California Credit Union SECTION IV LENDING

Transcription

1 SECTION IV LENDING Policy California Credit Union will provide loans to its members in accordance with the laws and regulations of the State of California, the laws and regulations of the United States applicable to credit unions, and the articles of incorporation, and by-laws adopted by the Board of Directors and approved by the California Department of Business Oversight. The credit union will make credit determination of all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, familial status, handicap, veteran status, or age (provided that the applicant has the capacity to contract); to the fact that all or part of the applicant s income derives from a public assistance program; to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The Credit Manager is designated as the credit manager for the credit union by the by-laws adopted by the Board of Directors and approved by the California Department of Business Oversight. The Credit Manager will maintain Procedures/Guidelines for lending at California Credit Union. The Credit Manager will inform the Board of Directors of issues relating to lending operations when needed but not less than annually. Policy Statement 12/21/17 BD /2017 BD

2 COMMERCIAL LOANS General Statement California Credit Union will make sound business loans as a means to meet changing member financial needs within its field of membership. Commercial loans will be priced to cover all costs of the loans and provide adequate margin for reserves and/or losses. Business loans provide additional opportunities to increase and diversify credit union assets. Commercial Loan Definition A commercial loan, as defined by CCU, includes any loan (including any unfunded commitments) where the borrower is a business, school, corporation, unincorporated association, or a natural person that uses the proceeds for business purposes, as defined by NCUA Rules and Regulations Part 723. A majority of commercial loans may also be reported as Member Business Loans on the credit unions Call Report, as outlined below. Purpose Based on the breadth of the Credit Union Staff s level of business lending experience, the Credit Union will consider loans that will fall under any of the categories to this Policy. By way of example, the Credit Union will lend on any kind of office, industrial, multi-family, retail properties and on a select basis single and special purpose commercial properties both for investors and owner users. Additionally, the Credit Union will provide business lines of credit and term loans, on an unsecured and secured basis. Undesirable Loans (Loans not to be made by CCU) Loans to startup companies where repayment source is not clearly defined and/or reliable (with the exception of SBA Guaranteed loans or CA Loan Guaranty programs). Loans to individuals starting or purchasing a business when they have no prior experience in the field Loans involving individuals or businesses unable or unwilling to provide satisfactory financial information Loans considered a poor credit risk, even if an endorser or guarantor is obtained Loans secured by an undivided interest in real property without subordination of alternate owner interest Loans for venture capital Loans to individuals or businesses that violate state or federal law or create a reputation risk for the credit union. Loans to pay interest on matured obligations, unless realistic cash flow projections clearly indicate repayment capacity. Loans to borrowers or guarantors whose previous performance has resulted in actual loss to the Credit Union. Loans for speculation on the future value of securities or commodities. Not considered to be commercial loans: Loans where the aggregate commercial loans to a member or associated members is less than $50,000. A loan fully secured by a lien on a 1-to-4 family dwelling that is held for investment purposes. (These loans remain MBLs) A loan secured by a vehicle manufactured for household use as long as additional loans are not secured by other vehicles in a fleet or the vehicle is used to carry fare paying Limit ERM

3 passengers. (These loans also remain MBLs)A loan fully secured by shares in the credit union or deposits in other financial institutions; The portion of loans 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. Not considered to be Member Business Loans: The commercial loan exceptions listed above and: Non-member in-participations A loan fully secured by a lien on a 1-to-4 family dwelling that is the member s primary residence. As matter of practice, when funding loans that are technically excluded from the MBL Cap, the credit union will still exercise a comparable level of underwriting and monitoring according to approved policies and procedures. CCU may not grant Commercial Loans to the following a) Any senior management employee directly or indirectly involved in the Credit Union s Commercial loan underwriting, servicing, and collection process, and any of their immediate family members; b) Any person meeting the definition of an associated borrower with respect to persons identified in the preceding paragraph; c) Commercial loans may not be granted if any additional income received by CCU or senior management employee is tied to the profit or sale of the business or commercial endeavor for which the loan is made d) Commercial loans may not be granted to a Director unless the Board of Directors approves granting the loan and the Director is excused from the decision making process Geographic Restrictions California Credit Union will focus on businesses and properties in southern California, however, in order to fully serve its membership, it may grant member business loans throughout the United States. Although the collateral can be outside of the credit union s field of membership, individuals, businesses and guarantors must qualify for membership and be members in Good Standing. Other than concentration limits, as addressed within this policy, there are no geographic restrictions for purchased participations. Maximum Loan Limits Aggregate net credit union exposure to any one member or group of associated members is the lesser of $15,000,000 or 15% of the credit union s regulatory net worth. The maximum loan to any one member or group of associated members may never exceed 15% of net worth, except that an additional 10 percent of a credit union's net worth is permitted if the amount that exceeds the credit union's 15 percent general limit is fully secured at all times with a perfected security interest by readily marketable collateral. Aggregate Member Business loans above $15,000,000 but less than 15% of the Credit Union s net worth must be approved prior to funding by the Board of Directors. Aggregate Limits: Net Reportable Member Business Loans, according to the statutory cap, may not exceed the lesser of 1.75 times the credit union s regulatory net worth or 1.75 times the minimum Limit ERM

4 net worth required under section 1790d(c)(1)(A) of the Federal Credit Union Act to be considered well capitalized. Loan Approval Authority 1. The Senior Loan Committee will have three primary members; Credit Manager, Chief Officer and MBL Department Manager. In addition there will be two alternates; the Chief Financial Officer and Chief Administrative Officer. 2. Two affirmative votes are required to approve loans, including the aggregate credit union exposure, up to the board approved house limit. 3. The individual primary committee members will have the authority to approve loans, including the aggregate credit union exposure on all other credit union loans, up to $3,000, The MBL Department Manager, with the concurrence of the Credit Manager, may delegate his limit as needed to individual MBL Department qualified staff members. 5. MBL Department Manager may also grant post-approval negotiated changes that are within policy. Department Manager may also approve conforming business automobile and equipment loans up to $100,000 for existing borrowers graded 3 or better, regardless of the borrower s current indebtedness to the Credit Union, as long as the loan to one member limit is not exceeded. Qualifications and Experience: Employees with business lending limits, must have a minimum of five years prior business lending experience. Relationship Managers and underwriters must have experience handling loans with similar characteristics as those that have the authority to underwrite or approve for the Credit Union. Members of the Senior Loan Committee shall also have such similar business lending experience or the equivalent in analytical experience with consumer lending or finance. Staff members who handle the administrative activities associated with member business loans must include individuals with a minimum of two years prior experience in commercial loan processing and/or servicing. Construction loans must be managed by individuals, either in house or in partnership with other credit unions or third parties, with not less than 10 years of experience. Decision Process The person or persons accountable for approving or denying a loan must inquire carefully into the capacity to repay, the credit history and the financial character of the member-applicant. The inquiry may include an analysis of financial statements, appraisals, cash flow, history and experience, industry evaluations, and tax returns necessary to understand the risk inherent in the loan. The evidence of this inquiry shall be in writing on a completed Credit Memorandum and/or other forms deemed necessary. Establishing Interest Rates Establishing interest rates is a responsibility of the Board of Directors. The following policy has been established for setting interest rates. Asset/Liability Committee (ALCO) The Board of Directors delegates to ALCO the authority to establish terms and conditions on all products and services including but not limited to maturities, interest rates, and fees. ALCO retains the authority to establish and maintain parameters when setting interest rates, including: Service fees Price adjustments off screen prices Limit ERM

5 Collateral and Guarantee Requirements Adjustable margins, caps, and initial start rates Origination fees Commercial Real Estate: LTV - Maximum LTV s are noted in the chart below: If the Credit Union loan will be in a junior lien position, the LTV will be the Combined Loan to Value (CLTV) considering the superior lien(s) and the Credit Union loan. If the Credit Union loan is a Cash Out Refinance, the maximum policy LTV requires a 5% reduction. DCR - Minimum DCR s are noted in the chart below: For investment property, ratio represents the actual property and market based property DCR. For owner user property, ratio represents the market based property DCR. If market analysis does not apply, ratio represents global DCR. For non-income producing property, ratio represents global DCR. General Collateral Type LTV DCR Commercial/Industrial 80% 1.15x Office 80% 1.15x Retail 80% 1.15x Mixed Use 80% 1.15x Multi-Family 5 or more units 80% 1.10x Multi-Family 1 to 4 units Non Owner Occupied 80% 1.00x Leasehold Estate (on Ground Lease Parcel) 75% 1.20x Leased Land unimproved income producing 80% 1.25x Unimproved Land non-income producing 65% 1.40x Specific Collateral Type (If 80% or more of collateral) LTV DCR Hospitality 70% 1.30x Restaurant 75% 1.30x Automotive 75% 1.30x Fitness 75% 1.30x Education 75% 1.20x Faith Based - Non profit 80% 1.10x Other Non-Profit 80% 1.10x Other Special Purpose (e.g. self-storage facility) 80% 1.20x C & I BUSINESS LOANS Collateral LTV DCR Business Assets/Equipment 80% 1.20x Rolling Stock aggregate over $50, % 1.20x Rolling Stock aggregate below $50, % N/A Government Guaranteed SBA SOP 1.20x Share Secured 100% N/A Unsecured N/A 1.20x Limit ERM

6 Exceptions to the Policy LTV and/or DCR limits may be approved, with proper justification, by the Credit Manager for loan when the aggregate net outstanding exposure is $3,000,000 or less. If the aggregate exposure exceeds $3,000,000 the exception must be approved by the Board. All exceptions will be reported to the board quarterly. Loans classified as Troubled Debt Restructures (TDRs) may have LTVs and DCRs that exceed Policy limits established for new loans; however, all exceptions will be reported to the Board and Problem Loan Committee. All new member business loans over $250,000 that are secured by real estate collateral will be supported by an appraisal, dated no more than 12 months from the appraisal effective date to the date of the note Exceptions to this policy, if properly mitigated may be approved by the Credit Manager. The exception, if approved will be included with the report to the board of all commercial loan policy exceptions. The credit union will require personal liability guarantees of a type deemed appropriate by the credit union (e.g. full recourse or specified recourse obligations) and permitted by NCUA and state regulations. Unsecured loans, may be made where prudent and under the condition where the aggregate unsecured outstanding to any one member does not exceed the lesser of $500,000 or 5.0% of the credit unions net worth. The aggregate of all unsecured commercial loans may not exceed 15% of the credit union s net worth. Concentrations Business Loan Concentrations by Type of Business as Tracked by NAICS Codes The North American Industry Classification System (NAICS) is the standard used by the Federal statistical agencies to classify business establishments. Each unique six digit code represents a particular type of business or industry. Reports that demonstrate concentrations within specific industries for all commercial loans and business deposits shall be presented to the Board and ALCO quarterly. Commercial Real Estate Concentration Limits by Property Type The information is tracked on both loans originated by the Credit Union and in-participation loans originated by other credit unions. The policy includes Maximums per category, which are net balances expressed as a percentage of Net Worth. The Net Worth used for these calculations is Regulatory Net Worth. The following chart details the current policy maximums: Property Type Max as % of Net Worth Commercial/ Industrial 50% Faith Based 30% Unimproved Land 10% Leased Land 20% Leasehold Estate 20% Hospitality 20% Mixed Use 25% Multi-Family 45% Office 40% Other Non-Profit 25% Retail 50% 1-4 Non Owner Occupied Residential 30% Restaurant 5% Automotive 10% Fitness 10% Limit ERM

7 Education 30% Single Purpose 20% Business Loans, including federal and state guaranteed and other C&I and miscellaneous business purpose loans. Loan Type Max as % of Net Worth Unsecured 10% Secured with UCC on all business assets 25% Equipment and Auto 15% Secured by Second TD (LOC & Term) 30% Person residence (business purpose) 15% Construction 10% Share Secured 50% Limits as Percentage of Regulatory Net Worth on Amount for CRE Loans by Guarantee Status Full Recourse Guarantees by Principal(s) 225% No Recourse. No Guarantees at All by Principal(s) [e.g., loans to not-for-profits defined by IRS Code 501(c)] 25% Specified Recourse Obligations/Carve-out Recourse by Principal(s) 25% Note: The percentages above include both loans originated by CCU and purchased participations. Securing Collateral On real property secured transactions, a title policy shall be obtained which designates the credit union as the insured, warrants the priority and validity of the credit union s security interest, and does not contain any exception which would preclude the credit union from obtaining marketable title to real property security in the event of default. (10 CCR (2)) Credit Enhancements CCU is authorized to participate in all available state and federal programs that have been designed to support small business and organizations. Underwriting will not deviate significantly from standard practices for nonguaranteed loans. The credit union will not rely on guarantees as either collateral or source of repayment, but rather as additional support to assist members and prospects with loans that may not have been approved without the enhancement. Typically qualifying borrowers will have sufficient cash flow, but may lack customary secondary or tertiary ability. Business Banking Department will adhere to all of the current Standard Operating Procedures, as published and revised from time to time by the Small Business Administration. Servicing Commercial Loans Refer to real estate loan servicing for general activities. Monitoring A loan file will be established to include at a minimum the initial analysis and documentation, recorded deed of trust, title policy, security agreements, and evidence of insurance. Insurance coverage necessary to protect the interests of CCU is required on all loans secured by real property. Limit ERM

8 The credit union will monitor for receipt of recorded deeds, required insurance, title policy and any other required documents received after closing. After closing, the credit union will monitor on an on-going basis for prompt payment of taxes through a tax service and for the maintenance of required insurance coverage. All direct Commercial and Industrial Loans (C&I) over $500,000, shall be subject to annual review, financial updates, site visit and collateral assessment. Annual or biennial updates of financial statements and tax returns will be required on all business loans over $100,000. Active lines of credit with limits over $100,000 and a borrowing base that consist primarily of accounts receivable will require periodic agings". All member business loans will be assigned a Risk Classification (as defined below) and the classification will be reviewed at least annually or sooner if circumstances change. The Chief Risk Officer or internal Audit Department will periodically engage independent parties to audit the credit quality and performance of the commercial loan portfolio. They may engage monthly reviews with limited samples., They will also engage a third party for a comprehensive review and obtain a detailed report for the Supervisory Committee, as need but never longer that every 24 months. with the report also being made available for review to the Board of Directors. The frequency of reviews will be based on current economic conditions, current portfolio performance (delinquency/charge off) and overall perceptions of Senior Management. Risk Classifications Risk classifications define the potential for loss, if any, that is identified for member business loans based on such factors as adequacy of collateral, liquidity, payment history or history of profitable operations. Potential loss loans must be classified special mention, substandard, doubtful or loss. Definitions and operational procedures related to Risk Classifications are addressed in the Commercial Loan Procedure Manual. Risk classifications are as follows. 1) Pass Excellent 2) Pass Good 3) Pass - Satisfactory 4) Watch 5) Special Mention 6) Substandard 7) Doubtful 8) Loss All loans rated 4 Watch or higher will be reported and discussed with the Problem Loan Committee Monthly Meeting. Collection Activity Collection efforts begin no later than the 30 th day of delinquency. The Special Assets Officer will prepare a summary report of all member business loans more than 30 days past due. The Problem Loan Committee will review collection progress on all loans that are 30 days or more past due. All necessary collection efforts, up to and including foreclosure and filing of lawsuits, will be undertaken to protect the interests of CCU. Balances remaining after exhausting all avenues of collection will be charged off. Record Keeping General Loan Procedures: CCU will separately identify member business loans in its records and in the aggregate on its financial statements. Limit ERM

9 Procedures Procedures are established and maintained to conform to the requirements of NCUA Rules, Regulations Part 723 and to provide additional detail and guidance. Relevant procedures related to Member Business include: Risk Grades Credit Quest Underwriting Processing/Funding Insurance Unity OnBase Loan Participation Loan Reviews/Portfolio Monitoring/Quality Control Loan Servicing ALLL Commercial Loan Collections CRE Valuation Environmental Government Guarantee Delegated MBL Credit Limits Limit ERM

10 COMMERCIAL LOAN PARTICIPATION PROGRAM General Statement California Credit Union may engage in loan participation transactions with other credit unions, credit union organizations or other financial organizations. The purchase and sale of sound loans assists management of CCU to: 1) Increase loans as a percentage of total assets 2) Manage the composition of the loan portfolio 3) Achieve geographic dispersion 4) Maximize the return on investment for its members 5) Achieve overall growth in assets consistent with safety and soundness standards Definition Participation Loan means a loan where one or more eligible organizations participate pursuant to a written agreement with the originating lender. Eligible organizations means a federal or state chartered credit union, a credit union organization established primarily to serve the operational needs of its member credit unions, or other state or federally chartered and federally insured Federal Deposit Insurance Corporation (FDIC) institutions. It shall be the policy of California Credit Union to comply with all federal and state statutes and regulations, including NCUA MBL regulations 723, participation section , NCUA Guidance Letter 13-CU-07, GAAP and FASB 166 and 167 such that credit participations meet the criteria of true participations. It is understood that all accounting and regulatory rules must be followed in order for the proper classification of transactions as transfers of financial assets. CCU may participate in a loan originated by another credit union, which is made to a member of the originating credit union. Loan Approval Approval to purchase and subsequently manage purchased participations will follow the same authority limits as outlined in the Commercial Loan section of this Policy. Participation Loan Terms The following shall apply to all participation loans, whether they are sale or purchase transactions: A written master participation agreement shall be properly executed, and retained by CCU. The master agreement shall include, either directly or through a document incorporated by reference into the master agreement, provisions for identifying the participation loan or loans prior to their purchase or sale. CCU shall retain the original or copies of the loan documents on participation loans either purchased by CCU or sold to others. CCU may sell or purchase from any participant the servicing of any loan in which it owns a participation interest. Real property must secure loans being considered for participation. CCU as an Originating Participant On loans for which CCU is the originating lender, it shall: 1) Originate loans only to its members. 2) Retain an interest of at least 5% of the face amount of each loan. 3) All loans must comply fully with all of CCU s underwriting standards. Limit ERM

11 CCU as a Non-Originating Participant As a participant in loans for which it is not the originating lender, CCU shall: 1. Participate only in loans it is empowered by policy to grant to its members. 2. Participate only in loans where the underwriting standards meet the standards for similar loans originated by CCU for its own members, 3. Not rely on the underwriting of originating financial institution, but will instead, using all of the raw data, including property information, appraisals, financial statements, tax returns, personal financial statements conduct an independent analysis and credit decision using all the standards for CCU direct loans. 4. Purchase participation loans only if made to members of another federally insured credit union. Since purchased loans to existing CCU members are not excluded from the MBL Cap and classified as direct MBLs, the credit union will only seek to purchase Commercial Loans made to non-members. 5. Obtain the appropriate loan approval, based on the board approved delegated authorities, for the disbursement of proceeds to the originating lender. 6. Evaluate the size and resources of the originating credit union and its ability to underwrite, fund, service and collect loans relative to the complexity of the participation transaction. 7. Confirm that the aggregate amount of loan participations purchased from any one originating lender does not exceed the greater of $5,000,000 or 25 percent of regulatory net worth, Limits on Amount of Commercial Real Estate Loan Participations by Property Type Aggregate balance of true participations that are excludable from the MBL cap limitation shall not exceed the lessor of 50% of Regulatory Net Worth and 5% of Assets. Limit ERM