(2)(a) “Associated borrower” means any of the following:
1. Any person or entity with a shared ownership, investment or other pecuniary interest in a business or commercial endeavor with the borrower.
2. Any person or entity named as a borrower or debtor in a loan or extension of credit, including a drawer, endorser or guarantor.
3. Any person or entity engaged in a common enterprise with the borrower or deriving a direct benefit from the loan to the borrower.
(b) For partnerships, joint ventures and associations, “associated borrower” does not include any of the following:
1. A member or partner of the borrower who is a partnership, joint venture or association that has a shared ownership, investment or other pecuniary interest in a business or commercial endeavor with the borrower, and a direct benefit and common enterprise do not exist.
2. A partnership, joint venture or association that has a shared ownership, investment or other pecuniary interest in a business or commercial endeavor with the borrower who is a limited partner not held generally liable for the debts or actions of the partnership, joint venture or association. The borrower must be limited from general liability by the terms of a partnership or membership agreement valid under applicable law.
3. A member or partner of a partnership, joint venture or association that has a shared ownership, investment or other pecuniary interest in a business or commercial endeavor with the borrower who is a member or partner of a partnership, joint venture or association, and a direct benefit and common enterprise does not exist.
(3)(a) “Commercial loan” means a loan, line of credit, letter of credit or letter of credit including unfunded commitments, and any interest a credit union obtains in these made by another lender to individuals, sole proprietorships, partnerships, corporations or other business enterprises for commercial, industrial, agricultural or professional purposes.
(b) “Commercial loan” does not include any of the following:
1. Loans for personal expenditure purposes.
2. Loan made by a corporate credit union.
3. Loans made by a credit union to another credit union.
4. Loans made by a credit union to a credit union service organization.
5. Loans secured by a one- to four- family residential property.
6. Loans fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions.
7. Loans secured by a vehicle manufactured for household use.
8. Loans that would otherwise meet the definition of commercial loan and are equal to or less than $50,000 after calculating the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union held by a borrower or an associated borrower.
(4) “Common enterprise” means the expected source of repayment for each loan or extension of credit is the same for each borrower, and no individual borrower has another source of income from which the loan, together with the borrower’s other obligations, may be fully repaid. An employer will not be treated as a source of repayment because of wages and salaries paid to an employee unless one of the following is met:
(a) The loans or extensions of credit are made to borrowers who are directly or indirectly related through common control, including where one borrower is directly or indirectly controlled by another borrower, and substantial financial interdependence exists between or among the borrowers. Substantial financial interdependence exists if 50 percent or more of one borrower's gross receipts or gross expenditures, on an annual basis, are derived from transactions with another borrower. Gross receipts and expenditures include gross revenues or expenses, intercompany loans, dividends, capital contributions, and similar receipts or payments.
(b) Separate borrowers obtain loans or extensions of credit to acquire a business enterprise of which those borrowers will own more than 50 percent of the voting securities or voting interests.
(5)(a) “Construction or development loan” means a financing agreement that enables the borrower to acquire property, including land or structures, or rights to property with the intent to construct, renovate or expand any of the following:
1. Income producing property, including residential housing for rent or sale.
2. A commercial building, including a building used for commercial, agricultural, industrial or other similar purposes.
(b) “Construction or development loan” does not include a loan to finance maintenance, repairs or improvements to an existing income producing property that does not change its use or materially impact the property.
(6) “Control” means a person or entity that directly or indirectly, or acting through or together with one or more persons or entities:
(a) Owns, controls or has the power to vote 25 percent or more of any class of voting securities of another person or entity;
(b) Controls, in any manner, the election of a majority of the directors, trustees or other persons exercising similar functions of another person or entity; or
(c) Has the power to exercise a controlling influence over the management or policies of another person or entity.
(7) “Credit risk rating system” means a formal process that identifies and assigns a relative credit risk score to each commercial loan in a credit union's portfolio using ordinal ratings to represent the degree of risk. The credit risk score is determined through an evaluation of quantitative factors based on financial performance and qualitative factors based on management, operational, market and business environmental factors.
(8) “Direct benefit” means the proceeds of a loan or extension of credit to a borrower, or assets purchased with those proceeds, that are transferred to another person or entity, other than in bona fide arm's-length transaction where the proceeds are used to acquire property, goods or services.
(9) “Director” means the director of the office of credit unions or an authorized representative.
(10) “Immediate family member” means a spouse or other family member living in the same household.
(11) “Loan secured by a one- to four- family residential property” means a loan that at origination is secured wholly or substantially by a lien on a one- to four- family residential property, and the lien is central to the extension of the credit or the borrower would not have been extended credit in the same amount or on terms as favorable without the lien. A loan is wholly or substantially secured by a lien on a one- to four- family residential property if the estimated value of the real estate collateral at origination, after deducting any senior liens held by others, is greater than 50 percent of the principal amount of the loan.
(12)(a) “Loan secured by a vehicle manufactured for household use” means a loan that at origination is secured wholly or substantially by a lien on a vehicle generally manufactured for personal, family or household use and not used as a fleet vehicle or to carry fare-paying passengers, and the lien is central to the extension of credit. A lien is central to the extension of credit if the borrower would not have been extended credit in the same amount or on terms as favorable without the lien. A loan is wholly or substantially secured by a lien on a vehicle manufactured for household use if the estimated value of the collateral at origination, after deducting any senior liens held by others, is greater than 50 percent of the principal amount of the loan.
(b) Vehicles that are manufactured for personal, family or household use and not used as a fleet vehicle or to carry fare-paying passengers include a passenger car, minivan, sport-utility vehicle, pickup truck, or similar light or heavy-duty truck.
(13) “Loan−to−value ratio” or “LTV ratio” means, with respect to any item of collateral, the aggregate amount of all sums borrowed and secured by that collateral, including outstanding balances, plus any unfunded commitment or line of credit from another lender that is senior to the credit union's lien position, divided by the current collateral value. The current collateral value shall be established by prudent and accepted commercial lending practices and shall comply with all regulatory requirements. For a construction and development loan, collateral value is the lesser of the cost to complete or the prospective market value, as determined in accordance with s. DFI-CU 72.03. (14)(a) “Member business loan” means any of the following:
1. A commercial loan as defined in sub. (3).
2. Any loan secured by a lien on a one- to four- family residential property that is not a member's primary residence, and any loan secured by a vehicle manufactured for household use that will be used for a commercial, corporate or other business investment property or venture, or agricultural purpose, if the outstanding aggregate net member business loan balance is $50,000 or greater.
(b) “Member business loan” does not include any of the following:
1. A loan for which a federal or state agency fully insures repayment, fully guarantees repayment or provides an advance commitment to purchase the loan in full.
2. Any non-member commercial loan or non-member participation interest in a commercial loan made by another lender, provided the credit union acquired these interests, and the credit union is not, in conjunction with another credit union, trading member business loans to circumvent the aggregate limit.
(15) “NCUA” means the National Credit Union Administration.
(16) “Net worth” has the meaning given in s. 12 CFR 702.2(f). (17) “Readily marketable collateral” means a financial instrument or bullion that is salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.
(18)(a) “Residential property” means a manufactured home, whether completed or under construction, house, condominium unit, cooperative unit, or unimproved land zoned for one- to four- family residential use.
(b) “Residential property” does not include a boat or motor home, even if used as a primary residence, or timeshare property.
DFI-CU 72.02 Prohibited member business loans. (1) INELIGIBLE BORROWERS. A credit union may not grant a commercial loan to any of the following:
(a) A senior management employee directly or indirectly involved in the credit union's commercial loan underwriting, servicing or collection process, and any of their immediate family members.
(b) A person meeting the definition of an associated borrower with respect to persons identified in par. (a).
(c) A director, unless the credit union's board of directors approves granting the loan and the director was recused from the board's decision making process.
(2) EQUITY AGREEMENTS AND JOINT VENTURES. A credit union may not grant a commercial loan if any additional income received by the credit union or its senior management employees is tied to the profit or sale of any business or commercial endeavor that benefits from the proceeds of the loan.
(3) CONFLICTS OF INTEREST. A third party used by a credit union to meet the requirements of this section shall be independent from the commercial loan transaction, and may not have a participation interest in a loan or an interest in any collateral securing a loan that the third party is responsible for reviewing, or an expectation of receiving compensation that is contingent on the closing of the loan, except as follows:
(a) A third party may provide a service to the credit union that is related to the transaction, including loan servicing.
(b) A third party may provide the requisite experience to a credit union and purchase a loan or a participation interest in a loan originated by the credit union that the third party reviewed.
(c) A credit union may use the services of a credit union service organization that meets the requirements of s. DFI-CU 72.04(4) even if the credit union service organization is not independent from the transaction, provided the credit union has a controlling financial interest in the credit union service organization as determined under generally accepted accounting principles. DFI-CU 72.03 Additional requirements for construction and development loans. (1) DEFINITIONS. In this section:
(a) “Cost to complete” means the sum of all qualifying costs necessary to complete a construction project and documented in an approved construction budget.
(b) “Prospective market value” means the market value opinion determined by an independent appraiser in a form and manner prescribed by the office of credit unions.
(c) “Prospective market value ‘as-completed’” means the property's market value at the time the development is to be completed.
(d) “Prospective market value ‘as-stabilized’” means the property's market value when the property is projected to achieve stabilized occupancy. For an income producing property, stabilized occupancy means the occupancy level that a property is expected to achieve after the property is exposed to the market for lease over a reasonable period of time and at comparable terms and conditions to other similar properties.
(e)1. “Qualifying costs” means any of the following:
a. Reasonable and customary costs paid to construct or improve a project, and other expenses normally included in a construction contract, including on- or off-site improvements, building construction, general contractor's fees, bonding and contractor insurance.
b. The value of the land, determined as the lesser of appraised market value or purchase price plus the cost of any improvements.
c. Interest, a contingency account to fund unanticipated overruns, development costs including 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 estate or the “as-stabilized” date for income producing real estate.
d. Project costs for related parties, if reasonable in comparison to the cost of similar services from a third party. Project costs for related parties includes developer fees, leasing expenses, brokerage commissions, and management fees.
2. “Qualifying costs” does not include 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. Selling costs funded out of sales proceeds include brokerage commissions and closing costs.
(2) COLLATERAL VALUATION. The collateral valuation for securing a construction or development loan shall be based on the satisfactory completion of the proposed construction or renovation where the loan proceeds are disbursed in increments as the work is completed.
(3) PROVISIONS. A credit union that elects to make a construction or development loan shall ensure that its commercial loan policy includes adequate provisions by which the collateral value associated with the project is properly determined and established. Collateral value shall be the lesser of the project's cost to complete or its prospective market value.
(4) POLICY INCLUSIONS. A credit union that elects to make a construction and development loan shall ensure that its commercial loan policy includes all of the following:
(a) A review and approval process of any line item construction budget, conducted by qualified personnel representing the interests of the credit union and completed prior to closing the loan.
(b) A requisition and loan disbursement process approved by the credit union.
(c) A process by which the release or disbursement of loan funds shall occur only after on-site inspections, documented in a written report by qualified personnel representing the interests of the credit union. The report shall certify that the work requisitioned for payment has been satisfactorily completed, and that any remaining funds available to be disbursed from the construction and development loan is sufficient to complete the project.
(d) A process by which each loan disbursement is subject to confirmation that no intervening liens have been filed.
(5) PROSPECTIVE MARKET VALUE. An opinion regarding prospective market value that complies with standards set forth in the Uniform Standards of Professional Appraisal Practice may be accepted by the office of credit unions. Prospective value opinions are intended to reflect the current expectations and perceptions of market participants, based on available data. Two prospective value opinions may be required to reflect the time frame during which development, construction and occupancy occur.
DFI-CU 72.04 Board of directors, senior executive officers and lending personnel responsibilities. (1) BOARD OF DIRECTORS. Prior to engaging in commercial lending, the board of directors of a credit union shall do all of the following:
(a) Approve a commercial loan policy that complies with s. DFI-CU 72.05. The board shall review its policy on an annual basis. The board shall update its policy prior to any material change in the credit union's commercial lending program or related organizational structure, and in response to any material change in portfolio performance or economic conditions. (b) Ensure the credit union appropriately staffs its commercial lending program in compliance with subs. (2) and (3).
(c) Understand and remain informed, through periodic briefings from responsible staff and other methods, about the nature and level of risk in the credit union's commercial loan portfolio, including its potential impact on the credit union's earnings and net worth.
(2) SENIOR EXECUTIVE OFFICERS. The senior executive officers overseeing the commercial lending function of a credit union engaged in commercial lending shall do all of the following:
(a) Maintain a comprehensive understanding of the role of commercial lending in the credit union's overall business model.
(b) Establish risk management processes and controls necessary to safely conduct commercial lending.
(3) LENDING PERSONNEL. A credit union engaged in commercial lending shall employ qualified staff with experience in all of the following areas:
(a) Underwriting and processing for the types of commercial lending in which the credit union is engaged.
(b) Overseeing and evaluating the performance of a commercial loan portfolio, including rating and quantifying risk through a credit risk rating system.
