APPENDIX B - CONSUMER LOAN POLICY. Table of Contents

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1 APPENDIX B - CONSUMER LOAN POLICY Table of Contents 1. CONSUMER LOAN POLICY STANDARD UNDERWRITING REFERRAL SOURCES UNDERWRITING OF EXISTING LOANS: UNDERWRITING LOAN POLICY EXCEPTIONS PROJECTED COMBINED DEBT-TO-INCOME (DTI) INCOME VERIFICATION EXISTING DEBT LOAN-TO-VALUE (LTV) RATIO REAL ESTATE SUPERVISORY LOAN TO VALUE (SLTV) REAL ESTATE SECURED - INSURANCE CO-SIGNERS SUBORDINATION AGREEMENTS LOANS TO SATISFY CURRENT INDEBTEDNESS PRICING FEES OBJECTIVE The objective of this consumer loan policy is to set forth the guidance to help establish acceptable quality loans that are desirable and to insure consistency in the underwriting and credit approval process. 1. CONSUMER LOAN POLICY a. Underwriting policies and procedures are set up to determine whether a loan request meets asset quality requirements. It is not the intention of this policy to replace the good sound credit judgment each banker is expected to exercise in day to day lending. Ultimate authority for decision recommendations resides with the originating banker and bank office. It is expected that all lending personnel read and understand this policy. 2. STANDARD UNDERWRITING a. If Banker is aware of a bankruptcy or a bankruptcy is currently reporting on the applicants credit bureau, no loan regardless of the amount, shall be made without prior approval from the Market President, Director of Communications, Chief Credit Officer (CCO), Chairman or Appendix B Consumer Loan Policy Page 1

2 CEO, with said approval considered after 3 years of exemplary credit history with no 30 day past dues or 30 day late payments in the last 12 months b. Loans are not to be made for the purpose of paying internally accrued interest, to prevent the inadvertent capitalization of interest. In the event the request is to refinance external credit, repayment capacity must be verified prior to approving any loan to pay interest. c. Loan Applications: Bismarck, Dickinson, Fargo and Sioux Falls Markets i. All loan requests shall be evidenced by written applications. In certain situations, it may be necessary to accept a telephone application. ii. If a telephone application is accepted, the Banker should note on the application that it was taken over the phone and the date it was taken. The applicant is to sign the application at the next subsequent in person meeting New Town, Parshall and Watford City Markets iii. All loan applications from customers that are new to the Bank shall be evidenced by a written application iv. For existing Bank customers, non-real estate loan requests less than $5,000 require a complete application every 6 months unless there are substantive changes in the customer s circumstances (employment change etc.) indicate a need for a new application. v. Credit request logs are to be use to document when a request is received and approved/declined regardless of the use or non-use of an application. vi. All real estate related loan requests must be documented with a written application vii. In certain situations, it may be necessary to accept a telephone application. If a telephone application is accepted, the Banker should note on the application that it was taken over the phone and the date it was taken. The applicant is to sign the application at the next subsequent in person meeting. d. The Banker will verify the identity of all applicants who do not have a current account relationship with Cornerstone Bank consistent with Bank Secrecy Act (BSA) e. Cornerstone Bank will extend credit only if at least one of the applicants has the legal capacity to contract. At least one applicant must be 18 years of age or older. If the applicant is not 18 years of age, the applicant will be asked to provide a suitable co-signer or co-applicant of their choosing f. Credit Bureau Report - All Markets i. The Banker is to pull and review credit bureau report with FICO score with all requests for credit applications. Credit Bureau reports are considered current for 6 months from date of application. With the exception of ATR loans, where the credit report must not be older than 30 days prior to the application date. Banker must review credit bureau with applicant to verify and confirm current obligations and address any changes/updates to credit bureau report. Banker is to pull a new credit bureau report if warranted to clarify discrepancies. ii. Consumer loans are available on a secured basis to borrowers with a Fair Isaac Appendix B Consumer Loan Policy Page 2

3 Corporation (FICO) score of 650 or greater, and on an unsecured basis when the FICO score is 700 or greater. FICO to be used for underwriting and pricing purposes is that of the primary wage earner. Subject to all other loan policy criteria, additional secured only credit requests will be considered for existing performing credits with a FICO score less than 650 (all accounts with Cornerstone Bank (CSB) and reported on the credit bureau are current and no 30 day or greater past due in the last 12 months). Approval of such credit requests will not be considered a policy exception g. Underwriting Documentation i. All Markets - All lines and loans shall be described on a Consumer Loan Application Worksheet (CLAW), a credit presentation form, showing details of loan purpose, amount, rate and terms, related borrowings, account relationships, collateral values, exceptions, etc., and be signed by originating Banker. Proper approval authority will also be documented on the CLAW. There are two exceptions: a. A CLAW is not required on ODP lines of $2,500 and less with a FICO that is 650 and greater. Documentation of DTI calculation and FICO score is required in the file. b. Non-real estate loans to existing borrowers with loan amounts under $5,000 in New Town, Parshall and Watford City markets. The Consumer Loan Application Worksheet (CLAW) is required but comments are to include, but not limited to, the use of funds, extenuating circumstances and source of repayment, if a single pay loan. h. It shall be the Banker s responsibility to make certain that the proper documents are filed with the proper agencies (department of transportation, county recorder, secretary of state, etc ) to perfect the bank s security interest. In addition, banker shall conduct payoffs for any debt consolidation or refinance loan, gather collateral at or before loan closing, and assure cashiers checks are made directly to previous creditors i. Documentation of all non-routine loans shall be checked with an attorney when deemed advisable. Consultation with Credit Administration is required prior to entering into such loans, and for determination of the attorney to be used j. Loans secured by fixed assets require a repayment schedule safely within the expected life (value) cycle of the asset financed as defined in Loan Policy, see Appendix B-1 - Consumer Loan Policy Guide k. Evidence of hazard or replacement cost insurance to cover assets pledged to the bank is required in an amount sufficient to cover our loan and any other liens currently in place prior to ours. Bank is to be listed as Lender Loss Payable or Mortgagee dependent on type of collateral. Evidence of the insurance is to be maintained in credit file New Town, Parshall and Watford City Markets Insurance is not required for loans under $5,000 with non-real estate collateral. Under certain circumstances insurance requirements may be waived for borrowers with sufficient wherewithal. The circumstances supporting the waiver are to be documented in the collateral and approved by originating Banker and a peer Banker. l. Stability (i.e. length of time) of employment and residence history shall be considered to Appendix B Consumer Loan Policy Page 3

4 approve a loan request. Current Employment of 6 consecutive months or 24 months of historical employment in current industry of employment is desired m. All consumer lending to utilize a monthly Debt-to-Income ratio (DTI) of 42%, see section 6 for DTI determination. It is the goal of Cornerstone Bank to establish full relationships with its customers inclusive of loans, deposits and investments. Cornerstone Bank will consider loans to non-deposit customers with the understanding the Banker will make a concerted and consistent effort to obtain all of our customers banking related business. Bankers should always attempt to cross sell customers to provide other banking services where appropriate n. A credit denial requires two Bankers to review 3. REFERRAL SOURCES Cornerstone Bank will conduct business with the highest integrity, and insists that its business partners do as well. Cornerstone Bank will accept referrals for consumer credit from outside sources and contacts that also exhibit the same commitment to integrity. This is not intended to cover incidental referrals that may result from positive word of mouth or other non-organized referral activity, whether from business or non-business. All referrals are, however, subject to Cornerstone Bank Code of Ethics. 4. UNDERWRITING OF EXISTING LOANS: After a loan is closed, changes to the loan can be made only through mutual agreement between the client and the bank. The type of agreement, the level of underwriting, and the documentation needed to support the change depends on the nature of the change. This section addresses the following actions that may be taken on existing consumer credits: a. Change in Terms A Change in Terms is a modification of an existing term loan or line of credit made prior to maturity that does not refinance the loan or line (see section b. for refinance definition). Loan terms that can be modified include: i. Payment amount ii. iii. Payment frequency Payment due date iv. Substitution of non-real estate collateral securing the loan. When substituting/releasing collateral, the value of the new/remaining collateral must be within Bank policy guidelines and within original approval parameters. Otherwise, the request must be treated as a new request for credit. Documentation to support the value of the new collateral must be retained in the loan file and the lien must be perfected, per guidelines. An analysis of the LTV impact is to be detailed on CIT request. v. A loan with payment protection can not be modified. A change in terms (CIT) involving a consumer loan with a guarantor requires the signature of the guarantor on the CIT in addition to the signature of the borrower(s). b. Extensions Appendix B Consumer Loan Policy Page 4

5 An extension is a Change in Terms that moves the maturity by the number of months extended. i. Extensions are only to be granted for lines and loans that current and performing as agreed. ii. iii. iv. Loans secured by a mortgage that are extended need to consider a modification of the mortgage extending the mortgage maturity date in conjunction with the line/loan extension. Extension requests are to be proactive in nature and are be completed prior to maturity of line/loan. Are limited to three months and made only once during the original term of the loan. v. Interest is to be brought current when extensions are granted c. Refinance i. Refinance of existing debt is applicable to both Real Estate and Non-Real Estate secured loans and lines. Underwriting guidelines and requirements without exception mirror those for new credit requests. A refinance is a new loan that extinguishes an existing debt and creates a new debt. A credit request must be treated as a refinance when: (1) An existing loan or line of credit is past its maturity (2) Additional principal is advanced on a term loan or the credit limit is increased on an existing line of credit (3) Clients are added or deleted (4) The interest rate is increased on a term loan, even if the maturity date does not change (5) Credit product changes. For example: (a) A secured loan product to an unsecured product (b) An unsecured product to a secured (c) A real estate secured loan to a non-real estate secured loan (d) A non-real estate secured loan to a real estate secured loan (e) Any line of credit to a term loan product (f) Any term loan product to a line of credit (g) An amortizing term loan product to a single pay loan product (h) A single pay loan to a term loan (i) The maturing loan or line of credit was originated using documentation from a bank that was subsequently acquired by Cornerstone Bank ii. All refinanced loans are to utilize new loan documentation with issuance of a new note number and are to meet guidance and terms as defined in Appendix B-1 Appendix B Consumer Loan Policy Page 5

6 iii. It is Cornerstone Bank policy to not capitalize interest and therefore refinances require interest is to be brought current at the time of refinance. iv. When a Home Equity Line of Credit (HELOC) or a Home Equity (HE) Term Loans are renewed, a Modification of the Mortgage is filed to amend the mortgage that was filed for the original loan d. Status Changes A status change is a change to information on loan documents that does not require that the original agreement be amended. Examples include a change of address (unless collateral address is also changing), the client s name changes in the event of marriage or divorce, changes in the index used for variable rate loans and lines of credit, or a change in the Bank s name in the event of an acquisition. All other changes should be formally documented and agreed to in writing by the client(s). e. Deferrals A deferral is delaying a contractually due payment on a loan without affecting the other terms, including the maturity, of the loan. The account is shown current upon granting the deferral. Once a loan is past its maturity date, payments cannot be deferred; the loan must either be refinanced or reflected as past due. Deferrals are granted on clients who have demonstrated a willingness to repay. Deferrals are limited to one month and can be provided only once during the original term of the loan. The debt ratio and loan-to-value are not considered when considering the granting of an extension. 5. UNDERWRITING LOAN POLICY EXCEPTIONS Loan Policy is set forth to establish acceptable terms and conditions under which the Bank will lend to its customers. Loan policy is to be adhered to both as written and as intended to protect the Bank. Recognizing that there are legitimate reasons why guidelines may not be followed 100% of the time, Cornerstone has established processes for obtaining approvals when it is desired to vary from approved guidelines and supporting procedures. Any exception to loan policy shall be stated on the loan approval documentation used showing details of the loan purpose, amount and terms, related borrowings, account relationships, collateral values, etc. with the mitigating factors that warrant the policy exception. Designated individuals are authorized to approve loan policy exceptions, see Loan Policy Appendix A Approval Lending Limits. 6. PROJECTED COMBINED DEBT-TO-INCOME (DTI) Capacity quantifies the applicant s ability to repay the loan from his/her primary and when applicable, additional sources of repayment. The primary measure of capacity is the projected debt-to-income ratio. The applicant must have enough sustainable income to service the credit request in addition to other obligations they have. The Banker is responsible for establishing the debts and the income that are the basis for the debt-to-income analysis and decision recommendation. All consumer lending is to utilize a maximum DTI income of 42%. Bankers need to use judgment when determining projected DTI. a. Applicants with DTI within guidelines after consideration of their cost of living still may not Appendix B Consumer Loan Policy Page 6

7 have the capacity to repay the requested loan b. It is the Banker s responsibility to look beyond the numbers to determine true repayment capacity c. The Banker must have judgment as to available credit when determining DTI. Historical credit use will help determine if the available credit must be factored into DTI d. DTI calculation needs to include rent or Principal, Interest, Taxes, and Insurance (PITI) payment. e. For DTI calculation, a 2.5% payment should be calculated for PLOC and credit cards without a payment noted. f. For HELOC debt, a payment of 1.25% should be used for interest only lines g. For student loan payments in deferral, a 1% payment should be used for outstanding balances 7. INCOME VERIFICATION The applicant(s) must provide the Banker with accurate income information for all sources of income to be used as the basis for considering the loan request (see 7.e. for requirement on CD secured loans). Income verification is required on all loans with application requirements. The Banker must disclose to the applicant that alimony, child support or maintenance income need not be revealed unless the applicant wants that income considered as a basis for repaying the loan. Acceptable sources of income verification are: a. Average of the most recent Two (2) years tax returns with all appropriate schedules. For self employed or rental income, two years tax returns are required. b. Most recent year s W2 c. Average of two (2) pay stubs within 60 days of application, or a current pay period YTD that reflects a minimum of 2 months of pay history that is within the year the loan is being completed as long as employment has not changed. d. Average of the last two social security, retirement or payroll direct deposits into a Cornerstone Bank deposit account i. Direct deposits to be Grossed up as follows: (1) Retirement/Social Security deposit amount x 1.25 (2) Payroll deposit amount x 1.25 ii. Letter from employer on company letter head stating: (1) Start date (2) Job Title/Position (3) Salary/Wage e. CD secured notes require income reporting but do not require income verification f. Overtime/bonuses can be considered in DTI calculation when there is evidence of the income for at least two years g. Income verification is not necessary on ODP lines less than $2,500; however, underwriting Appendix B Consumer Loan Policy Page 7

8 must still be documented in the file. h. In considering a commission only based income; income must be supported by the two (2) most recent tax year returns. In considering rental income, the income must be supported by the appropriate schedule from tax returns and lease agreements. The lease agreement is to verify length of time payment to be received. When considering rental income, any related debt service requirements against the rental property must also be considered in the DTI calculation. i. When lending to a self employed borrower or for amounts unsecured greater than $50,000, a Personal Financial Statement is required. It is recognized that the requirements and quality of personal financial statements are situational in nature. When lending to an individual or to an entity where the individual has an active guaranty (the individual is making payments as a result of his/her guaranty) at minimum the Bank requires a PFS detailing current and noncurrent assets and liabilities, the resulting net worth and contingent liabilities as outlined in the Bank personal financial statement form. It is not necessary to use the Bank s form however the format used must provide the necessary information. All personal financial statements are to be dated and at a minimum signed by the borrower or guarantor. Accountant prepared and provided personal financial statements are acceptable without signatures if the accompanying cover letter or is attached to the PFS. j. The level of due diligence applied to the PFS is subject to the risk associated with the credit exposure. The Banker must complete sufficient due diligence to allow for Bank reliance on the accuracy of the statement. For example, the PFS of a high net worth client with low leverage may only require a comparison to the current credit bureau report to verify the accuracy of current indebtedness. The opposite is equally applicable, i.e. the PFS of a small or moderate net worth highly leveraged client may require independent verification of the majority of the significant assets such as brokerage statements, IRAs/401k statements, closely held business YE financial statements, RE tax records etc. The cash flow of an individual can also drive the need for further financial statement due diligence. If an individual s personal cash flow is insufficient and reliant on utilization of existing assets, independent verification of assets and asset liquidity may be required. The opposite also applies in that an individual with high cash flow with minimal debt service and outside demands on cash flow may only require verification of cash flow and indebtedness through the use of tax returns and a current credit bureau report. 8. EXISTING DEBT Bankers must properly position requests for a PFS with the borrower understanding that the credit underwriting process may create a need for additional information and due diligence. Incomplete or financial statements lacking necessary detail will delay the decision process or may result in a declination of the request. Bankers are responsible for identifying applicant debts that will be outstanding after the requested loan is closed. This includes the proposed loan and excludes any debt that will be paid from the proceeds of the proposed loan. Most debts will be identified on the credit bureau report. If the applicant and/or banker are aware of debts that are not indicated on the credit bureau report, the banker must add the obligation into the ratios. Debt to be considered is to include but is not limited to: a. Monthly mortgage payments at the higher of the introductory rate or fully-indexed rate based Appendix B Consumer Loan Policy Page 8

9 on substantially equal monthly fully amortizing payments b. Monthly payments on any simultaneous loans granted. c. Monthly payments for property taxes and other fixed costs such as homeowner s association fees. d. Monthly payments for any insurance the Bank requires the Borrowers to purchase. e. All other existing debt, alimony and child support payments and all other required obligations. 9. LOAN-TO-VALUE (LTV) RATIO For each Loan-to-value (LTV), a maximum LTV will be established that is consistent with Appendix B1. The maximum LTV requirements are influenced by traditional market factors and community competition. It is understood that the disposition of collateral will not always cover the client s obligation in the event of default. For real estate secured loans, reference to LTV includes combined loan-to-value in that all debt secured by the collateral is considered in calculating the LTV ratio. Cornerstone Bank does not provide junior lien financing for loans secured with assets other than real estate. Multiple pieces of collateral may be used to secure a loan. Cross collateralization is permitted. 10. REAL ESTATE SUPERVISORY LOAN TO VALUE (SLTV) Appendix A to Part 365 Interagency Guidelines for Real Estate Lending Policies sets forth criteria with maximum recommend loan to value for various categories of real estate. Those specifically applicable to consumer lending are raw land (applies to undeveloped lots), land development (applies to developed lots) and 1-4 family residential construction. Any credits exceeding SLTV limits must be tracked for regulatory reporting purposes. It is expected consumer lending will remain within SLTV parameters. In the event it appears necessary to exceed a SLTV limit please consult with Credit Administration for proper loan approval and monitoring purposes. Consumer applicable SLTV limits are as follows: Raw land (undeveloped lot) SLTV 65% Developed land (improved lot) SLTV 75% Construction 1-4 family residential SLTV 85% Owner Occupied or Home Equity 1-4 family residential 90%* * A SLTV has not been set for 1-4 family owner occupied or home equity, however guidance does recommend a limit of 90% unless support by private mortgage insurance (PMI). 11. REAL ESTATE SECURED - INSURANCE Clients will provide proof of homeowner s casualty insurance prior to closing and/or executing an Agreement to Provide Insurance. The amount of the insurance should cover outstanding lien exposure but in no event less than 80% of the replacement cost of the improvements. Cornerstone Bank is to be named as mortgagee in the intended security interest position. Flood Determinations will be conducted by the Banker once a preliminary credit decision has been made. If the flood determination indicates that the structure is in a special flood hazard area, evidence of adequate flood insurance is required prior to closing. The amount of flood insurance required for the loan is as follows: Appendix B Consumer Loan Policy Page 9

10 a. The outstanding principal balance of the loan plus all subsequent and proposed liens; b. The insurable value of the home; c. The maximum amount of insurable available under the Program. The National Flood Insurance Reform Act of 1994 raised the limits of coverage to $250,000 for 1-4 residential structure. If there is a valid reason to dispute the accuracy of the flood determination, one of the following can be done: a. Information can be submitted to the flood determination vendor to support a change in determination. b. The client can request a special determination from the Federal Emergency Management Agency (FEMA) to declare that the structure is not in a flood zone. The requested action does not negate the need for flood insurance unless the revised flood zone determination from the flood vendor or the Letter of Map Amendment/Revision from FEMA is obtained prior to closing and clearly identifies flood insurance is not required. 12. CO-SIGNERS Use of co-signers is available for appropriate circumstances but is not to be used as a solution for poor credit. If an applicant has a limited credit history that restricts the Banker s ability to evaluate the applicant s history of repaying debts, the application can still be considered if the applicant submits a suitable co-signer. A co-signer is defined as an individual who agrees to be liable for a debt even though he/she receives no benefit from the loan proceeds. If an individual is added to an application as a co-signer, Debt-to-Income (DTI) will be calculated individually for both the applicant and the co-signer. The applicant s DTI indicates whether the applicant, despite his/her lack of credit history, has the capacity to repay the loan without relying on the co-signer. The co-signer s DTI is calculated to determine if the co-signer has the capacity to repay the debt if the applicant cannot. In addition, a joint DTI needs to be completed. Moved to appendix B-1 to address market variances 13. SUBORDINATION AGREEMENTS Subordination agreements may be complex and fully eliminate the Bank s collateral and collection rights. Prior to approval the Banker is to verify that the loan will remain within the Bank s policy after entering into the subordination agreement. Factors for consideration shall include LTV, DTI, FICO, etc. In essence, reconsideration of underwriting credit per Bank policy. Bankers are not to sign off without prior review and approval from either the Retail Manager or the Market President (CEO or CCO) can also approve; however, it is expected that Bankers will consider other approvals first). 14. LOANS TO SATISFY CURRENT INDEBTEDNESS It is the Banker s responsibility to insure the Bank s lien position is perfected and as intended. Bankers are to use O&E s, title opinions, lien searches, etc., pre and post to verify the Banks collateral position. The Banker will need to take necessary steps to verify prior security interests are satisfied and released prior to or in conjunction with the advance of Bank funds 15. PRICING Appendix B Consumer Loan Policy Page 10

11 Pricing of all consumer loans must be determined using the standard published rate sheet for the specific Markets. Any exceptions to pricing must be documented with reasons for the exception. For co-borrower loans in all Markets, the rate shall be determined based on the FICO of the primary wage earner. 16. FEES Fees will be assessed per the Loan Fee sheet located on the Intranet. Any waivers will be mitigated on the loan approval documentation. Appendix B Consumer Loan Policy Page 11