Key Takeaways from Oregon Rulemaking on Credit Union Member Business Loans
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.
Consumer Financial Protection Bureau
Data Spotlight: Financial well-being in America, from 2017 to 2020: In 2017, CFPB published its first report on Financial Well-Being in America. Since then, the financial circumstances of many Americans have changed dramatically. This spotlight shows that Americans experienced an average increase in their financial well-being between 2017 and 2020, likely boosted by the large government response to the COVID-19 pandemic. Yet, a deeper analysis shows that the largest increases were experienced by those with higher incomes, and that approximately one-third of Americans saw a decline in their financial well-being. Read the full report
CFPB Launches Inquiry into Practices that Leave Workers Indebted to Employers: The Consumer Financial Protection Bureau (CFPB) has launched an inquiry into practices and financial products that may leave employees indebted to their employers. In today’s Request for Information, the CFPB seeks data about, and worker experiences with, these emerging practices and financial products referred to as employer-driven debt. The CFPB is interested in knowing whether consumers have a meaningful choice in accepting employer-driven debt products. The CFPB also wants to understand the terms and conditions for these products, including whether they might impede someone from seeking a better-paying job.
CFPB Report Highlights Experiences of Military Families with Medical Billing, Credit Reporting, and Debt Collection: The Consumer Financial Protection Bureau (CFPB) released its annual report on the top financial concerns facing servicemembers, veterans, and military families, based on the complaints they submitted to the CFPB. Servicemembers told the CFPB about billing inaccuracies and that debt collectors used aggressive tactics to recover allegedly unpaid medical bills. Servicemembers also reported failures by credit reporting companies in helping to resolve inaccuracies and other credit reporting issues.
Federal Reserve System
Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire: The Board is publishing final amendments to Regulation J to govern funds transfers through the Federal Reserve Banks’ (Reserve Banks) new FedNowSM Service. The final rule also includes changes and clarifications to regulations governing the Fedwire Funds Service, to reflect the fact that the Reserve Banks will be operating a second funds transfer service in addition to the Fedwire Funds Service, as well as technical corrections to regulations governing the check service.
Financial Crimes Enforcement Network
No-Action Letter Process: FinCEN is issuing this advance notice of proposed rulemaking (ANPRM) to solicit public comment on questions relating to the implementation of a no-action letter process at FinCEN. Given that the addition of a no-action letter process at FinCEN may affect or overlap with other forms of regulatory guidance and relief that FinCEN already offers, including administrative rulings and exceptive or exemptive relief, this ANPRM, among other things, seeks public input on whether a no-action letter process should be implemented and, if so, how the no-action letter process should interact with those other forms of relief.
National Credit Union Association
Senate Confirms Harper to Full Term on the NCUA Board: The U.S. Senate by a vote of 59 to 40 today confirmed Todd M. Harper to be a Member of the National Credit Union Administration Board for a term expiring on April 10, 2027.
NCUA’s Webinar on Challenges Faced by Small Credit Unions: Nearly two-thirds of all federally insured credit unions have less than $100 million in assets, and they face an array of challenges in a rapidly changing financial services market.
Growth in Lending, Assets, Insured Shares Reported in First Quarter of 2022: According to the latest financial performance data released today by the National Credit Union Administration, total loans outstanding in federally insured credit unions increased $136 billion, or 11.7 percent, over the year ending in the first quarter of 2022, to $1.30 trillion. During the same period, total assets rose by $169 billion, or 8.7 percent, to $2.12 trillion. Insured shares and deposits rose $125 billion, or 8.0 percent, to $1.69 trillion, from one year earlier.
Office of Foreign Assets Control
Notice of OFAC Sanctions Actions (6.10.2022): The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing the names of one or more persons that have been placed on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) based on OFAC’s determination that one or more applicable legal criteria were satisfied. All property and interests in property subject to U.S. jurisdiction of these persons are blocked, and U.S. persons are generally prohibited from engaging in transactions with them.
Notice of OFAC Sanctions Actions (6.8.2022): The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing the names of one or more persons that have been placed on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) based on OFAC’s determination that one or more applicable legal criteria were satisfied. All property and interests in property subject to U.S. jurisdiction of these persons are blocked, and U.S. persons are generally prohibited from engaging in transactions with them.
Notice of OFAC Sanctions Actions (6.6.2022): The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing the names of persons whose property and interests in property have been unblocked and have been removed from the list of Specially Designated Nationals and Blocked Persons.
Notice of OFAC Sanctions Actions (6.6.2022): The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing updates to 740 entries on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List), Non-SDN Menu Based Sanctions List (NS–MBS List), and Sectoral Sanctions Identifications List (SSI List).
Washington State Department of Financial Institutions
Division of Credit Unions – Update to Washington Credit Union Act: With the passage of HB 1165, several updates were made to the Washington Credit Union Act; these changes are effective June 9, 2022. The new law: Authorizes credit unions to invest in the equity interest of corporations that are engaged in or planning activity that is incidental or complementary to the credit union’s operations; modifies certain powers and authorities of state-chartered credit unions; and, allows credit unions to acquire real property without occupying the property within a designated period of time. At this point, the Division of Credit Unions does not plan on rulemaking to implement this new law.
Questions? Contact the Compliance Hotline: 1.800.546.4465; [email protected].
Posted in Chapters, Compliance Resources.