The Examiners Are Coming So It's Best to Be Prepared
The most important thing a credit union must do in either participating in or originating member business loans is have well-written board approved policies in place.
These policies must reflect the following NCUA Rules and Regulations concerning not only member business loans but also appraisals and participations. Most state's rules closely follow NCUA. If you are a state-chartered credit union, you will be better served by following NCUA rules. But in any case, check with your state department of financial institutions to be sure.
As a consultant to credit unions, I find that the examiners concentrate their attention on several key areas.
They check to be sure the written board policies conform to the 12.25% of assets cap. Remember, loans under $50,000 do not count in your member business loan totals. Participations also count under that cap unless you have obtained a waiver.
Appraisals for commercial real estate loans must be completed by a state-certified appraiser for all loans over $250,000. This is a full appraisal with three approaches to valuation: The cost approach, the income approach and the sales approach. Going concern appraisals receive unfavorable mention by examiners.
Loan write-ups should be well written and laid out so that anyone looking at the file knows immediately what the loan is all about. The write-up and all approvals and underlying documentation initiating the loan transaction should be in the first section of the credit file. Signed original loan documents should be put in a separate documentation file (copies in credit files) and filed in the vault.
Another area that is of great concern to examiners is cash flow. Since commercial lenders are cash flow lenders, the cash flow of the borrower, the guarantor and, for real estate loans, the property must be analyzed and the underlying calculations must be part of the loan write-ups.
Underwriting procedures should include the following cash flow, net worth, collateral, financial ratios and industry average analysis. For real estate loans, the originating loan officer should conduct an environmental evaluation of the property as well. Even though the appraiser may mention environmental issues in the appraisal, a questionnaire provided to and completed by the borrower is helpful in evaluating any environmental risks to the property. I also recommend site visits.
Examiners check to make sure there are no documentation deficiencies. That the loan is well collateralized and the loan-to-value ratio does not exceed 80%. Be sure to include current insurance policies in the file as well as any other necessary documents.
Management establish a clear order of authority from the board on down. There should be an order of succession, and the credit union should not depend on one person with the appropriate qualifications to do this type of business.
A collection policy should be in place with a calling program for loan payments.
Monthly reporting to senior management and the board should include all of the relevant numbers, such as the loan to asset ratio, number of unsecured loans and loans in the pipeline, among others.
Examiners will also evaluate every area of risk, including credit, compliance, interest rate, strategic, transaction and reputation risk.
There should be a strong loan review program in place, which is reviewed by someone other than the originating loan officer. The first review would take place soon after the loan is put on the books and repeated annually. This can take place after the credit union has received the annual financial statements and tax returns that are required as part of the loan documentation.
Collection procedures should be in place beginning with a calling program. It is a good idea for the loan officer to start calling the borrower when their loan payment is 5 days past due. All conversations with the borrower must be well documented and made part of the credit file.
Finally to insure the quality of your loan portfolio, it is strongly suggested that you know your borrower. Business lending is relationship lending. Building an on-going relationship with your borrower is part of a safe and sound lending practice.