ALEXANDRIA, Va. – A credit union can not include closing costs as part of the market value when calculating the amount of equity the borrower has in a construction project, NCUA recently reminded. The $138 million High Desert FCU sought guidance on the matter and in a May 25 opinion letter, NCUA Associate General Counsel Sheila Albin said closing costs cannot be included because they do not contribute to the market value of the project. The MBL rule requires a borrower to have a 25% equity interest in the market value of a construction or development project, unless the credit union obtains a waiver from the NCUA or the loan is otherwise exempt, Albin wrote. To determine the amount of required equity, a credit union must ascertain the market value of the project at the time the loan is made. "We believe that a credit union cannot add closing fees, such as points, mortgage fees and finance charges, related to the financing of an MBL to the market value of a construction project," Albin wrote. "While these costs are incidental to the financing of a construction MBL and may be part of the acquisition cost for the borrower, they do not increase the project's value." The NCUA Board clarified that the equity requirement is based on the cost amount of the project when it incorporated a previous legal opinion issued by the Office of General Counsel into the preamble of the final MBL rule issued in 2003. 68 Fed. Reg. 56,537, 56,540 (Oct. 1, 2003); OGC Legal Opinion 01-0422, dated June 7, 2001. The preamble states that a project's market value at loan closing includes the appraised value of the land on which the project is to be built, less any liens, plus the cost to build the project. 68 Fed. Reg. 56,540.

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