Section 186.098 authorizes a credit union to make loans to members. Ch. DFI—CU 72, Admin. Code, sets forth requirements for a credit union to make member business loans.
5. Plain language analysis:
The proposed rule repeals and recreates ch. DFI-CU 72, Admin. Code, to reflect changes effective January 1, 2017 to the National Credit Union Administration’s (NCUA’s) member business loans and commercial lending rules, 12 C.F.R. Part 723. Prior to the revision, ch. DFI-CU 72 and 12 C.F.R. Part 723 were substantially similar. The proposed rule updates Wisconsin’s rules to reflect revisions to its federal counterpart. Proposed changes strengthen a credit union’s board of directors and management responsibilities; replace current loan-to-value requirements and portfolio limits with a risk-based approach; modify waiver requirements and processes for obtaining waivers; and calculate the member business loan cap as a multiple of net worth, and not as a percentage of assets. 6. Summary of, and comparison with, existing or proposed federal regulation:
Existing federal regulations are contained in 12 C.F.R. Part 723. The federal rule applies to federally-chartered credit unions and to state-chartered credit unions in states that have adopted the federal rule. Wisconsin is one of seven states that have a state-specific rule. The other states are: Connecticut, Illinois, Maryland, Oregon, Texas and Washington. The proposed rule would revise Wisconsin’s state-specific rule to reflect the recently revised federal rule. Provisions from revised 12 C.F.R. Part 723 that the office of credit unions seeks to incorporate into the repealed and recreated ch. DFI—CU 72 are as follows: policy and program responsibilities that a state-chartered credit union must adopt and implement as part of a safe and sound commercial lending program; a statutory limit on the aggregate amount of member business loans that a state-chartered credit union may make pursuant to 12 U.S.C. 1757a; the removal of prescriptive requirements and limitations – such as collateral and security requirements, equity requirements, and loan limits – to be replaced with a broad principles-based regulatory approach; and the elimination of a several waiver processes. 7. Comparison with rules in adjacent states:
Only Illinois has a comparable rule: Ill. Admin. Code title 38, s. 190.165. This rule gives Illinois state-chartered credit unions the authority to make business loans to members. Illinois has recently adopted a rule to revise this rule to reflect the recent revisions to 12 C.F.R. Part 723. Minnesota, Iowa and Michigan follow revised 12 C.F.R. Part 723 and have not adopted a comparable state-specific rule. 8. Summary of factual data and analytical methodologies:
The office of credit unions reviewed the revisions to 12 C.F.R. Part 723. Proposed changes to ch. DFI—CU 72 are based on these revisions as well as staff regulatory experience. 9. Analysis and supporting documents used to determine effect on small business:
Small credit unions will not be impacted by the proposed rule. Only 27 out of the 143 Wisconsin federally insured state chartered credit unions fall within the definition of a small business under s. 227.114(1), Stats. Typically these credit unions do not engage in the commercial lending anticipated by the proposed rule. Proposed requirements regarding a board of directors’ management responsibilities and having a commercial loan policy in place are minimal and should have little to no additional cost. (Note: the department used “assets” in lieu of “gross annual sales” as the closest approximation to determine the effect on small business under s. 227.114(1), Stats., because credit unions do not have gross annual sales.) 10. Anticipated costs incurred by private sector:
The office of credit unions does not anticipate any costs will be incurred by the private sector.
11. Effect on small business:
The proposed rule will have little to no effect on small business.
12. Agency contact person:
Kim Santos, Director, Office of Credit Unions, PO Box 14137, Madison, WI 53708-0137. Tel. (608) 267-2608; e-mail Kim.Santos@wisconsin.gov 13. Place where comments are to be submitted and deadline for submission:
Comments may be submitted to the contact person shown below no later than the date on which the public hearing on this proposed rule order is conducted. Information as to the place, date and time of the public hearing will be published in the Wisconsin Administrative Register.
By mail: Mark Schlei, Deputy Chief Legal Counsel, Department of Financial Institutions, PO Box 8861, Madison, WI 53708-8861.
By delivery: Mark Schlei, Deputy Chief Legal Counsel, Department of Financial Institutions, 201 W. Washington Avenue, Suite 500, Madison, WI 53703.
SECTION 1. Chapter DFI-CU 72 is repealed and recreated to read:
COMMERCIAL AND MEMBER BUSINESS LOANS
DFI-CU 72.01 Definitions. In this chapter:
(1) “Amount,” when referring to the amount of a business loan, includes all of the following:
(a) Any unfunded commitment to make the loan.
(b) The outstanding balance of the loan.
(c) Any undisbursed proceeds of the loan.
(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.
