CUNA’s compliance staff continued its closer look into the NCUA’s guidance on its Member Business Loans rule with a CompBlog entry last week on collateral and security requirements. CompBlog has also taken a closer look at board and management responsibilities, and commercial loan policies.
Credit unions that grant commercial loans must require sufficient collateral to protect against the risk of loss in the event of a borrower default. According to the guidance, the amount of collateral needed will be determined by the creditworthiness of the borrower and the marketability of the collateral.
Additionally, to confirm, value, manage and control collateral, credit unions must have policies and procedures in place that include:
Policies should factor in the size and complexity of the loan transaction and should also address:
Additionally, NCUA rules require credit unions to establish internal loan-to-value (LTV) ratio limits, which should be based on internal risk management analysis and accepted financial industry standards. The former prescriptive requirements for LTV ratios have been eliminated to allow credit unions to make their own risk-based decision.
NCUA does not require credit unions to meet the bank regulatory standards for LTV guidelines for real estate but views them as reasonable benchmarks as they reflect common industry practice.
The MBL guidance contains of list of the LTV ratio guidelines for each types of collateral, which can be used as a reference when setting internal limits. When a credit union decides to exceed these limits, it should be able to justify why.
Further, the guidance also states that when calculating LTV for an acquisition transaction, it is sound practice to establish the collateral value to be the lesser of: