Md. Code Regs. 09.03.01.14 - Member Business Loans
A. In
this regulation, the following terms have the meanings indicated:
(1) "Associated member" means a member with
shared ownership, investment, or other pecuniary interest in a business or
commercial endeavor with the borrower.
(2) "Development or construction loan" or
both means a financing arrangement for acquiring property or rights to
property, including land or structures, with the intent to convert it to
income-producing property such as residential housing for rental, sale,
commercial use, industrial use, or a similar use.
(2-1) "Family member" means a spouse or other family member living in the same household.
(3) "Loan-to-value ratio or LTV" means the
aggregate amount of all sums borrowed including outstanding balances plus any
unfunded commitment or line of credit from all sources on an item of collateral
divided by the market value of the collateral used to secure the
loan.
(4) "Member business loan"
means a loan, line of credit, or letter of credit (including an unfunded
commitment), the proceeds of which will be used for a commercial, corporate,
other business investment property or venture, or agricultural
purpose.
(5) "Member business loan"
does not include a loan or loans:
(a) That is
fully secured by a lien on a one-to-four-family dwelling that is the member's
primary residence;
(b) That is
fully secured by shares or deposits in credit unions, or savings and deposits
in other financial institutions;
(c) For which a federal, state, or local
political subdivision fully insures repayment, guarantees repayment, or
provides an advance commitment to purchase in full;
(d) To a member or associated member which is
equal to or less than $50,000; or
(e) Granted to a credit union by a corporate
credit union.
(6) "Net
worth" means retained earnings as defined under Generally accepted accounting
principles. Retained earnings include, but are not limited to, undivided
earnings, regular reserves, and any other appropriations designated by
management or the Commissioner.
(7)
"Senior management employee" means the chief executive officer (typically the
president or treasurer/manager), the assistant chief executive officer
(typically the assistant president, vice president, or assistant
treasurer/manager), or the chief financial officer (typically the
comptroller).
B.
Requirements. A credit union may make member business loans only in accordance
with the following requirements:
(1) Written
Business Loan Policy.
(a) The board shall
adopt a written business loan policy, which may be included in the credit
union's overall lending policy required by Financial Institutions Article
§6-605,
Annotated Code of Maryland.
(b) The
board shall review the policy at least annually.
(c) At a minimum, the policy shall address
the following:
(i) The types of business loans
that will be made;
(ii) The credit
union's trade area for business loans;
(iii) The maximum amount of credit union
assets, in relation to net worth, that will be invested in business
loans;
(iv) The maximum amount of
credit union assets, in relation to net worth, that will be invested in a given
category or type of business loan;
(v) The maximum amount of credit union
assets, in relation to net worth, that will be loaned to any one member or
group of associated members, subject to §B(4) of this
regulation;
(vi) The qualifications
and experience of personnel involved in making and administering business
loans, which must include at least 2 years experience in the applicable type of
lending;
(vii) The methodology used
in determining the ability of the borrower to repay the loan, which shall
include analysis of the balance sheet, cash flow analysis, income and expense,
tax data, analysis of leveraging, and comparison with industry averages,
excluding any document not generally available for a particular type of
business loan if stated in the business loan policy;
(viii) The receipt and periodic updating of
financial statements, tax returns, or other documentation;
(ix) Collateral requirements, including
loan-to-value ratios, appraisal, title search and insurance requirements, steps
to be taken to secure various types of collateral, and how often the value and
marketability of collateral is reevaluated;
(x) Appropriate interest rates and maturities
of business loans;
(xi) Loan
monitoring, servicing, and follow-up procedures, including collection
procedures;
(xii) Guidelines for
purchase and sale of member business loans and loan participations, if the
credit union intends to engage in that activity; and
(xiii) Restrictions on member business loans
to officials, senior management employees, and their family members as stated
in §D of this regulation.
(2) Under §B(1)(b)(iii) of this
regulation, the aggregate amount of member business loans shall be limited to
the lesser of 12.25 percent of total assets or 1.75 times the credit union's
net worth.
(3) Collateral and
Security Requirements.
(a) A member business
loan secured by collateral on which the credit union will have a first lien may
have an LTV greater than 80 percent only if:
(i) The value in excess of 80 percent is
covered through private mortgage insurance or equivalent insurance acceptable
to the credit union; or
(ii) The
loan is insured or guaranteed or subject to advance commitment to purchase by
an agency of the federal government, State, or any of its political
subdivisions.
(b) A
member business loan secured by collateral on which the credit union will have
a second or lesser priority lien may not exceed an 80 percent LTV
ratio.
(c) A member business loan
secured by collateral on which the credit union will have a first lien as well
as a second or lesser priority lien may have an LTV greater than 80 percent and
not greater than 95 percent, only if:
(i) The
value in excess of 80 percent is covered through private mortgage insurance or
equivalent insurance acceptable to the credit union; or
(ii) The loan is insured or guaranteed or
subject to advance commitment to purchase by an agency of the federal
government, State, or any of its political subdivisions.
(d) Member business loans secured by
collateral on which the credit union will have a first, second, or lesser lien
may not exceed a 95 percent LTV ratio.
(4) Loans to One Borrower.
(a) The aggregate amount of outstanding
member business loans, including any unfunded commitments, to any one member or
group of associated members may not exceed the greater of:
(i) 15 percent of the credit union's net
worth; or
(ii) $100,000.
(b) If a portion of a member
business loan is fully secured by a one-to-four-family dwelling that is the
member's primary residence, by shares in the credit union, by savings or
deposits in another financial institution, or is subject to an advance
commitment to purchase by an agency of the federal government or of a state or
any of its political subdivisions, that portion may not be taken into account
in determining the 15 percent limit.
(c) The Commissioner may grant a higher limit
upon written request by the credit union as described in §F(2) of this
regulation.
(5)
Development and Construction Loans.
(a) Loans
made for the purpose of development or construction or both are subject to the
following additional requirements:
(i) The
aggregate amount of all development or construction loans or both may not
exceed 15 percent of net worth;
(ii) The borrower shall have a minimum of 30
percent equity interest in the project being financed if the loan is for land
development;
(iii) The borrower
must have a minimum of 25 percent equity interest in the project being financed
if the loan is for construction or for a combination of development and
construction; and
(iv) The funds
for the project may be released only after on-site, written inspections by
qualified personnel and according to a preapproved draw schedule and any other
conditions as set forth in the loan documents.
(b) The Commissioner may grant a higher limit
upon written request by the credit union as described in §F(2) of this
regulation.
(6)
Prohibition of Member Business Lending. A credit union may not make a member
business loan if its net worth is less than 7 percent or its CAMEL composite
rating is 4 or 5.
C.
Classification of Problem Business Loans.
(1)
Business Loan Categories.
(a) A business loan
may be classified by credit union management or the Commissioner into one or
more of the categories described in this subsection upon a regular
review.
(b) Substandard. A loan
classified as substandard is inadequately protected by the current sound worth
and paying capacity of the obligor or the value of any collateral pledged.
Loans classified as substandard have well-defined weaknesses that jeopardize
the liquidation of the debt and are characterized by the distinct possibility
that the credit union will sustain some loss if the weaknesses are not
corrected. Loss potential, while existing in the aggregate amount of
substandard loans, does not have to exist in individual loans classified
substandard.
(c) Doubtful. A loan
classified as doubtful has all the weaknesses inherent in a substandard loan,
with the added characteristic that the weaknesses make collection or
liquidation in full highly improbable, on the basis of currently existing
facts, conditions, and values. The possibility of loss is extremely high, but
because of certain important and reasonably specific pending factors, which may
strengthen the loan, its classification as an estimated loss may be deferred or
limited until its more exact status may be determined. Pending factors include
proposed merger, acquisition, or liquidation actions, capital injection,
perfecting liens on additional collateral, and refinancing plans.
(d) Loss. A loan classified as loss is
considered uncollectable and of such little value that its continuance as a
loan on the books of a credit union is not warranted. This classification does
not necessarily mean that the loan has absolutely no recovery or salvage value,
but rather that it is not practical or desirable to defer writing off this
asset even though partial recovery may occur in the future.
(2) Allowance for Loan Losses.
(a) The determination whether a member
business loan will be classified as substandard, doubtful, or loss for purposes
of the valuation allowance for loan losses, will be based on factors not
limited to the delinquency of the loan, including, but not limited to, the
adequacy of analysis and documentation.
(b) An allowance for loan losses shall be
maintained for the specified classified loans as follows:
(i) Loss loans at 100 percent of outstanding
balance;
(ii) Doubtful loans at 50
percent of outstanding balance; and
(iii) Substandard loans at 10 percent of
outstanding balance unless other factors (for example, history of these loans
at the credit union) indicate a greater or lesser amount is
appropriate.
D. Restrictions on Member Business Loans to
Officials, Senior Management Employees, and Their Family Members.
(1) A credit union may make member business
loans to officials, senior management employees, and their family members
subject to the following restrictions:
(a) The
official, senior management employee, or their family member who will receive
the proceeds of a member business loan may take no part in the decision-making
process for approval of the loan;
(b) All member business loans to officials,
senior management employees, or their family members that, when added to the
aggregate of all other credit union loans for which the official, senior
management employee, or their family member is a debtor, guarantor, endorser,
or cosigner, are in excess of $25,000 shall be approved by the board;
and
(c) The rates, terms, and
conditions for any member business loan for which an official, senior
management employee, or their family member is a debtor, guarantor, endorser,
or cosigner may not be more favorable than the rates, terms, and conditions for
a comparable loan to another member of the credit union.
(2) Equity Agreements/Joint Ventures. A
credit union may not grant a member business loan if a portion of the amount of
income to be received by the credit union, officials, senior management
employees, or their family members is tied to the profit or sale of the
business or commercial endeavor for which the loan is made.
E. Records Requirements. Aggregate
member business loans shall be identified on the credit union's financial
statements and each category of member business loan shall be separately
identified in the credit union's records.
F. Waiver of Limits.
(1) A credit union may request a waiver of
certain limits as listed in this regulation as follows:
(a) Loan-to-value ratios and requirements for
collateral and security under §B(3) of this regulation;
(b) Maximum loan amount to one borrower or
associated group of borrowers under §B(4) of this regulation;
and
(c) Development or construction
loan limits, or both, under §B(5) of this regulation.
(2) Upon written request by a credit union,
the Commissioner may waive the limitations listed in §F(1) of this
regulation. Federally insured credit unions need the approval of the
Commissioner and the Regional Director of the National Credit Union
Administration. The Commissioner shall approve or deny the request within 45
calendar days of the date the complete request was received by the
Commissioner. The request for waiver shall contain the following:
(a) A copy of the business loan
policy;
(b) A statement of the
higher limit sought;
(c) An
explanation of the need to raise the limit;
(d) Documentation to support the credit
union's ability to manage the activity;
(e) An analysis of the credit union's prior
experience making member business loans, including at a minimum:
(i) The history of loan losses and loan
delinquency;
(ii) Volume and
cyclical or seasonal patterns;
(iii) Diversification;
(iv) Concentrations of credit to one borrower
or group of associated borrowers in excess of 15 percent of the credit union's
net worth;
(v) Underwriting
standards and practices;
(vi) Types
of loans grouped by purpose and collateral; and
(vii) The qualifications of personnel
responsible for underwriting and administering member business loans.
(3) If the credit
union's policies or practices violate safe and sound lending principles, the
Commissioner may restrict all limits as listed in this chapter or revoke the
credit union's approval to make member business loans.
Notes
Regulations .14 and new Regulation .14 adopted effective October 1, 2001 (28:19 Md. R. 1683)
Regulation .14 amended effective April 29, 2002 (29:8 Md. R. 697)
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