a C.F.O., anyone interested?”
  15. 15. Describe Your Trade Area <ul><li>Your trade area </li></ul><ul><li>Included in your By-Laws </li></ul>“ For Father’s Day, I’m giving my dad an hour of free tech support.”
  16. 16. Define Membership in Your CU <ul><li>Describe how the business qualifies to be a member </li></ul><ul><ul><li>SEG based </li></ul></ul><ul><ul><li>For Community based – books and records of the business in your community </li></ul></ul>
  17. 17. Maximum Loans in Each Category <ul><li>Percentage of unsecured loans in relation to CU assets </li></ul><ul><li>Percentage of loans secured by real estate to CU assets </li></ul><ul><li>Percentage of all other business loans </li></ul><ul><li>Percentage of miscellaneous business loans </li></ul>
  18. 18. Underwriting Due Diligence <ul><li>How you analyze and document the ability of the borrower to repay </li></ul><ul><li>Your underwriting process and due diligence standards </li></ul><ul><li>The need for periodic financial statements, credit reports, and other data </li></ul>“ Sorry – that’s the screen saver.”
  19. 19. Credit Analysis <ul><li>Periodic financial statements </li></ul><ul><ul><li>Balance sheet/income statement analysis </li></ul></ul><ul><ul><li>Cash flow analysis </li></ul></ul><ul><li>Credit reports </li></ul><ul><ul><li>Dun & Bradstreet </li></ul></ul><ul><li>Borrower’s history and experience </li></ul><ul><ul><li>Business plan </li></ul></ul><ul><li>Environmental impact assessment </li></ul><ul><li>Comparison to industry </li></ul>
  20. 20. Cash flow <ul><li>Calculated from personal tax return </li></ul><ul><ul><li>Cash flow ratio </li></ul></ul><ul><li>Calculated from business income and expense </li></ul><ul><ul><li>Debt service ratio </li></ul></ul><ul><li>Calculated from rent roll or P&L on property </li></ul><ul><ul><li>Total Income – Vacancy Factor – Total Expenses + Depreciation + Interest = Amount available for debt coverage. Divide by amount required for debt coverage. </li></ul></ul>
  21. 21. The Loan Application <ul><li>Business loan application signed by each person who is a party to the loan and liable for repayment </li></ul><ul><li>Last 3 years business financial statements </li></ul><ul><li>Current balance sheet </li></ul><ul><li>Year-to-date income statement </li></ul><ul><li>2-years minimum personal and business tax returns </li></ul><ul><li>Personal financial statement </li></ul><ul><li>A business plan </li></ul>
  22. 22. 723.7 Collateral & Security <ul><li>Maximum loan to value – 80% except autos. </li></ul><ul><li>Unsecured – maximum $100,000 to 1 borrower </li></ul><ul><li>Total unsecured loans not to exceed 10% of CU net worth </li></ul>“ This one allows release of your information to a sitcom.”
  23. 23. Collateral Requirements <ul><li>Appraisal Requirements </li></ul><ul><ul><li>Over $250,000 State Certified Appraiser </li></ul></ul><ul><li>Title and Insurance Requirements </li></ul><ul><ul><li>Real estate collateral </li></ul></ul><ul><ul><ul><li>1 st position D/T </li></ul></ul></ul><ul><ul><li>Non-real estate collateral </li></ul></ul><ul><ul><ul><li>UCC filings </li></ul></ul></ul>
  24. 24. NCUA 722 - Appraisals <ul><li>Title XI Financial Institutions Reform, Recovery and Enforcement Act of 1989 -FIRREA </li></ul><ul><li>Commercial property appraisals – State Certified Appraiser for all loans over $250,000 </li></ul><ul><li>Summary Report </li></ul>
  25. 25. Appraisals <ul><li>Must be addressed to the credit union as requesting party </li></ul><ul><li>3 value approach </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Comparable sales </li></ul></ul>“ It’s an O.K. phone, but it takes great pictures.”
  26. 26. Maximum to One Borrower <ul><li>The maximum amount -15% of CU Net Worth or $100,000 whichever is greater </li></ul>“ I lost all my Facebook friends after I asked them to lend me some money.”
  27. 27. 723.16 <ul><li>Aggregate limit of MBL is the lesser of 1.75x CU net worth or 12.25% of CU total assets. </li></ul><ul><li>Participation business loans are included in cap unless you get a waiver. </li></ul><ul><li>(Note how to obtain a waiver documented in 723) </li></ul>
  28. 28. 723.19 Record Keeping <ul><li>Identify MBL in your records and in the aggregate on your financial reports. </li></ul><ul><li>Separate accounting for MBLs </li></ul>“ Look, they say sit, you sit. They say roll over, you roll over. Where’s the problem?”
  29. 29. Who is Responsible <ul><li>Director’s Supervisory Committee </li></ul><ul><li>Internal Auditor </li></ul><ul><li>CEO </li></ul><ul><li>Senior Lender is the Loan Administrator </li></ul><ul><li>Individual Loan Officer </li></ul>“ Miss Durban, is there anything C.E.O.-ish for me to do?”
  30. 30. State Rules <ul><ul><li>Your State Website, Department of Financial Institutions </li></ul></ul><ul><ul><li>Trend is to follow NCUA 723 very closely </li></ul></ul>“ This one’s too hard to type on while I’m driving.”
  31. 31. Loans & Lines of Credit 701.21 <ul><li>Overdraft policy </li></ul><ul><ul><li>Set a $ cap </li></ul></ul><ul><ul><li>Time limit – maximum 45 days </li></ul></ul><ul><ul><li>Establish fee and interest rate </li></ul></ul><ul><li>Loan maturity maximum of 15 years </li></ul>“ There’s your problem.”
  32. 32. Interest Rates <ul><li>Interest rate floor and ceilings </li></ul><ul><li>Fixed rate - under what conditions </li></ul><ul><li>Loans attached to the Prime Rate </li></ul><ul><ul><li>Describe Index </li></ul></ul><ul><li>Points in lieu of fees </li></ul><ul><ul><li>Describe what points include </li></ul></ul>
  33. 33. Loan Participations 701.22 <ul><li>Maximum 10% of CU net worth to one borrower </li></ul><ul><li>Written master participation agreement </li></ul><ul><li>Originating lender to retain 10% of loan </li></ul><ul><li>Requires same underwriting standards. </li></ul><ul><li>Participate only in loans empowered to grant. </li></ul><ul><li>Board approval or investment committee prior to disbursement </li></ul>
  34. 34. Other Rules and Regulations <ul><li>UCC </li></ul><ul><ul><li>Federal law governing all collateral other than real estate </li></ul></ul><ul><li>GAAP and FASB </li></ul><ul><ul><li>Generally accepted accounting principals </li></ul></ul><ul><ul><li>Financial accounting standards board </li></ul></ul><ul><ul><ul><li>Independent board responsible for establishing and interpreting GAAP </li></ul></ul></ul>“ They moved my bowl.”
  35. 35. UCC <ul><li>Uniform Commercial Code </li></ul><ul><li>Article 9 – liens against or taking a security interest in business collateral </li></ul><ul><li>UCC filing in conjunction with the security Agreement – gives the lender all of the rights and protections under the UCC </li></ul>
  36. 36. 3 More <ul><li>Environmental Laws both State and Federal </li></ul><ul><li>Bank Secrecy Act </li></ul><ul><li>Small Business Administration </li></ul>“ Just because you work at a bad bank doesn’t make you a bad banker.”
  37. 37. SBA <ul><li>New: Small Business Lending Improvement Act of 2007 </li></ul><ul><ul><li>Enhanced 7(a) for rural areas with 85% guarantee for loans under $250,000 </li></ul></ul><ul><li>New: America’s Recovery Capital </li></ul><ul><ul><li>No interest, deferred payment lines of credit, for any business purpose </li></ul></ul><ul><ul><li>100% SBA guarantee </li></ul></ul>
  38. 38. Loan Approval Authority <ul><li>Board of Directors </li></ul><ul><li>CEO </li></ul><ul><li>Member Business Loan Committee </li></ul><ul><li>Senior MBL Lender </li></ul><ul><li>Member Business Loan Officer </li></ul>“ Interesting, but we can never forget that you got your MBA online.”
  39. 39. The Loan Committee <ul><li>Should review or approve all loan requests </li></ul><ul><li>The make up of the committee </li></ul><ul><li>The limit over which there must be Board approval </li></ul>“ Never, ever think outside the box.”
  40. 40. Risk Management <ul><li>Careful implementation of policy and procedures </li></ul><ul><li>Immediate recognition of problems </li></ul><ul><li>Loan Review </li></ul><ul><li>Audits </li></ul><ul><li>Examinations </li></ul>
  41. 41. MBL Procedures <ul><li>General loan procedures </li></ul><ul><li>Lending processes </li></ul><ul><ul><li>Loan monitoring </li></ul></ul><ul><ul><li>Servicing and follow-up </li></ul></ul><ul><ul><li>Collections </li></ul></ul><ul><ul><li>Workout </li></ul></ul>“ You have to know how to work the machine.”
  42. 42. Loan Grading System <ul><li>Must include </li></ul><ul><ul><li>Pass </li></ul></ul><ul><ul><li>Watch List </li></ul></ul><ul><ul><li>Sub Standard </li></ul></ul><ul><ul><li>Doubtful </li></ul></ul><ul><ul><li>Loss </li></ul></ul>“ First rule – what happens in accounting stays in accounting.”
  43. 43. Allowance for Loan Losses <ul><li>Reserve 10% for Sub Standard </li></ul><ul><li>Reserve 50% for Doubtful </li></ul><ul><li>Reserve 100% for Loss </li></ul>“ Well, get some new numbers or I’m getting a new numbers guy.”
  44. 44. Environmental Policy <ul><li>Loan Officer Responsibility </li></ul><ul><li>On Loans over $500,000 where contamination is suspected : </li></ul><ul><ul><li>Phase 1 Environmental Assessment </li></ul></ul><ul><ul><li>Phase 2 Environmental Assessment </li></ul></ul>
  45. 45. Best Practices <ul><li>Anything not specifically stated </li></ul><ul><li>Contributes to strength and integrity of loan portfolio </li></ul>“ Don’t embarrass me again, spell-checker.”
  46. 46. CUSOs 712 <ul><li>CU investment in CUSO limited to 1% of net worth. </li></ul><ul><li>List of activities and services CUSO may engage in. </li></ul><ul><li>Activities that are prohibited. </li></ul>
  47. 47. Additional Resource <ul><li>“ Credit Union Guide to Member Business Lending” published by Sheshunoff </li></ul><ul><li>www.sheshunoff.com /Credit Unions/Lending </li></ul><ul><li>NCUA website: www.ncua.gov/Rules </li></ul>
  48. 48. <ul><li>Carol Wakefield </li></ul><ul><li>310 699 5336 </li></ul><ul><li>[email_address] </li></ul>Thank You “ There – now I’ve taught you everything I know about splitting rocks.”