CHAPTER I: DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION
PART 190 ILLINOIS CREDIT UNION ACT
SECTION 190.165 BUSINESS LOANS
Section 190.165 Business Loans
a) The following are definitions applicable in this Section.
1) "Associated Member" means any member with a common ownership, investment or other pecuniary interest in a business or commercial endeavor with the borrower.
2) A "Business Loan" is defined as any loan, line of credit, letter of credit (including any unfunded commitments), to a member of the credit union, for which the proceeds will be used to finance a commercial, corporate, other business investment property or venture, or agricultural purpose, including any interest the credit union obtains in a loan made by another lender to a member or nonmember of the credit union pursuant to Section 51 of the Act if the loan would constitute a business loan if made by the credit union, except that the effect of any interest obtained in nonmember business loans on a credit union's aggregate member business loan limit will be as set forth in subsection (g)(2)(D).
3) "Net Worth" means retained earnings as defined under GAAP. Retained earnings include regular reserves, undivided earnings and any other appropriations designated by management or regulatory authorities or Surplus, excluding the Allowance for Loan Losses Accounts.
4) "Net Member Business Loan Balance" means the outstanding loan balance plus any unfunded commitments, reduced by any portion of the loan that is secured by shares in the credit union, or by shares or deposits in other financial institutions, or by a lien in the member's primary residence, or insured or guaranteed by any agency of the federal government, a state or any political subdivision of such state, or subject to an advance commitment to purchase by any agency of the federal government, a state or any political subdivision of such state, or sold as a participation interest without recourse and qualifying for true sales accounting under generally accepted accounting principles.
5) "Primary Residence" means the address at which one resides.
6) "Immediate Family Member" means a spouse or other family member living in the same household.
b) Nothing in this Section shall be applicable to:
1) loans fully secured by shares in the credit union or deposits in other financial institutions.
2) net member business loan balances in an aggregate amount of $50,000 or less to one member or associated member for which the proceeds may be used for a commercial business or agricultural purpose.
3) loans to credit union service organizations (CUSO) as defined under Section 190.5 of this Part.
4) loans for any one to four family owner-occupied parcel of real estate as long as the borrower/owner maintains the subject property as his primary residence.
5) loans fully secured or fully guaranteed by, or subject to an advance commitment to purchase in full by, an agency of the federal government or of a state or any of its political subdivisions.
6) loans granted by a credit union to another credit union.
c) Prohibited Activities
1) A credit union may not grant a member business loan to the following:
A) Chief executive officer;
B) Any assistant chief executive officers;
C) Chief financial officer;
D) Any associated member or immediate family member of anyone listed in subsections (c)(1)(A) through (c)(1)(C).
2) A credit union may not grant a member business loan to a compensated director unless the board of directors approves granting the loan and the compensated director is recused from the decision making process.
3) Equity agreements/joint ventures. A credit union may not a grant a member business loan if any additional income received by the credit union or senior management employees is tied to the profit or sale of the business or commercial endeavor for which the loan is made.
d) Credit unions with assets greater than $30 million may make business loans in accordance with specific lending policies which shall address, but not be limited to:
1) Types of business loans to be made within a designated trade area.
2) A requirement to analyze and document the ability of the borrower to repay the loan consistent with appropriate underwriting and due diligence standards, which also addresses the need for periodic financial statements, credit reports, and other data when necessary to analyze future loans and lines of credit, such as, borrower's history and experience, balance sheet, cash flow analysis, income statements, tax data, environmental impact assessment, and comparison with industry averages, depending upon the loan purpose.
3) Expertise Requirement
A) Provisions for ensuring the utilization of services of experienced personnel with at least 2 years of direct experience with the type of business loans the credit union will be making. A credit union may comply with this experience requirement without hiring staff as long as the credit union ensures that the expertise is available. For example, a credit union may use the services of a CUSO, an employee of another credit union, an independent contractor, or other third parties. However, the actual decision to grant a loan must reside with the credit union.
B) Any third party used by a credit union to meet the requirements of subsection (d)(3)(A) must be independent from the transaction and a credit union is prohibited from using a third party to meet the requirements of this subsection (d) if the credit union is purchasing a business loan, or a participating interest in a business loan, from the third party responsible for reviewing the loan, or if the third party has an interest in the collateral securing a business loan which the third party is responsible for reviewing, with the following exceptions:
i) The third party may provide a service to the credit union related to the transaction, such as loan servicing;
ii) The third party may provide the requisite experience to the credit union and purchase a loan or a participation interest in a loan originated by the credit union that the third party reviewed; or
iii) A credit union may use the services of a CUSO that otherwise meets the requirements of subsection (d)(3)(A) even though the CUSO is not independent from the transaction, provided the credit union has a controlling financial interest in the CUSO as determined under generally accepted accounting principles.
4) The maximum amount of secured and unsecured business loans to any one member or group of associated members, provided it does not exceed the limits as set forth in subsections (f) and (h).
5) The aggregate amount of the credit union assets in relation to net worth that will be invested in business loans, provided credit unions subject to section 107A of the Federal Credit Union Act (12 USC 1757a) may not exceed the limit set forth in subsection (g).
6) The maximum amount of credit union assets in relation to net worth that will be allotted to given types of business loans.
7) Collateral requirements, including, but not limited to:
A) Loan-to-value ratios;
B) Determination of value;
C) Determination of ownership;
D) Steps to secure various types of collateral; and
E) How often the credit union will re-evaluate the value and marketability of collateral.
8) Defined interest rates and defined maturities of business loans.
9) Loan monitoring, servicing, and follow-up procedures, including collection procedures.
10) Identification of those individuals prohibited from receiving member business loans.
e) Business loans shall not be granted by credit unions with assets of $30 million or less unless the Division has approved a credit union's request for a business loan amendment to its bylaws. The request must be accompanied with specific lending policies including but not limited to the criteria listed in subsection (d). All approval of requests shall be based upon the history of the credit union, current financial condition and the adequacy of applicable operating policies as documented in the Division's statutory or special examination. Evaluation of the history, current financial condition, and operating policies of the credit union will include, but not be limited to, the credit union's capital adequacy, asset quality, management policies, earnings, and liquidity. These factors must be reflective of a safe and sound financial operation (in accordance with 205 ILCS 305/8, 9, 36 and 61).
f) The net member business loan balances of any one member or group of associated members shall not exceed 15% of the credit union's net worth. Credit unions seeking an exception to this limit must request a waiver in writing. The maximum limit on a member business loan is in addition to the secured and unsecured limits established in Sections 190.160 and 190.140, provided however, in no event shall all loans to any member exceed in the aggregate 10% of the credit union's unimpaired capital and surplus.
g) Aggregate Member Business Loan Limit
1) The aggregate limit on the net member business loan balances of a credit union subject to section 107A of the Federal Credit Union Act (12 USC 1757a), excluding any business loans exempted from the aggregate member business loan limit by section 107A of the Federal Credit Union Act or Part 723 of the National Credit Union Administration Regulations (12 CFR 723, 2004, no subsequent dates or editions), is the greater of:
A) 1.75 times the credit union's net worth or 12.25% of the credit union's assets, whichever is less; or
B) the aggregate member business loan limit authorized by section 107A of the Federal Credit Union Act.
2) Exceptions to the aggregate loan limit for a credit union include:
A) Credit unions that have a low-income designation or participate in the Community Development Financial Institutions program;
B) Credit unions that were chartered for the purpose of making member business loans and can provide documentary evidence (such evidence includes but is not limited to the original charter, original bylaws, original business plan, original field of membership, board minutes and loan portfolio).
C) Credit unions that have a history of primarily making member business loans, meaning that either member business loans comprise at least 25% of the credit union's outstanding loans (as evidenced in any call report or any equivalent documentation including financial statements) or member business loans comprise the largest portion of the credit union's loan portfolio (as evidenced in any call report or any equivalent documentation including financial statements). For example, if a credit union makes 23% member business loans, 22% first mortgage loans, 22% new automobile loans, 20% credit cards loans, and 13% total other real estate loans, then the credit union meets this exception.
D) If the interest held by a credit union in any loans made by another lender to a nonmember of the credit union would constitute a business loan if made to a member of the credit union, the total of the interest held in such nonmember business loans plus the credit union's net member business loan balances must not exceed the aggregate limit set forth in subsection (g)(1), unless the credit union has requested approval from the Division, by submitting an application that:
i) Includes a current copy of the credit union's member business loan policies;
ii) Confirms that the credit union is in compliance with all other aspects of this Section;
iii) States the credit union's proposed limit on the total amount of nonmember business loan interests that the credit union may acquire if the application is granted; and
iv) Attests that the acquisition of an interest in nonmember business loans is not being used, in conjunction with one or more other credit unions, to have the effect of trading member business loans that would otherwise exceed the aggregate limit.
3) Request for Exception
A) An exception under subsection (g)(2)(A) is effective upon written notice to the Division of such designation or participation.
B) An exception under subsection (g)(2)(B) or (g)(2)(C) must be submitted in writing to the Division, including documentation demonstrating that the credit union meets the criteria for the exception.
i) Approval of an exception shall be given in writing to the credit union.
ii) The exception does not expire until revoked for safety and soundness reasons by the Division.
iii) The Division shall notify the respective Region of the NCUA of the decision on the request.
h) Collateral
1) Unless the Division grants a waiver, all member business loans, except those made under subsections (h)(2), (3) and (4), must be secured by collateral. The maximum loan to value (LTV) ratios for all liens shall not exceed 80%, unless the loan amount in excess of 80% is covered through private mortgage or equivalent insurance, or is insured or guaranteed by or subject to an advance commitment to purchase by any agency of the federal government or a state or its political subdivisions, but in no case shall the LTV exceed 95%.
2) Unsecured member business loans may be made if:
A) The credit union has a current net worth of 7% or, if applicable, meets its risk based net worth ratio, whichever is higher;
B) The aggregate of the unsecured outstanding member business loans to any one member or group of associated members does not exceed the lesser of $100,000 or 2.5% of the credit union's net worth; and
C) The aggregate of all unsecured outstanding member business loans does not exceed 10% of the credit union's net worth.
3) Credit card line of credit programs offered to nonnatural person members, or guaranteed by nonnatural persons, that are limited to routine purposes normally made available under those programs are exempt from the collateral requirement of subsections (h)(1) and (2).
4) Credit unions may make vehicle loans under this Section without complying with the loan-to-value ratios in this Section, provided that the vehicle is a car, van, pick-up truck, or sports utility vehicle and not part of a fleet of vehicles.
i) Construction Loans
Unless the Division grants a waiver, loans granted for the construction or development of commercial or residential property are subject to the following additional requirements:
1) The aggregate of all construction and development net member business loan balances must not exceed 15% of the credit union's net worth. The following loans may be excluded from the calculation of the aggregate:
A) loans made to finance the construction of a single-family residence if a prospective homeowner has contracted to purchase the property; and
B) a loan to finance the construction of one single-family residence per member-borrower or group of associated member-borrowers, irrespective of the existence of a contractual commitment from a prospective homeowner to purchase the property;
2) The borrower must have a minimum of 25% equity interest in the project being financed, the value of which is determined by the market value of the project at the time the loan is made, except that the loan to value requirements of subsection (h) shall apply in lieu of this equity interest requirement in the case of loans made to finance the construction of a single-family residence if a prospective homeowner has contracted to purchase the property and in the case of one loan to a member-borrower or group of associated member-borrowers to finance the construction of a single-family residence, irrespective of the existence of a contractual commitment from a prospective homeowner to purchase the property; and
3) The funds may be released only after on-site, written inspections by qualified personnel and according to a preapproved draw schedule and any other conditions as set forth in the loan documentation.
j) Request for Waiver
1) Credit unions may request a waiver for a category of business loans in the following areas:
A) Maximum secured and unsecured loan amounts to one borrower or associated group of borrowers under subsections (f) and (h);
B) Maximum aggregate unsecured member business loan limit under subsection (h)(2);
C) Collateral requirements under subsection (h);
D) The aggregate amount of construction loans and the minimum equity interest in construction loans under subsection (i); and
E) Any appraisal requirements imposed by Part 190 with respect to loans secured by real estate.
2) A request for a waiver must be submitted in writing to the Division. The waiver request must contain the following:
A) A copy of the credit union's business lending policy;
B) The waiver sought;
C) An explanation of the higher limits sought (if applicable);
D) Documentation supporting the credit union's ability to manage this activity; and
E) An analysis of the credit union's prior experience in making member business loans, including the credit union's history of loan losses and delinquency, volume and cyclical or seasonal patterns, diversification, concentrations of credit to one borrower or group of borrowers in excess of 15% of net worth, underwriting standards and practices, types of loans grouped by purpose and collateral, and the qualifications of personnel responsible for underwriting and administering member business loans.
3) The Division shall consider standard criteria when determining whether to grant a waiver requested by a credit union as provided in subsection (j)(1). The criteria include but are not limited to:
A) The two most recent Division examinations;
B) The credit union's reserve/equity position;
C) The credit union's current delinquency and loan loss trends; and
D) The credit union's Business Lending Policy and Procedures.
4) The Division shall respond to requests for waivers as follows:
A) The Division shall inform the credit union in writing of the date the written request for waiver was received.
B) Approval of waivers shall be given in writing within 45 calendar days from receipt of the waiver request and supporting documents listed in subsection (j)(2), if it is determined by the Division that the waiver will not adversely affect the credit union's financial position.
C) If a waiver approved by the Division must also be approved by the National Credit Union Administration (NCUA), the Division shall forward the waiver request and supporting documents to the NCUA Regional Director and provide the credit union with written notice of the date the request was forwarded.
D) If a waiver request does not require NCUA approval, the credit union may assume approval of the waiver request if it does not receive notification within 45 days after the date the request was received by the Division.
k) Recordkeeping Requirements
Business loans must be separately identified in a credit union's records and separately identified in the aggregate on a credit union's financial reports.
l) Allowance for Loan Losses for Business Loans
1) Allowance for Loan Losses for Business Loans will be determined and accounted for by the credit union as follows:
A) Substandard Loans – A substandard loan is one that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the credit union will sustain some loss if the deficiencies are not corrected. Loans listed in this category shall generally be listed in a range from zero to under 50% potential loss.
B) Doubtful Loans – A loan classified doubtful has all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include: proposed merger, acquisition, or liquidation actions; capital injection; perfecting liens on collateral; and refinancing plans. Loans in this category shall be listed at a minimum 50% potential loss.
C) Loss Loans – Loans classified loss are considered uncollectible and of such little value that their continuance as loans on the credit union balance sheet is not warranted. This classification does not necessarily mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off the asset even though partial recovery may occur in the future. Loans in this category shall be listed at 100% potential loss.
D) Loans may be excluded from the "loss loans" category and classified as either substandard or doubtful if there is evidence of collectibility. Evidence of collectibility shall include without limitation the following collection activities and remedies:
i) Execution and filing of an enforceable reaffirmation agreement on the loan in a Chapter 7 bankruptcy (11 USC 701 et seq.) proceeding prior to completion of the Division's loan analysis in any statutory examination of the credit union.
ii) Receipt of payments on the loan in a Chapter 13 bankruptcy (11 USC 1301 et seq.) within 180 days after the confirmation of the plan; or, if the plan stipulates repayment of the loan in full but payments have not yet been disbursed to the credit union, the credit union has determined from the Trustee that plan payments are being made on a timely basis to the Trustee.
iii) Receipt of payments on the loan in a Chapter 11 bankruptcy reorganization (11 USC 1101 et seq.) or Chapter 12 bankruptcy family farm reorganization (11 USC 1201 et seq.) within 180 days after the confirmation of the plan.
iv) Voluntary repayment of the loan pursuant to section 524(f) of the federal Bankruptcy Code (11 USC 524(f)).
v) Collection of the loan pursuant to repossession of collateral without judicial process, or by replevin, detinue, forcible entry and detainer or mortgage foreclosure proceedings.
vi) Collection of the loan pursuant to post-judgment enforcement remedies, including wage deduction, garnishment and turnover orders entered in citation to discover assets supplementary proceedings.
vii) The entry of a judgment pay plan order providing for repayment of the loan in a judicial proceeding.
viii) Documented evidence of repayment of that portion of the loan covered by collateral protection or other insurance policies.
ix) Documentation evidence of periodic payments on a consistent basis in an amount sufficient to retire the loan balance in a reasonable time.
2) Non-delinquent loans may be classified in the above categories by the Division, dependent upon an evaluation of factors, including, but not necessarily limited to, the adequacy of the credit union's analysis and documentation of the loan application, and the credit union's collateral requirements. Subsection (d)(2) contains analysis and documentation requirements.
(Source: Amended at 30 Ill. Reg. 18919, effective December 4, 2006)