Thank you for sharing!

Your article was successfully shared with the contacts you provided.

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. [email protected]

Complete your profile to continue reading and get FREE access to CUTimes.com, part of your ALM digital membership.

Your access to unlimited CUTimes.com content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Critical CUTimes.com information including comprehensive product and service provider listings via the Marketplace Directory, CU Careers, resources from industry leaders, webcasts, and breaking news, analysis and more with our informative Newsletters.
  • Exclusive discounts on ALM and CU Times events.
  • Access to other award-winning ALM websites including Law.com and GlobeSt.com.

Already have an account?

Credit Union Times

Join Credit Union Times

Don’t miss crucial strategic and tactical information necessary to run your institution and better serve your members. Join Credit Union Times now!

  • Free unlimited access to Credit Union Times' trusted and independent team of experts for extensive industry news, conference coverage, people features, statistical analysis, and regulation and technology updates.
  • Exclusive discounts on ALM and Credit Union Times events.
  • Access to other award-winning ALM websites including TreasuryandRisk.com and Law.com.

Already have an account? Sign In Now
Join Credit Union Times

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.