[Federal Register Volume 63, Number 188 (Tuesday, September 29, 1998)]
[Rules and Regulations]
[Pages 51793-51802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25959]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 722, 723 and 741
Organization and Operation of Federal Credit Unions; Appraisals;
Member Business Loans; and Requirements for Insurance
AGENCY: National Credit Union Administration (NCUA).
ACTION: Interim final rule with request for comments.
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SUMMARY: The NCUA is updating, clarifying and streamlining its existing
rules concerning member business loans and appraisals for federally
insured credit unions, as well as implementing recent statutory
limitations regarding member business loans. The intended effect of
this rule is to reduce regulatory burden, maintain safety and
soundness, and provide an exception for qualifying credit unions from
the statutory aggregate limit on a credit union's outstanding member
business loans.
DATES: Effective September 29, 1998. Comments must be received on or
before November 30, 1998.
ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail
or hand-deliver comments to National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703)
518-6319. Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Staff Attorney,
Office of General Counsel at the above address or telephone: (703) 518-
6540; or David Marquis, Director, Office of Examination and Insurance,
at the above address or telephone: (703) 518-6360.
SUPPLEMENTARY INFORMATION:
A. Background
The NCUA Board adopted its first member business loan rule in April
1987 due to the increased amount of credit union losses attributed to
business lending activity. In response to continued losses to credit
unions and the National Credit Union Share Insurance Fund (NCUSIF) due
to member business loans, the NCUA Board adopted a more restrictive
member business loan rule in September 1991. In general, the results of
the 1991 revision have been very positive. Nonetheless, experience with
the regulation indicated a need for simplification, clarification, and
improvement. Therefore, on July 23, 1997, the Board issued proposed
amendments to the regulation governing member business loans (Current
Section 701.21(h) and Proposed Part 723 of NCUA's Regulations) and
appraisals (Part 722 of NCUA's Regulations) with a sixty-day comment
period. 62 FR 41313 (August 1, 1997).
The NCUA Board was considering adopting a final member business
loan rule in March of this year, when it became apparent that Congress
was considering legislation regarding the ability of credit unions to
grant member business loans. The NCUA Board decided to defer
consideration of a final rule until Congress had acted on this
legislation. Since then, the Credit Union Membership Access Act (the
Act) was enacted into law on August 7, 1998. Public Law 105-219. Among
other things, the Act imposes a new aggregate limit on a credit union's
outstanding member business loans. However, the Act also provides for
three circumstances where a credit union may qualify for an exception
from the aggregate limit.
The NCUA Board has decided to finalize those aspects of the
proposed
[[Page 51794]]
rule that are not affected by the Act, as well as set forth the
procedures for obtaining an exception from the aggregate limit as
provided for by the Act. The Board is issuing this rule as an interim
final rule because there is no public interest in delaying action on
exceptions from the aggregate limit. On the contrary, there is a strong
public interest in permitting credit unions to continue to grant, and
members to receive, business loans. Therefore, the Board finds it
necessary and appropriate to act expeditiously to allow certain credit
unions to obtain an exception to continue to grant business loans that
would exceed the aggregate loan limit. If this rule is not effective
immediately, a number of credit unions and their members could be
adversely impacted. Accordingly the Board, for good cause, finds that
(1) pursuant to 5 U.S.C. 553(b)(3)(B), notice and public procedures are
impracticable, unnecessary, and contrary to the public interest; and
(2) pursuant to 5 U.S.C. 553(d)(3), the rule shall be effective
immediately and without 30 days advance notice of publication. Although
this rule is being issued as an interim final rule and is effective
immediately, the NCUA Board encourages interested parties to submit
comments, especially on the exception from the aggregate loan limits.
B. Previous Comments and New Statutory Provisions
Thirty-four comments were received. Comments were received from
eight federal credit unions, seven state chartered credit unions, ten
state leagues, three national credit union trade associations, one
bank, four bank trade associations, and one consulting group. Except
for the bank and bank trade associations, the commenters were very
supportive of the proposal, although most commenters suggested ways to
improve the final rule. Two commenters expressed complete support for
the proposal.
Section-by-Section Analysis
The proposed amendments were written in a plain English question
and answer format. Eight commenters approved of the plain English
format but some of these commenters questioned whether a question and
answer format would be comprehensive. The commenters expressing doubt
requested an additional section of supplementary information.
Four commenters opposed the plain English question and answer
format. They believe that using it is not in the best interest of the
credit union industry because this format is not comprehensive and
would limit the creativity of credit unions in providing business loans
to their members. These commenters recommend that the regulation be
written in the traditional regulatory style and be supplemented with
questions and answers for further clarification of the rule.
The NCUA Board has not received any evidence to indicate any
problems with the plain English format. The NCUA Board believes the
question and answer format will lessen misunderstandings and is
comprehensive and easy to understand. The NCUA Board does not believe a
supplementary information section in the final rule is necessary.
Therefore, the final rule is written in this format.
NCUA proposed moving the rule from Part 701 to Part 723 of NCUA's
Regulations. Five commenters approved placing the member business loan
rule in its own Part. The NCUA Board agrees and the final rule will be
in Part 723.
Proposed Section 723.1--What is a Member Business Loan?
This section provides a definition of a member business loan. The
proposal defined a member business loan as any loan, line of credit, or
letter of credit where the borrower uses the proceeds for the following
purposes: commercial, corporate, investment property, business venture
or agricultural. This definition was slightly different from the
current rule in that the proposal deletes the term ``business'' from
``business investment property.'' However, NCUA may no longer define
what is a member business loan by regulation because the Act defines
the term. Therefore, a member business loan means any loan, line of
credit or letter of credit, the proceeds of which will be used for a
commercial, corporate or other business investment property or venture,
or agricultural purpose. Section 107A(c)(1)(a) of the Act.
Proposed Section 723.1(b)--Exceptions to the General Rule?
This section sets forth the exceptions to the definition of a
member business loan. NCUA proposed to increase the dollar threshold at
which the rule applies from $50,000 to $100,000. Fifteen commenters
supported the new threshold. Some of these commenters believe the
change would help small and low-income credit unions. However, the Act
sets forth the applicable exceptions to the definition of a member
business loan. The dollar threshold is set at $50,000.
The new regulation sets forth five exceptions that are virtually
identical to the exemptions in the current member business loan
regulation. The following loans are exempt from the member business
loan definition: (1) an extension of credit that is fully secured by a
lien on a 1-to-4 family dwelling that is the primary residence of a
member; (2) an extension of credit that is fully secured by shares in
the credit union making the extension of credit or deposits in
financial institutions; (3) an extension of credit that meets the
member business loan definition made to a borrower or an associated
member that has a total of all such extensions of credit in an amount
equal to or less than $50,000; (4) an extension of credit the repayment
of which is fully insured or fully guaranteed by, or where there is an
advance commitment to purchase in full by, an agency of the Federal
Government or of a State, or any political subdivision thereof; or (5)
an extension of credit that is granted by a corporate credit union (as
that term is defined by the Board) to another credit union.
Proposed Section 723.2--What are the prohibited activities?
NCUA proposed no substantive changes from the current rule, except
to add senior management employees and officials to the provision
prohibiting equity agreements or joint ventures. Four commenters agreed
with NCUA that senior management employees and officials should be
prohibited from receiving income tied to a business loan the credit
union makes. Two opposed the proposal.
One commenter believed it would be inconsistent to prohibit non-
compensated officials from entering into equity agreements and joint
ventures involving business loans while permitting credit unions to
make business loans to those officials. However, this commenter agreed
with the proposal to extend the prohibition against equity agreements
and joint ventures involving business loans to senior management
employees as long as NCUA excludes non-compensated officials from the
prohibition. The NCUA Board agrees and has incorporated this change
into the final rule.
Two commenters believed that the current prohibition on senior
management officials receiving business loans should be eliminated. The
NCUA Board has not been provided with any convincing reason to
eliminate the prohibition. One commenter correctly pointed out that the
title to this section should be changed to ``who is ineligible to
receive a member business loan.'' This commenter stated that otherwise
it would make senior management
[[Page 51795]]
employment a prohibited activity. The NCUA Board agrees and has
retitled the section accordingly.
Proposed Section 723.3--What are the requirements for construction and
development lending?
This section sets forth the requirements for construction and
development lending. NCUA proposed no substantive changes to this
section from the current rule. NCUA clarified that construction and
development loans below the dollar limits, individually and/or in the
aggregate, are not considered to be member business loans for the
purpose of this rule. Thus, if a member has a construction loan for
$40,000, and no other outstanding business type loans, including
unfunded business type lines of credit, then the construction loan is
not a member business loan. No substantive comments were received on
this section. The NCUA Board is adopting this section in final as
proposed.
Proposed Section 723.4--What are the other applicable regulations?
This section merely describes the other lending rules credit unions
must follow when granting member business loans to the extent they are
consistent with this regulation. NCUA proposes no substantive changes
from the current rule. One commenter objected to incorporating Sections
701.21(a) through (g) of NCUA's regulations into this regulation. One
commenter supported this provision. The NCUA Board has not been
provided with any convincing reason to change this section, so it is
adopting it in final as proposed.
Proposed Section 723.5--How do I implement a member business loan
program?
This section requires the board of directors to adopt business loan
policies and review them at least annually. This section also requires
the board to use the services of an individual with at least two years
direct experience in the type of lending in which the credit union will
be engaging. The preamble to the proposal also clarified that NCUA has
never required experience with business loans in general but, rather,
has required experience with making loans the credit union intends to
grant. The preamble also clarified that credit unions need not hire
staff to meet the requirements of this section; however, credit unions
must ensure that the expertise is available. Credit unions can meet the
experience requirement through various approaches. For example, a
credit union can use the services of a CUSO, an employee of another
credit union, an independent contractor, or other third parties.
However, the actual decision to grant a loan must reside with the
credit union.
Two commenters supported NCUA's clarification that the rule does
not require two years experience specifically in business lending. Two
commenters did not believe there would be any hindrances in obtaining a
staff person with two years relevant lending experience. Two commenters
believe it is difficult to find someone who has the relevant experience
for every type of commercial loan. One commenter stated that the real
issue is having the money to hire such experienced people.
Two commenters recommended eliminating the two-year experience
requirement. Two commenters believed NCUA should allow credit unions to
address qualifications based on what the credit union desires. One
commenter agreed with the new language but believed it is still overly
restrictive and represents an attempt to micromanage credit unions.
One commenter appreciated NCUA's clarification that the requirement
to retain staff with two years of experience does not mean specific
business lending experience. This commenter stated that allowing two
years of lending experience to suffice without a specific requirement
for business lending experience, coupled with the ability of a credit
union to use CUSO services, an employee from another credit union, or a
contractor, will remove a business lending impediment for many credit
unions.
The NCUA Board believes it is crucial for a credit union to have
experienced personnel involved in making decisions regarding business
lending. Member business loans require special expertise in virtually
all phases of origination and administration. Prior to NCUA's
imposition of the experience requirement, a number of credit unions
suffered losses from member business loans as a result of poorly
structured and administered loans. Most of these problems could have
been avoided had the credit union been better informed and prepared
through the use of experienced personnel. Therefore, the NCUA Board is
continuing to require credit unions instituting member business loan
programs to retain personnel with two years of business lending
experience.
Two commenters requested that the final regulation contain some of
the examples in the preamble to the proposal of proper arrangements
such as the use of a CUSO or an employee of another credit union. The
Board agrees and the final rule contains examples of how to fulfill the
two-year requirement.
Proposed Section 723.6--What must our member business loan policies
address?
This section sets forth those items that credit unions must address
in their written business loan policies. The proposal adds a new
requirement for credit unions to review financial statements. One
commenter believed it is overly burdensome to review and analyze the
member's entire financial statements instead of reviewing updates. Five
commenters did not believe it would be excessively burdensome. After
further consideration, the NCUA Board does not see any significant
benefit in requiring a review of financial statements on all member
business loans. In most cases, a credit union engaging in business
lending will ordinarily review the financial statements of its open-end
business loans. Therefore, the final rule does not require credit
unions to review financial statements.
The proposal also changes the term ``appraisals'' to
``determination of value.'' The wording in the current rule unduly
emphasizes member business loans as real estate loans. The proposed
wording clarifies that, whether a member business loan is for real
estate or non-real estate, credit unions must meet the collateral
requirements. The proposal also changes the term ``title search'' to
``determination of ownership'' for the same reason.
One commenter believed the present regulatory distinction between
real estate secured business loans and other business loans is often
blurred and that the proposed new regulation does little to recognize
this distinction. This commenter stated that the terms used in this
regulation are more applicable to real estate lending. Another
commenter suggested that NCUA consider two distinct classes of member
business loans: one for real estate, incorporating underwriting
criteria such as higher loan-to-value ratios, owner occupancy
standards, lien position requirements, longer loan terms; and one for
other types of business loans, with flexible underwriting criteria
appropriate to the specific loan. Although there is a distinction
between real estate secured business loans and other types of business
loans, the NCUA Board believes the stated requirements are necessary
for both. The NCUA Board believes the proposed changes in language will
be helpful to credit unions in making business loans.
The proposal also clarified that the maturity of a member business
loan may not exceed twelve years. The proposal
[[Page 51796]]
inadvertently failed to exclude federally insured state chartered
credit unions from this requirement as NCUA has consistently done in
the past. Nine commenters stated that the twelve-year maturity limit
should not apply to state chartered credit unions. NCUA agrees and the
final rule permits state chartered credit unions to grant business
loans with a maturity limit consistent with state law. Five credit
unions requested that the twelve-year maturity limit be increased for
federal credit unions. This is currently impermissible for federal
credit unions since the Federal Credit Union Act limits such loans to
twelve years.
Proposed Section 723.7--What other items must the member business loan
policy address?
This section sets forth the remaining issues that written loan
policies must address, including loan-to-value ratios and the
requirement for the personal liability and guarantee of the member. The
proposal increases the second lien limitation from 70% to 80% for
collateral ratios. The proposal also clarifies that private mortgage
insurance for first liens with a loan-to-value ratio exceeding 80%
applies only to real estate loans. Twelve commenters supported the
increase in the second lien limitation from 70% to 80%. However, some
commenters questioned whether the same stringent loan-to-value ratios
would be required for loans on personal properties, vehicles and
equipment. They believed that NCUA's approach could hinder the
competitiveness of credit unions wanting to provide business loans to
their members. One commenter believed the second lien limitation should
be increased further while another commenter believed the 70% loan-to-
value is adequate. Two commenters believed that credit unions need more
flexibility for loan to value ratios. One commenter believed NCUA
should allow loan-to-value ratios up to 100%. The NCUA Board believes
the specified loan limits are appropriate for member business loans and
has incorporated them into the final rule.
One commenter stated that the regulation should be clarified so
that the loan-to-value ratios for business loans are applicable only
for member business loans. For example, if a business loan for $50,000
is granted on an unsecured basis and if an additional $40,000 is
granted to the borrower, only $40,000 would be subject to the loan-to-
value limitations. The Board agrees that only that portion of member
business loans in excess of $50,000 are subject to the loan-to-value
limitations. However, if the two loans are on the same collateral, the
loan-to-value limitation will apply to the aggregate amount of the
loans. For example, if the credit union makes a loan on a piece of real
estate for $40,000 and subsequently makes another $40,000 loan on the
same collateral, the loan-to-value limitation will apply to the entire
$80,000.
This proposed section would also allow any credit union to seek a
waiver from the loan-to-value ratios for a particular business loan
program. Five commenters agreed with expanding the waiver provision to
permit credit unions that recently initiated member business loan
programs to seek an exemption from loan-to-value limitations. The final
rule includes this waiver authority from the loan-to-value limitations.
The proposal exempts federally insured credit unions from the loan-
to-value ratios with respect to credit card line of credit programs
offered to nonnatural persons that are limited to routine purposes
normally made under those programs. One commenter supported this
proposal. One commenter erroneously believed this section did not apply
to federal credit unions.
Proposed Section 723.8--How much may one member or a group of
associated members borrow?
This section sets forth the aggregate amount of outstanding member
business loans that credit unions may grant to one member or a group of
associated members. Unless NCUA grants a waiver, the proposal limits
the aggregate amount of outstanding business loans to any one member or
group of associated members to 15% of the credit union's reserves (less
the Allowance for Loan Losses account) or $100,000, whichever is
higher. Six commenters agreed with the 15% threshold although one
commenter would delete the dollar threshold. One commenter requested
that the 15% limit be increased. The NCUA Board has not been provided
with a convincing rationale for raising the 15% limit and is adopting
the proposal in final.
The NCUA Board is clarifying how loan participations are treated in
regard to business loan limits. In those situations where the credit
union sold the participation without recourse, the amount sold would
not be included when calculating the 15% limit for a single borrower.
However, if the credit union sold the participation with recourse (that
is, the selling credit union essentially retains a contingent
liability), it would include the amount sold when calculating the 15%
limit.
The NCUA Board is also clarifying that the aggregate amount of
outstanding member business loans to any one member includes any
unfunded commitments.
Proposed Section 723.9--How do I calculate the aggregate 15% limit?
The current rule states that, if any portion of a member business
loan is secured by shares in the credit union or a deposit in another
financial institution, or fully or partially insured or guaranteed by,
or subject to an advance commitment to purchase by any agency of the
federal government or of a state or any of its political subdivisions,
such portion is not used in calculating the 15% limit. NCUA proposed no
substantive changes to the current rule on the calculation of the 15%
limit. Some credit unions have asked NCUA staff whether the partial
guarantee by a federal agency includes loans guaranteed by the Small
Business Administration. The amount of the loan guaranteed by the Small
Business Administration is not used in calculating the 15% limit.
For the purpose of being consistent with proposed section 723.1(b),
NCUA proposed to change the term ``financial institution'' in this
section to ``federally insured financial institution.'' Since the Act,
in setting forth the exceptions to the member business loan definition,
does not require the financial institution to be federally insured,
NCUA is not adopting this change.
Proposed Section 723.10--What loan limit waivers are available?
The proposal provides for a waiver from: (1) the maximum loan
amount to one borrower or associated group of members; (2) loan-to-
value ratios; and (3) construction and development lending. Although a
number of commenters approved of the waiver provision, twelve
commenters specifically questioned whether the waivers apply to
individual loans or to a category of loans. The intent of the proposal
was to exempt categories of loans. A loan-by-loan waiver would be
unworkable and overly burdensome for credit unions and NCUA. The final
rule clearly states that the waiver is for a category of loans.
Proposed Section 723.11--How do I obtain an available waiver?
This section describes the information that a credit union must
submit to the Regional Director with a waiver request. NCUA proposed no
substantive changes to the requirements of the current rule. However,
in the interim final rule, the NCUA Board is providing a mechanism for
state chartered federally insured credit unions to have the waiver
request
[[Page 51797]]
processed through the state supervisory authority.
Proposed Section 723.12--What will NCUA do with my waiver request?
This section addresses what the Regional Director must consider in
reviewing the waiver request and how the waiver is processed. The
proposal increased the number of days from 30 to 60 that a Regional
Director must act on a waiver request. It also eliminated the automatic
waiver approval if a region does not take action on a request within
the specified timeframe. Twelve commenters believed that the number of
days NCUA should have to process the waiver should be limited to 30
days and the automatic waiver provision should be reinstated. A few
commenters requested that NCUA have less than 30 days to approve or
disapprove the request. One commenter asked that NCUA clarify whether
there are any time limits once a waiver has been approved. The NCUA
Board is extending the number of days the agency has to process the
waiver to 45 days (from the receipt from the federal credit union or
the state supervisory authority) and has restored the automatic waiver
approval if a region does not take action on a request within the
specified timeframe. Any waiver is revocable in NCUA's sole discretion.
If a waiver is revoked, loans granted under the waiver authority are
grandfathered.
Proposed Section 723.13--What options are available if the Regional
Director denies our waiver request or a portion of it?
Under the current rule, a credit union may appeal the denial of its
waiver request by the Regional Director to the NCUA Board. NCUA
proposed no substantive changes to this area and no substantive
comments were received. The Board is adopting this section in final as
proposed.
Proposed Section 723.14--How do I reserve for potential losses?
Consistent with the current rule, this section addresses the
criteria for determining the classification of loans. NCUA proposes no
substantive changes to the loan classification. However, NCUA proposes
to move the current Appendix of Section 701.21(h) to this proposed
section. No substantive comments were received on this section. The
Board is adopting this proposed section in final.
Proposed Section 723.15--How much must I reserve for potential losses?
This section provides a schedule a credit union must use to reserve
for classified loans. NCUA proposes no substantive changes to this
schedule from the current rule. However, NCUA clarified the meaning of
this section by stating that this is the minimum amount when
establishing the reserve percentage. One commenter opposed the
mandatory reserve requirement. The Board believes the current
requirement is working well and is retained as proposed.
New Section 723.16--What is the aggregate member business loan limit?
The Act imposes a new aggregate limit on a credit union's
outstanding member business loans (including any unfunded commitments)
of the lesser of 1.75 times the credit union's net worth or 12.25% of
the credit union's total assets. Net worth is all of the credit union's
retained earnings. Retained earnings normally includes undivided
earnings, regular reserves and any other reserves. If a credit union
currently has business loans that exceed the aggregate loan limit and
does not qualify for an exception, it has until August 7, 2001 to
reduce the total amount of outstanding member business loans or below
the aggregate loan limit. Furthermore, an insured credit union that is
undercapitalized may not make any new business loans until such time
the credit union becomes adequately capitalized as required by the
prompt corrective action provisions of the Credit Union Membership
Access Act of 1998.
New Section 723.17--Are there any exceptions to the aggregate loan
limit?
The Act sets forth three exceptions to the aggregate limit: (1)
credit unions that have a low-income designation or participate in the
Community Development Financial Institutions program; (2) credit unions
that have a ``a history of primarily making member business loans,'' or
(3) credit unions that were chartered for the purpose of primarily
making member business loans.
A credit union that does not currently have a low-income
designation and is seeking to determine whether it qualifies should
contact its regional director or the appropriate state supervisor. The
Board is defining ``a history of primarily making member business
loans'' as either (1) member business loans that comprise at least 25%
of the credit union's outstanding loans (as evidenced in a call report
for 1998 or any of the three prior years); or (2) member business loans
comprise the largest portion of the credit union's loan portfolio. For
example, if a credit union makes 23% member business loans, 22% first
mortgage loans, 22% new automobile loans, 20% credit card loans and 13%
other real estate loans, then the credit union would be considered as
meeting the primarily making business loan standard. For determining
the categories of loans the credit union should use loan categories
that are similar to those set forth in the call report such as:
unsecured credit card loans/lines of credit; all other unsecured loans/
lines of credit; new vehicle loans; used vehicle loans; total first
mortgage loans; total other real estate loans; total member business
loans. NCUA estimates that less than 70 credit unions, out of a total
of 11,125 federally insured credit unions, will qualify for either of
these exceptions.
An exception may also be granted for credit unions that were
chartered for the purpose of primarily making member business loans. It
is up to the credit union to provide sufficient documentation to
demonstrate it meets this exception. Due to the nature of federal
chartering it is unlikely that many federal credit unions will qualify
for this type of exception. Furthermore, the NCUA Board is seeking
comment on how it can more fully define credit unions that were
``chartered for the purpose of * * * primarily making business loans''
for the purpose of the exception.
A credit union that does not qualify for an exception must
immediately stop making business loans that will exceed the aggregate
loan limit. Credit unions that, in good faith, believe they qualify for
an exception can continue to make new member business loans as long as
they have applied for an exception.
New Section 723.18--How do I obtain an exception?
To obtain the exception, a federal credit union must submit
documentation to the Regional Director, demonstrating that it meets the
criteria of one of the exceptions. The regional director will process
requests for exemptions expeditiously for federal credit unions.
Although NCUA believes most exceptions will be granted in 1998 it is
possible for a credit union to qualify in the future. For example, a
credit union that receives a low-income designation in the year 2001
could apply for and receive an exception on that basis.
A state chartered federally insured credit union must submit
documentation to its state regulator to receive the exception. Although
effective when granted by the state regulator, the state regulator
should forward its decision to NCUA.
The exception does not expire unless revoked by the regional
director for a
[[Page 51798]]
federal credit union or by the state regulator for a federally insured
state chartered credit union. If an exception is revoked, loans granted
under the exception authority are grandfathered.
If an exception request is denied for a federal credit union, it
may be appealed to the NCUA Board within 60 days of the denial by the
regional director. A federal credit union can continue to make business
loans until the NCUA Board decides the appeal.
Proposed Section 723.16--What are the recordkeeping requirements?
This proposed section, consistent with the current rule, requires a
credit union to identify member business loans separately in its
records and financial reports. NCUA proposed no substantive changes to
this requirement from the current rule. Four commenters believed that
this recordkeeping would be burdensome and unnecessary. NCUA believes
it is important for credit unions as well as NCUA to be able to monitor
business lending activity. Therefore, the Board is not making any
changes to this section in the final rule, except to renumber it as
Section 723.19.
Proposed Section 723.17--What additional steps do federally insured
state chartered credit unions have to perform?
In the preamble to the proposal, the Board stated that it believes
it is important for state supervisory authorities to remain aware of,
and involved in, member business loan activities in federally insured
state chartered credit unions. This new section would require federally
insured state chartered credit unions to obtain written approval for a
waiver from their state supervisory authority prior to submitting the
waiver request to NCUA. Three commenters questioned why NCUA believes
it is necessary to have this section. The commenters asked what would
happen if a state had no policy on waivers and declined to rule on the
waiver. These commenters believed this provision simply makes it more
difficult for a state chartered federally insured credit union to
obtain a waiver and that it makes little sense to restrict state
chartered credit unions in such a manner.
It appears that some of the commenters believed the waiver process
was on a loan-by-loan basis instead of a category loans. The NCUA Board
still believes it is important for state supervisory authorities to be
involved in waivers from the member business loan rule. Therefore,
Section 723.11 requires a federally insured state chartered credit
union to process its waiver request through the state supervisory
authority. The NCUA Board believes the state supervisory authorities
will expeditiously process this request and there will only be a
minimal increase in time in processing waivers from state chartered
federally insured credit unions. NCUA will not approve a waiver request
that the state supervisory authority has not forwarded to NCUA or a
request that the state supervisory authority recommends denial.
Proposed Section 723.18--How can a state supervisory authority develop
and implement a member business loan regulation?
As in the current rule, the proposal allows a federally insured
state chartered credit union to obtain an exemption from NCUA's member
business rule so that a state supervisory authority can enforce the
state's rule instead of NCUA's rule. The NCUA Board must approve the
state's rule before a federally insured state chartered credit union is
exempt from NCUA's member business loan rule. To provide better
guidance to the states, the proposal identifies the minimum
requirements that they must address for a rule to be approved by the
NCUA Board. One commenter opposes the application of NCUA's member
business rule to federally insured state chartered credit unions and
requests that it be eliminated for them. Past practice has indicated
the importance of this rule being applied to state chartered federally
insured credit unions. However, the NCUA Board recognizes the concerns
of the state supervisory authorities and the interim final rule
modifies this section to demonstrate that the NCUA Board in reviewing a
state's rule is concerned, as insurer, with the safety and soundness
issues presented by the rule and not whether the language of the rule
is virtually identical to NCUA's rule.
Three commenters questioned whether the adoption of the revised
rule by NCUA automatically means a state's rule is no longer
``substantially equivalent.'' Because of the new statutory requirements
of the Act, no state rule is currently approved for use by federally
insured state chartered credit unions. Therefore, states must seek a
new determination from NCUA.
Three commenters encouraged the NCUA Board to allow more
flexibility in the interpretation of what is ``substantially
equivalent'' where safety and soundness can be maintained. In making
its determination to approve a state's rule, the Board is primarily
concerned with safety and soundness considerations, and that is why the
minimum standards for such a determination are set forth in the
regulation.
Because proposed section 723.17 is deleted from the final rule,
this section is renumbered as Section 723.20.
Proposed Section 723.19--Definition
NCUA proposed a general definition section at the end of the rule.
This section clarified the loan-to-value ratio by including terminology
that requires the inclusion of unfunded commitments and/or lines of
credit when determining the aggregate sum. Six commenters believed NCUA
should require credit unions to include unfunded commitments and/or
lines of credit in the aggregate sum to determine loan-to-value ratios.
One commenter disagreed. The NCUA Board is adopting in final the
proposal to include unfunded commitments and/or lines of credit in the
aggregate sum for loan-to-value determinations since this is the total
amount that the credit union agreed to loan to the borrower. However,
this section in the final rule is numbered section 723.21.
Miscellaneous
One commenter requested that the preamble or final regulation state
that credit scoring is permitted to assist in determining the credit
worthiness of a business loan applicant. Although not stated in the
regulation, we note that credit scoring that complies with equal credit
opportunity laws is permitted in evaluating the credit worthiness of a
business loan applicant.
Part 722--Appraisals
Certain loans as specified in Section 722.3(a) do not require an
appraisal. In addition, the NCUA Board proposes a waiver process from
the appraisal requirement where the appraisal requirement is an
unnecessary burden. Eight commenters supported the waiver appraisal
provision, although there was some confusion on whether it applied to a
loan program or individual loans. The intent of the proposal was to
apply to a loan program. The final rule reflects that the waiver
applies to a loan program. Three commenters objected to having a waiver
process. The NCUA Board does not believe that a waiver process will
have a negative effect on the safety and soundness of credit unions.
C. Other Reductions in Regulatory Burden
Under the current rule, all loans, lines of credit, or letters of
credit that meet the definition of a member business loan must be
separately identified in the
[[Page 51799]]
records of the credit union and be reported as such in financial and
statistical reports required by the NCUA. NCUA believes that this
information is already collected, and readily available, through the
5300 Call Report. The current requirement imposes an unnecessary burden
on credit unions and, therefore, the NCUA Board is deleting this
monitoring requirement.
The current rule requires credit unions to provide periodic
disclosures to credit union members on the number and aggregate dollar
amount of member business loans. NCUA believes the language is
ambiguous and does not serve any true safety or soundness issue or
concern. Therefore, the NCUA Board is deleting this requirement.
Current Sec. 701.21(c)(5) references the member business loan
section. Due to the proposed change to the member business loan rule
numbering system, NCUA is updating Sec. 701.21(c)(5) to reference the
appropriate sections of the final rule.
D. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any proposed regulation may
have on a substantial number of small entities (primarily those under
$1 million in assets). The final member business loan rule would reduce
existing regulatory burdens. In addition, most small credit unions do
not grant member business loans. Therefore, the NCUA Board has
determined and certifies that the final rule will not have a
significant economic impact on a substantial number of small credit
unions. Accordingly, the Board has determined that a Regulatory
Flexibility Analysis is not required.
Paperwork Reduction Act
The reporting requirements in part 723 have been submitted to the
Office of Management and Budget for approval and the OMB number will be
published as soon as it is received by NCUA. Under the Paperwork
Reduction Act of 1995, no persons are required to respond to a
collection of information unless it displays a valid OMB control
number. The control number will be displayed in the table at 12 CFR
Part 795.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The final rule, as does the current rule,
applies to all federally insured credit unions, including federally
insured state chartered credit unions. However, since the final rule
reduces regulatory burden, NCUA has determined that the final rule does
not constitute a ``significant regulatory action'' for purposes of the
Executive Order.
Congressional Review
The Office of Management and Budget has determined this is not a
major rule.
List of Subjects
12 CFR Part 701
Credit, Credit unions, Insurance, Mortgages, Reporting and
recordkeeping requirements, Surety bonds.
12 CFR Part 722
Appraisals, Credit, Credit unions, Reporting and recordkeeping
requirements, State-certified and State-licensed appraisers.
12 CFR Part 723
Credit, Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on September
23, 1998.
Becky Baker,
Secretary of the Board.
For the reasons set forth in the preamble, it is proposed that 12
CFR chapter VII be amended as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 3601-3610. Section 701.35
is also authorized by 42 U.S.C. 4311-4312.
Sec. 701.21 [Amended]
2. Section 701.21 is amended in paragraph (c)(5) by revising
``Sec. 701.21(h)(1)(i)'' to read ``Sec. 723.1 of this chapter'' and
``Sec. 701.21(h)(2)(ii)'' to read ``Secs. 723.8 and 723.9 of this
chapter.''
3. Section 701.21(h) is removed and reserved.
PART 722--APPRAISALS
4. The authority citation for part 722 continues to read as
follows:
Authority: 12 U.S.C. 1766, 1789 and 3339.
5. Section 722.3 is amended by removing ``or'' at the end of
paragraph (a)(7), by removing the period at the end of paragraph
(a)(8)(ii) and adding ``; or'' in its place, and by adding a new
paragraph (a)(9) to read as follows:
Sec. 722.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(9) The regional director has granted a waiver from the appraisal
requirement for a category of loans meeting the definition of a member
business loan.
* * * * *
6. Part 723 is added to read as follows:
PART 723--MEMBER BUSINESS LOANS
Sec.
723.1 What is a member business loan?
723.2 What are the prohibited activities?
723.3 What are the requirements for construction and development
lending?
723.4 What are the other applicable regulations?
723.5 How do you implement a member business loan program?
723.6 What must your member business loan policy address?
723.7 What are the collateral and security requirements?
723.8 How much may one member, or a group of associated members,
borrow?
723.9 How do you calculate the aggregate 15% limit?
723.10 What loan limit waivers are available?
723.11 How do you obtain a waiver?
723.12 What will NCUA do with my waiver request?
723.13 What options are available if the NCUA Regional Director
denies our waiver request, or a portion of it?
723.14 How do I reserve for potential losses?
723.15 How much must I reserve for potential losses?
723.16 What is the aggregate member business loan limit for a
credit union?
723.17 Are there any exceptions to the aggregate loan limit?
723.18 How do I obtain an exception?
723.19 What are the recordkeeping requirements?
723.20 How can a state supervisory authority develop and enforce a
member business loan regulation?
723.21 Definitions.
Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.
Sec. 723.1 What is a member business loan?
(a) General rule. A member business loan includes any loan, line of
credit, or
[[Page 51800]]
letter of credit where the borrower uses the proceeds for the following
purposes:
(1) Commercial;
(2) Corporate;
(3) Other business investment property or venture; or
(4) Agricultural.
(b) Exceptions to the general rule. The following is not a member
business loan:
(1) A loan fully secured by a lien on a 1 to 4 family dwelling that
is the member's primary residence;
(2) A loan fully secured by shares in the credit union making the
extension of credit or deposits in other financial institutions;
(3) Loan(s) to a member or an associated member which, when added
together, are equal to or less than $50,000;
(4) A loan where a federal or state agency (or its political
subdivision) fully insures repayment, or fully guarantees repayment, or
provides an advance commitment to purchase in full; or
(5) A loan granted by a corporate credit union to another credit
union under part 704 of this chapter.
Sec. 723.2 What are the prohibited activities?
(a) Who is ineligible to receive a member business loan? You must
not make a member business loan to the following:
(1) Any member of the board of directors who is compensated as
such;
(2) Your chief executive officer (typically this individual holds
the title of President or Treasurer/Manager);
(3) Any assistant chief executive officers (e.g., Assistant
President, Vice President, or Assistant Treasurer/Manager);
(4) Your chief financial officer (Comptroller); or
(5) Any associated member or immediate family member of anyone
listed in paragraphs (a)(1) through (4) of this section.
(b) Equity agreements/joint ventures. You may not grant a member
business loan if any additional income received by the credit union,
senior management employees, or any member of the board of directors
who is compensated as such, is tied to the profit or sale of the
business or commercial endeavor for which the loan is made.
Sec. 723.3 What are the requirements for construction and development
lending?
Unless the Regional Director grants an exemption, loans granted for
the construction or development of commercial or residential property
are subject to the following additional requirements.
(a) The aggregate of all construction and development loans must
not exceed 15% of reserves, (excluding the Allowance for Loan Losses
account). To determine the aggregate, you may exclude any portion of a
loan:
(1) Secured by shares in the credit union;
(2) Secured by deposits in another federally insured financial
institution;
(3) Fully or partially insured or guaranteed by any agency of the
federal government, state, or its political subdivisions; or
(4) Subject to an advance commitment to purchase by any agency of
the federal government, state, or its political subdivisions;
(b) The borrower must have a minimum of 35% equity interest in the
project being financed; and
(c) The funds may be released only after on-site, written
inspections by independent, qualified personnel and according to a
preapproved draw schedule and any other conditions as set forth in the
loan documentation.
Sec. 723.4 What are the other applicable regulations?
The provisions of Sec. 701.21(a) through (g) of this chapter apply
to member business loans to the extent they are consistent with this
part.
Sec. 723.5 How do you implement a member business loan program?
The board of directors must adopt specific business loan policies
and review them at least annually. The board must also utilize the
services of an individual with at least two years direct experience
with the type of lending the credit union will be engaging in. Credit
unions do not have to hire staff to meet the requirements of this
section; however, credit unions must ensure that the expertise is
available. A credit union can meet the experience requirement through
various approaches. For example, a credit union can use the services of
a credit union service organization, an employee of another credit
union, an independent contractor, or other third parties. However, the
actual decision to grant a loan must reside with the credit union.
Sec. 723.6 What must your member business loan policy address?
At a minimum, your policy must address the following:
(a) The types of business loans you will make;
(b) Your trade area;
(c) The maximum amount of your assets, in relation to reserves,
that you will invest in business loans;
(d) The maximum amount of your assets, in relation to reserves,
that you will invest in a given category or type of business loan;
(e) The maximum amount of your assets, in relation to reserves,
that you will loan to any one member or group of associated members,
subject to Sec. 723.8;
(f) The qualifications and experience of personnel (minimum of 2
years) involved in making and administering business loans;
(g) A requirement to analyze and document the ability of the
borrower to repay the loan;
(h) Receipt and periodic updating of financial statements and other
documentation, including tax returns;
(i) A requirement for sufficient documentation supporting each
request to extend credit, or increase an existing loan or line of
credit (except where the board of directors finds that the
documentation requirements are not generally available for a particular
type of business loan and states the reasons for those findings in the
credit union's written policies). At a minimum, your documentation must
include the following:
(1) Balance sheet;
(2) Cash flow analysis;
(3) Income statement;
(4) Tax data;
(5) Analysis of leveraging; and
(6) Comparison with industry average or similar analysis.
(j) The collateral requirements must include:
(1) Loan-to-value ratios;
(2) Determination of value;
(3) Determination of ownership;
(4) Steps to secure various types of collateral; and
(5) How often the credit union will reevaluate the value and
marketability of collateral;
(k) The interest rates and maturities of business loans;
(l) General loan procedures which include:
(1) Loan monitoring;
(2) Servicing and follow-up; and
(3) Collection;
(m) Identification of those individuals prohibited from receiving
member business loans.
Sec. 723.7 What are the collateral and security requirements?
(a) Unless your Regional Director grants a waiver, all member
business loans must be secured by collateral as follows:
[[Page 51801]]
------------------------------------------------------------------------
Lien Minimum loan to value requirements
------------------------------------------------------------------------
All............................... LTV ratios cannot exceed 95%.
First............................. You may grant a LTV ratio in excess
of 80% only where the value in
excess of 80% is covered through:
for real estate member business
loans, acquisition of private
mortgage or equivalent type
insurance provided by an insurer
acceptable to the credit union
(where available); insurance or
guarantees by, or subject to
advance commitment to purchase by,
an agency of the federal
government; or insurance or
guarantees by, or subject to
advance commitment to purchase by,
an agency of a state or any of its
political subdivisions.
First............................. LTV ratios up to 80%.
Second............................ LTV ratios up to 80%.
------------------------------------------------------------------------
(b) Borrowers, other than a not for profit organization as defined
by the Internal Revenue Service Code (26 U.S.C. 501) or those where the
Regional Director grants a waiver, must provide their personal
liability and guarantee.
(c) Federally insured credit unions are exempt from the provisions
of paragraphs (a) and (b) of this section with respect to credit card
line of credit programs offered to nonnatural person members that are
limited to routine purposes normally made available under those
programs.
Sec. 723.8 How much may one member, or a group of associated members,
borrow?
The aggregate amount of outstanding member business loans
(including any unfunded commitments) to any one member or group of
associated members must not exceed the greater of:
(a) 15% of the credit union's reserves (excluding the Allowance for
Loan Losses account); or
(b) $100,000; or
(c) An amount approved by the credit union's Regional Director.
Sec. 723.9 How do you calculate the aggregate 15% limit?
(a) Step 1. Calculate the numerator by adding together the total
outstanding balance of member business loans to any one member, or
group of associated members. From this amount, subtract any portion:
(1) Secured by shares in the credit union;
(2) Secured by deposits in another federally insured financial
institution;
(3) Fully or partially insured or guaranteed by any agency of the
Federal government, state, or its political subdivisions;
(4) Subject to an advance commitment to purchase by any agency of
the Federal government, state, or its political subdivisions.
(b) Step 2. Divide the numerator by all reserves, excluding the
Allowance for Loan Losses account.
Sec. 723.10 What loan limit waivers are available?
In addition to an individual waiver from the personal liability and
guarantee requirement, you also may seek a waiver for a category of
loans in the following areas:
(a) Loan-to-value ratios;
(b) Maximum loan amount to one borrower or associated group of
borrowers; and
(c) Construction and development loan limits.
Sec. 723.11 How do you obtain a waiver?
To obtain a waiver, a federal credit union must submit a request to
the Regional Director. A state chartered federally insured credit union
must submit the request to its state supervisory authority. If the
state supervisory authority approves the request, the state regulator
will forward the request to the Regional Director. A waiver is not
effective until it is approved by the Regional Director. The waiver
request must contain the following:
(a) A copy of your business lending policy;
(b) The higher limit sought;
(c) An explanation of the need to raise the limit;
(d) Documentation supporting your ability to manage this activity;
and
(e) An analysis of the credit union's prior experience making
member business loans, including as a minimum:
(1) The history of loan losses and loan delinquency;
(2) Volume and cyclical or seasonal patterns;
(3) Diversification;
(4) Concentrations of credit to one borrower or group of associated
borrowers in excess of 15% of reserves (excluding the Allowance for
Loan Losses account);
(5) Underwriting standards and practices;
(6) Types of loans grouped by purpose and collateral; and
(7) The qualifications of personnel responsible for underwriting
and administering member business loans.
Sec. 723.12 What will NCUA do with my waiver request?
Your Regional Director will:
(a) Review the information you provided in your request;
(b) Evaluate the level of risk to your credit union;
(c) Consider your credit union's historical CAMEL composite and
component ratings when evaluating your request; and
(d) Notify you of the action taken within 45 calendar days of
receiving the request from the federal credit union or the state
supervisory authority. If you do not receive notification within 45
calendar days of the date the request was received by the regional
office, the credit union may assume approval of the waiver request.
Sec. 723.13 What options are available if the NCUA Regional Director
denies our waiver request, or a portion of it?
You may appeal the Regional Director's decision in writing to the
NCUA Board. Your appeal must include all information requested in
Sec. 723.11 and why you disagree with your Regional Director's
decision.
Sec. 723.14 How do I reserve for potential losses?
Non-delinquent loans may be classified based on factors such as the
adequacy of analysis and supporting documentation. You must classify
potential loss loans as either substandard, doubtful, or loss. The
criteria for determining the classification of loans are:
(a) Substandard. Loan is inadequately protected by the current
sound worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of debt. They are
characterized by the distinct possibility that the credit union will
sustain some loss if the deficiencies are not corrected. Loss
potential, while existing in the aggregate amount of substandard loans,
does not have to exist in individual loans classified substandard.
(b) Doubtful. A loan classified doubtful has all the weaknesses
inherent in one classified substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions, and values, highly
questionable and improbable. The possibility of loss is extremely high,
but because of certain
[[Page 51802]]
important and reasonably specific pending factors which may work to the
advantage and strengthening of the loan, its classification as an
estimated loss is deferred until its more exact status may be
determined. Pending factors include: proposed merger, acquisition, or
liquidation actions; capital injection; perfecting liens on collateral;
and refinancing plans.
(c) Loss. Loans classified loss are considered uncollectible and of
such little value that their continuance as loans is not warranted.
This classification does not necessarily mean that the loan has
absolutely no recovery or salvage value, but rather, it is not
practical or desirable to defer writing off this basically worthless
asset even though partial recovery may occur in the future.
Sec. 723.15 How much must I reserve for potential losses?
The following schedule sets the minimum amount you must reserve for
classified loans:
------------------------------------------------------------------------
Classification Amount required
------------------------------------------------------------------------
Substandard............................ 10% of outstanding amount
unless other factors (for
example, history of such loans
at the credit union) indicate
a greater or lesser amount is
appropriate.
Doubtful............................... 50% of the outstanding amount.
Loss................................... 100% of the outstanding amount.
------------------------------------------------------------------------
Sec. 723.16 What is the aggregate member business loan limit for a
credit union?
The aggregate limit on a credit union's outstanding member business
loans (including any unfunded commitments) is the lesser of 1.75 times
the credit union's net worth or 12.25% of the credit union's total
assets. Net worth is all of the credit union's retained earnings.
Retained earnings normally includes undivided earnings, regular
reserves and any other reserves.
Sec. 723.17 Are there any exceptions to the aggregate loan limit?
There are three circumstances where a credit union may qualify for
an exception from the aggregate limit. The three exceptions are:
(a) Credit unions that have a low-income designation or participate
in the Community Development Financial Institutions program;
(b) Credit unions that were chartered for the purpose of primarily
making member business loans and can provide documentary evidence; or
(c) Credit unions that have a history of primarily making member
business loans, meaning that either member business loans comprise at
least 25% of the credit union's outstanding loans (as evidenced in a
call report for 1998 or any of the three prior years) or member
business loans comprise the largest portion of the credit union's loan
portfolio. For example, if a credit union makes 23% member business
loans, 22% first mortgage loans, 22% new automobile loans, 20% credit
card loans, and 13% total other real estate loans, then the credit
union meets this exception.
Sec. 723.18 How do I obtain an exception?
To obtain the exception, a federal credit union must submit
documentation to the Regional Director, demonstrating that it meets the
criteria of one of the exceptions. A state chartered federally insured
credit union must submit documentation to its state regulator. The
state regulator should forward its decision to NCUA. The exception does
not expire unless revoked by the state regulator for a state chartered
federally insured credit union or the Regional Director for a federal
credit union. If an exception request is denied for a federal credit
union, it may be appealed to the NCUA Board within 60 days of the
denial by the Regional Director. Until the NCUA Board acts on the
appeal, the credit union can continue to make new business loans
Sec. 723.19 What are the recordkeeping requirements?
You must separately identify member business loans in your records
and in the aggregate on your financial reports.
Sec. 723.20 How can a state supervisory authority develop and enforce
a member business loan regulation?
(a) The NCUA Board may exempt a federally insured state chartered
credit union from NCUA's member business loan rule, if, NCUA approves
the state's rule for use for state chartered federally insured credit
unions. In making this substantial equivalency determination, the Board
is guided by safety and soundness considerations and reviews whether
the state regulation minimizes the risk and accomplishes the overall
objectives of NCUA's member business rule in this part. Specifically,
the Board will focus its review on the definition of:
(1) A member business loan;
(2) Loan to one borrower limits;
(3) Written loan policies;
(4) Collateral and security requirements;
(5) Construction and development lending; and
(6) Loans to senior management.
(b) To receive NCUA's approval of a state's members business rule,
the state supervisory authority must submit its rule to the NCUA
regional office. After reviewing the rule, the region will forward the
request to the NCUA Board for a final determination.
Sec. 723.21 Definitions.
For purposes of this part, the following definitions apply:
Associated member is any member with a shared ownership,
investment, or other pecuniary interest in a business or commercial
endeavor with the borrower.
Construction or development loan is 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 or sale; commercial use; industrial use;
or similar uses.
Immediate family member is a spouse or other family member living
in the same household.
Loan-to-value ratio is the aggregate amount of all sums borrowed,
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.
Reserves are all reserves, including the Allowance for Loan Losses
and Undivided Earnings or surplus.
PART 741--REQUIREMENTS FOR INSURANCE
7. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766 and 1781-1790. Section 741.4 is
also authorized by 31 U.S.C. 3717.
Sec. 741.203 [Amended]
8. Section 741.203 is amended in paragraph (a) by revising
``Sec. 701.21(h)'' to read ``part 723.''
[FR Doc. 98-25959 Filed 9-28-98; 8:45 am]
BILLING CODE 7535-01-P