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.
(c) Conducting collection and loss mitigation activities for the types of commercial lending in which the credit union is engaged.
(4) OPTIONS TO REQUIRED EXPERIENCE. (a) A credit union may meet the experience requirements in subs. (2) and (3) by conducting internal training and development, hiring qualified personnel or using a third-party. A third-party may include an independent contractor or credit union service organization.
(b) Use of a third-party under sub. (3) is permissible only if all of the following requirements are met:
1. The third-party has no affiliation or contractual relationship with the borrower or any associated borrowers.
2. The actual decision to grant a loan resides with the credit union.
3. Qualified credit union staff exercises ongoing oversight over the third party by regularly evaluating the quality of work the third party performs for the credit union.
4. The third-party arrangement complies with s. DFI- CU 72.02.
DFI-CU 72.05 Commercial and member business loan policy requirements. (1) Prior to engaging in commercial lending, a credit union shall adopt and implement a comprehensive written commercial loan policy and establish procedures for commercial lending. The policy shall ensure that the credit union's commercial lending activities are performed in a safe and sound manner by providing for ongoing control, measurement and management of its commercial lending activities. The policy shall be approved by the board of directors of the credit union.
(2) A credit union’s commercial loan policy shall address all of the following:
(a) Types of commercial loans permitted.
(b) Trade area.
(c) Maximum amount of assets, in relation to net worth, allowed in secured, unsecured and unguaranteed commercial loans, and in any given category or type of commercial loan and to any one borrower or group of associated borrowers. The policy shall specify that the aggregate dollar amount of commercial loans to any one borrower or group of associated borrowers may not exceed the greater of 15 percent of the credit union’s net worth or $100,000, plus an additional 10 percent of the credit union’s net worth if the amount that exceeds the credit union’s 15 percent general limit is fully secured at all times with a perfected security interest by readily marketable collateral as defined in s. DFI-CU 72.01(17), unless a waiver is obtained under s. DFI-CU 72.08. Any insured or guaranteed portion of a commercial loan made through a program in which a federal or state agency insures repayment, guarantees repayment or provides an advance commitment to purchase the loan in full is excluded from this limit. (d) Qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering and collecting commercial loans.
(e) Loan approval processes, including establishing levels of loan approval authority commensurate with the proficiency of a loan committee or an individual in evaluating and understanding commercial loan risk when considered in terms of the level of risk the borrowing relationship poses to the credit union.
(f) Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and the borrowing relationships contemplated. The underwriting standards shall address all of the following:
1. The level and depth of financial analysis necessary to evaluate the financial trends and condition of the borrower, and the ability of the borrower to meet debt service requirements.
2. Thorough due diligence of every principal to determine whether any related interests of the principal might have a negative impact or place an undue burden on the borrower and related interests with regard to meeting the debt obligations with the credit union.
3. Requirements of a projection prepared by a borrower when historic performance does not support projected debt payments. The projection shall be supported by reasonable rationale and include a projected balance sheet, and income and expense statement.
4. Financial statement quality and degree of verification sufficient to support an accurate financial analysis and risk assessment.
5. Methods to be used in collateral evaluation for all types of collateral authorized, including loan-to-value ratio limits. Methods shall be appropriate for the particular type of collateral, the means to secure various types of collateral and the measures taken for environmental due diligence.
6. Appropriate risk assessment, including analysis of the impact of current market conditions on the borrower and associated borrowers.
(g) Risk management processes commensurate with the size, scope and complexity of the credit union’s commercial lending activities and borrowing relationships, including all of the following:
1. Use of loan covenants, if appropriate, including frequency of borrower and guarantor financial reporting.
2. Periodic loan review, consistent with loan covenants and sufficient to conduct portfolio risk management. The review shall include a periodic reevaluation of the value and marketability of any collateral.
3. A credit risk rating system. Credit risk ratings shall be assigned to commercial loans at inception and reviewed as frequently as necessary to satisfy the credit union's risk monitoring and reporting policies, and to ensure adequate reserves as required by generally accepted accounting principles.
4. A process to identify, report and monitor loans approved as exceptions to the credit union's loan policy.
DFI-CU 72.06 Collateral and security requirements. (1) A credit union shall require collateral commensurate with the level of risk associated with the size and type of any commercial loan. Collateral shall be sufficient to ensure adequate loan balance protection along with appropriate risk sharing with the borrower and principals. A credit union making an unsecured loan shall determine and document in the loan file any mitigating factors that sufficiently offset the relevant risk.
(2) A credit union that does not require the full and unconditional personal guarantee from the principals of a borrower who has a controlling interest in the borrower shall determine and document in the loan file any mitigating factors that sufficiently offset the relevant risk.
DFI-CU 72.07 Calculating the aggregate 15 percent limit. For the purpose of calculating the aggregate 15 percent limit, the credit union shall do all of the following:
(1) Calculate the numerator by adding together the amount of the member business loans to a borrower and associated borrowers, if any. From the total, subtract any portion that is any of the following:
(a) Secured by shares in the credit union.
(b) Secured by shares or deposits in other financial institutions.
(c) Insured or guaranteed by a federal or state agency.
(d) Subject to an advance commitment to purchase by a federal or state agency.
(2) After completing the calculation in sub. (1), divide the numerator by the credit union’s net worth.
DFI-CU 72.08 Waivers. (1) A credit union may seek a waiver for the maximum loan amount to borrowers and associated borrowers under s. DFI-CU 72.05. (2) To obtain a waiver, a credit union shall submit a written request to the director. The request shall contain all of the following:
(a) A copy of the current commercial and member business loan policy.
(b) The higher limit sought and an explanation of the need for the increase.
(c) Documentation supporting the member’s ability to repay the loan. Supporting documentation includes cash flow analysis and collateral requirements, loan presentation and details, and the credit union’s review and approval of the plan.
(d) Documentation supporting the credit union’s ability to manage the loan. Supporting documentation includes an analysis of the credit union’s experience and qualifications in making related types of loans, and loan procedures including monitoring, servicing and collection.
(3) Upon receipt of the request for waiver, the director shall do all of the following:
(a) Review the information provided in the request.
(b) Evaluate the level of risk to the credit union.
(c) Consider the credit union’s historical capital, asset quality, management, earnings, liquidity, and sensitivity to market risk, CAMELS, composite and component ratings.
(4) The director shall notify the credit union of the action taken within 45 calendar days of receiving a completed request for waiver.
(5) If the request for waiver is approved, the director shall promptly notify the applicable region of the NCUA of the approval.
DFI-CU 72.09 Limit on aggregate member business lending, exemptions and method of calculation. (1) LIMITS. The aggregate limit on a credit union's net member business loan balances shall be the lesser of 1.75 times the actual net worth of the credit union, or 1.75 times the minimum net worth required under s. 12 USC 1790d(c)(1)(A). (2) EXEMPTIONS. All of the following credit unions are exempt from compliance with the aggregate member business loan limit in this section:
(a) A credit union that has a low income designation under s. 12 CFR 701.34. (b) A credit union that participates in the Community Development Financial Institutions program under s. 12 CFR 1805.201. (c) A credit union that was chartered for the purpose of making member business loans.
(d) A credit union that, as of the date of enactment of the Credit Union Membership Access Act of 1998, had a history of primarily making commercial loans.
(3) METHOD OF CALCULATION. For the purposes of NCUA form 5300 reporting, a credit union's net member business loan balance is determined by calculating the outstanding loan balance plus any unfunded commitments, reduced by any portion of the loan that is subject to any of the following:
