Appraisals Based on `Going Concern Value' Can Not be Used to Calculate MBL Loan-to Value Ratio, NCUA Says

ALEXANDRIA, Va. - NCUA reminded federally-chartered credit unions that they can not use an appraisal based on the "going concern value" of the business when calculating the loan-to-value (LTV) ratio for a member business loan. In a Sept. 21 legal opinion letter to Plymouth, Mich.-based Community Financial Members Federal Credit Union, NCUA Associate General Counsel Sheila Albin wrote it can not use the calculation unless it receives a waiver. NCUA's MBL rule generally requires a maximum LTV ratio for MBLs of 80%. "The rule defines the LTV ratio as "the aggregate amount of all sums borrowed on an item of collateral divided by the market value of the collateral used to secure the loan," Albin wrote. A FCU must determine the LTV ratio for an MBL based on the market value of the property pledged to secure the loan, she added. According to the Uniform Standards of Professional Appraisal Practice (USPAP), "going concern value" is defined as the "value of an operating business enterprise" and includes goodwill as "an integral component." "This intangible business value, therefore, may decline significantly in events such as business downturns, civil lawsuits, management changes, noncompliance with licensing or tax laws, or bankruptcy," Albin wrote. A going concern value is not property in which a credit union can obtain a security interest and inflating an appraisal by incorporating the going concern value, therefore, would be inconsistent with the MBL rule's LTV requirements and may cause "significant losses due to the insufficiency of the collateral securing the MBL." NCUA acknowledged that there may be circumstances where an FCU may want to consider the going concern value in making a lending decision, for example, in deciding to fund an MBL where the purpose of the loan is to acquire an existing business. "Because going concern value is not a permissible measure of collateral value in calculating the LTV ratio under the MBL rule, an (FCU) must receive a waiver if a borrower has not offered sufficient collateral to secure the loan as required by the rule," Albin wrote. In order to make MBLs for acquiring going concerns, an FCU must use a loan officer who is experienced in such MBLs and who can evaluate the borrower's ability to run the business and maintain its going concern value, she added. "Appropriate underwriting" for these MBLs requires a competent business or intangible asset appraisal as contemplated by the USPAP, particularly Standards Rules 9 and 10," Albin wrote. -msamaad@cutimes.com