Key Takeaways from Oregon Rulemaking on Credit Union Member Business Loans

Posted by Ben Shuey on June 14, 2022

Oregon’s Department of Consumer and Business Services Division of Financial Regulation (DFR) completed rulemaking to update the member business loan rules for Oregon state-chartered credit unions. The rule went into effect on June 1, 2022.

The rulemaking updates OAR 441-720-0300 through 441-720-0370 and aligns the state’s rules with the NCUA rules in 12 CFR 723.

The updated OAR includes new definitions that address whether and when the member business lending rules apply, including when credit union members and loans fall within the rules. These definitions include:

(2) “Commercial loan” means:

(a) Any loan, line of credit, or letter of credit, and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for personal expenditure purposes.
(b) Excluded from this definition are loans made by a corporate credit union; loans made by a federally insured credit union to another federally insured credit union; loans made by a credit union to a credit union service organization; loans fully secured by shares, including deposits, in the credit union, making the extension of credit or in other financial institutions; loans secured by a one-to-four (1-4) family residential property (whether or not it is the borrower’s primary residence); loans secured by a vehicle manufactured for household use that will be used for a commercial, corporate, other business investment property or venture, or agricultural purpose (unless a fleet of six or more vehicles); and loans that would otherwise meet the definition of commercial loan and which, when the aggregate outstanding balances and unfunded commitments to a borrower or an associated borrower, less any loans fully secured by shares, including deposits, are equal to less than $50,000. The definition of “commercial loan” also excludes covered loans issued under the Small Business Administration’s Paycheck Protection Program.

(14) “Member business loan” means any commercial loan as defined in OAR 441-720-0300(2) of this part, and any loan secured by a vehicle manufactured for household use that will be used for a commercial, corporate, other business investment property or venture, or agricultural purpose if the aggregate member business loan balance and unfunded commitments to a member and associated borrowers is $50,000 or greater.

The final rule clarifies the credit union’s board of directors need to review and update the commercial loan policy if there is any material change in circumstances. Prior to engaging in commercial lending, a credit union board must approve policies, and management must prepare procedures, for the types of loans the credit union is originating (or plans to originate). At a minimum, the policies and procedures should address the following:

(1) Types of loans to be made;
(2) Identification of trade area to be served;
(3) The maximum amount of net worth that will be invested in commercial loans;
(4) The maximum amount of net worth that will be invested in a given category or type of commercial loan;
(5) The maximum amount of net worth that will be loaned to any one member (including those loans that the member guarantees) and group of associated borrowers, subject to OAR 441-720-0330;
(6) Qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting commercial loans;
(7) Initial and ongoing analysis and documentation of the ability of the borrower to repay the loan;
(8) Periodic receipt and analysis of the financial statements and other documents, including tax returns, of the borrower(s) and guarantor(s);
(9) Considerations governing the quality and complexity of the financial statements;
(10) Documentation sufficient to support each request for an extension of credit, or an increase in an existing loan or line of credit, except where the credit union finds that the required documentation is generally not available for a particular type of loan and states the reasons for those findings in the credit union’s written policies. The documentation is expected to include the following:

(a) Understanding and history of the borrower(s) and guarantor(s) and the business operation and ownership;
(b) Balance sheet, income statement, and tax returns;
(c) Analysis of financial statements, cash flow, and leverage position; debt service coverage ratio guidelines including, but not limited to, the lessees of non-owner occupied property; and the global financial ability to repay;
(d) Comparison with industry average or similar analysis; (e) Explanation of the related debt with the credit union;
(f) A detailed explanation of the complexity of the loan purpose, repayment, collateral, loan structure, conditions, capacity, relationship, strengths and weaknesses, and associated risks; and
(g) Borrower documentation such as loan agreement and covenants, note, security agreement, borrowing authority, and commitment letter.

(11) Collateral requirements must include all of the following:

(a) Steps to be taken to secure various types of collateral;
(b) Determination of ownership;
(c) Determination of value, source, and marketability, including a real estate appraisal policy;
(d) Maximum loan-to-value ratio guidelines;
(e) Frequency of reevaluation of the value and marketability of the collateral; and
(f) Insurance, if applicable.

(12) General underwriting guidelines such as cash-out purpose and maximum financing; expectations for due diligence of loan brokers and their loans and borrowers; and expectations for stress-testing.
(13) General credit risk management and administration procedures which include:

(a) Loan approval authorities and limits;
(b) Credit risk rating system;
(c) Servicing and follow-up;
(d) Collection process;
(e) Frequency and type of loan monitoring, which may include financial analysis, documented collateral inspection, loan agreement and covenant compliance, and credit risk rating system review;
(f) Review of concentrations and limits, loan losses, delinquencies, and underwriting standards and practices; and
(g) Internal controls and audit processes.

(14) Interest rates and maturities of loan type; pricing and risk philosophy.
(15) Procedures for adequate safeguards to minimize potential environmental liability.
(16) Identification of individuals prohibited from receiving commercial loans under OAR 441-720-0370.
(17) Approval of policy exceptions and reporting process, noting distinctions between the process for routine exceptions and significant exceptions and, to control risk, how to avoid frequent exceptions.
(18) If, however, a credit union makes a commercial loan through a program in which a federal or state agency (or its political subdivision) insures repayment, guarantees repayment, or provides an advance commitment to purchase the loan in full, and that program has requirements that are less restrictive than those required by this rule, then the credit union may follow the loan requirements of the relevant guaranteed loan program.

In addition, the final rule:

• Revises collateral and security requirements;
• Adds new recordkeeping requirements;
• Defines the terms and scope of aggregate lending limit to credit union members and associated borrowers;
• Defines how to calculate the aggregate 15% lending limit;
• Defines what constitutes an aggregate (net) member business loan limit and creates exemption to the aggregate member business loan limit;
• Defines the procedures for obtaining an exemption to member business loan limitations;
• Defines what constitutes construction and development lending;
• Creates commercial loan risk classifications; and
• Defines what constitutes prohibited commercial loans

Question of the Week

Q. Do we have the right to refuse to cash an “on-us” check (a check drawn on a credit union member’s account) when the check is presented by a non-member?

A. Oregon, Washington, and Idaho laws state that a financial institution cannot refuse to cash this type of check simply because the non-member doesn’t have a relationship with the credit union.

However, a credit union can deny cashing an on-us check presented by a non-member if the non-member fails to comply with the check cashing requirements, such as possessing a valid ID, providing a thumbprint, properly endorsing the check, or paying a fee to cash the item. Additionally, if there are not enough funds in the account to cash the check, or the check appears altered or suspicious, the credit union may refer the non-member back to the check maker or try to verify the check with the maker before cashing the item.

Related Links

ORS 73.0412
RCW 62A.3-412
IDS 28-3-412

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