Other Guidelines

• Business Purpose Loan Guidelines

  Issued: 
  December 2003

  Revised:
  December 2006

  Purpose:

  To establish Business Purpose Loan (BPL) underwriting and documentation standards.

  Definitions:

  A. Business Purpose Loan (BPL): Any loan or aggregate of loans incurred for the purpose of business, commercial or agricultural use in an amount less than $50,000.00.

  B. Member Business Loan (MBL): Any loan or aggregate of loans incurred for the purpose of business, commercial or agricultural use in an amount equal to or greater than $50,000.00.

  C. Applicable regulatory guidance: KDCU BPL guidelines apply to any loan or aggregate of loans in an amount less than $50,000.00.  NCUA Rules and Regulations Part 723 applies to any loan or aggregate of loans at or above $50,000.00.

  D. Business Purpose Loan distinguished from a Consumer Loan: A Business Purpose Loan is made for a business, commercial or agricultural use while a consumer loan is made for a personal, family or household use.

  Consumer loans are generally made under the protections of the Uniform Consumer Credit Code and Federal Truth in Lending laws. Consumer protection laws do not generally extend to a Business Purpose Loan or a Member Business Loan unless the parties agree in writing to extend the protections to the loan.

  The department recommends that credit unions granting BPLs use commercial lending documents which provide the credit union with greater flexibility regarding loan rates and collection procedures. 

  E. Policy Requirements

  A Business Purpose Loan (BPL/MBL) Policy must be developed and adopted by the Board of Directors.  It must specify at a minimum:

  1. Types of loans that will be considered, (equipment, real estate, working capital, etc.)
  2. Limitations based on total loans, individual     loans, geographic location, etc.
  3. Minimum lending personnel experience requirements

  F. Underwriting Requirements

  1. Completed and signed Loan Application to include stating the reason for the request (see #10 regarding persons with authority to borrow)
  2. Verification of the Ownership Structure of the business entity (individual, partnership, corporation, LLC)
  3. Current Financial Statement prepared by an independent auditor and 3 years income tax information (if available)
  4. Detailed Business Plan if a new business
  5. Cash Flow Analysis
  6. Current Credit Bureau Report (within 30 days)
  7. Better Business Bureau Report (if available)
  8. Business Averages and Norms for operating funds or inventory loans
  9. Agreement by all owners to sign individually and as authorized representatives of the business
  10. Resolution for “Corporate Authority to Borrow”, signed by all corporate officers, if the business is a corporation
  11. Resolution for “Partnership Authority to Borrow”, signed by all partners, if the business is a Partnership
  12. Signed Loan Agreement and Promissory Note stating the right of the credit union to request financial information and the right to inspect the business property as well as any other conditions the credit union wishes to establish on the loan.
  13. Signed Security Agreement with detailed description of the collateral, serial numbers or other identifiers and a lien search for all previously owned collateral
  14. Liens filed for all titled collateral and filed financing statements (UCC-1) with the Secretary of State for all other collateral
  15. Proof of insurance on all collateral and on the business

• Indirect Lending

  Indirect lending occurs when the credit union has an arrangement with a dealer to submit loan requests directly to them. The dealer may prepare some of the documentation or may not, depending on the arrangement.

  Most credit unions state in advance the type of loans that they want to consider from the dealer. Once the agreement is made, the dealer submits applications and deals to the credit union by fax or electronically for consideration. The credit union is then expected to make a decision quickly.

  Many of the arrangements require the credit union to pay the dealer a fee for the granting of a loan sent to the credit union. Many are also allowed to up charge the interest rate. Depending on the arrangement, the dealer may also be allowed to add maintenance agreements and insurance to the deal.

  Most credit unions do their own underwriting on indirect lending although there are arrangements where the dealer can do the underwriting within guidelines issued by the credit union.

  NCUA issued a white paper on indirect lending in 1995. This white paper gives an excellent description of how indirect lending works, but is not considered guidance or regulation.

  If a credit union is interested in indirect lending, it should spend some time visiting other credit unions with successful indirect programs.

  There are third party sub prime indirect programs available to credit unions also. Each credit union considering this type of indirect lending should be sure they understand the system well and refer all contracts to their attorney.

  The Kansas Department of Credit Unions neither endorses nor recommends indirect lending. If a credit union gets involved in the program, it will be reviewed closely by the examination staff.

• Risk-Based Loan Pricing

  Risk-based loan pricing in lending is a method utilized by lenders to develop loan interest rates that reflects the risk being taken. It is a common industry practice in consumer and commercial lending.The method enables the lender to receive a level of reward that is in-line with the risk taken and is consistent with the financial theory of risk and reward.

  Fair lending practices require that any risk based program be unbiased. Lenders can take on regulatory risk and potential financial liability if their pricing methods utilize potentially biased criterion.  Therefore, many lenders use a breakdown of FICO scores from the credit bureau report to determine the risk of the credit borrower and therefore the pricing of the loan.  The FICO score is used because it is issued by the credit bureau through a license with Fair, Isaac Co. and the credit union has no way to influence the score.  The score is completely independent and therefore unbiased.

  Generally, three or more tiers are set up with escalating interest rates as the credit risk increases.

  Other items can be used to refine the interest rate charged to the borrower also as long as the credit union can not influence the loan's pricing.  This could include things like: the length of employment in a similar or same field, the percentage of unsecured borrowing to their unsecured credit limit, and the length or term of the loan.

  An example of a risked based lending breakdown is as follows (these are only examples and not suggestions):

  A rating	FICO score exceeding 780	New car loan rate 5% with no down payment
  B rating	FICO score 720-779	New car loan rate 6% with no down payment
  C rating	FICO score 660-719	New car loan rate 8% with minimum 10% down
  D rating	FICO score 600-659	New car loan rate 10% with minimum 10% down
  F rating	FICO score under 600	New car loan rate 18% with minimum 20% down

  A good resource for risk-based loan pricing is to network with other credit unions and lenders that have a history of risk-based loan pricing.  Your trade association may also resources available.

• Principles of Leadership

  1. Provide an environment for every person to excel.
  2. Treat every person with dignity and respect – no one is more important than anyone else.
  3. Be forthright, honest, and direct with every person and in every circumstance.
  4. Improve effective use of technology to gain efficiency.
  5. Cherish your time and the time of others – it is not renewable.
  6. Identify the critical problems that need solution for the organization to succeed.
  7. Describe complex issues and problems simply so every person can understand.
  8. Never stop learning – depth and breadth of knowledge are equally important.
  9. Encourage constructive criticism.
  10. Surround yourself with great people and delegate to them full authority and responsibility.
  11. Make ethical standards more important than legal requirements.
  12. Strive for team-based wins, not individual wins.
  13. Emphasize capability – not organized.
  14. Incorporate measures and metrics everywhere.
  15. Identify and concentrate on core functions.

• Credit Union Board and Committee Minutes Guidelines

  Minutes are a part of books and records concerning the safety and soundness of credit unions (K.S.A. 17-2206). Minutes are a final accurate record of what transpired at a board or committee meeting and are considered to be a legal document.

  Minutes at a minimum consist of the following:

  • Name of the credit union
  • Date, time, location (address) of meeting
  • Complete list of all attendees, determination of a quorum, time of attendance by name for those who arrived after the meeting is formally convened and departed prior to the end of the meeting.
  • A copy of the agenda
  • Reports such as financial statements, committee reports, etc.
  • Approval of loans to be charged off, identified by each loan or an amount corresponding to an attached list
  • Approval of new members, unless a membership officer is appointed
  • Approval when changing loan rates
  • Approval of dividends
  • Approval of loans to officials, as required by K.S.A. 17-2216a(b)
  • Recording of all motions

  Record motions properly. A motion is a formal suggestion made by an attendee at the meeting that has been seconded by another attendee, and then passed by a vote. The secretary or member who records the minutes may need to restate a motion after a lengthy discussion. It is therefore very important to record these motions exactly as they have been stated. An example of how to document a motion is as follows: Moved, seconded, and carried that all members of the Board established the quarterly dividend as 3% on member share accounts. The names of all attendees making and seconding any motions should be recorded.

  Record every action taken. Actions taken by consensus are discouraged but if occur should be recorded as part of the minutes. Pertinent points made by attendees as part of a discussion prior to a motion should be recorded as part of the minutes. One final tip would be to read the book Robert’s Rules of Order. This is an excellent tool to assist anyone taking minutes. It will help to familiarize you with the format for making, seconding and amending motions.

• Savings Promotion Account Guidelines

  Savings Promotion Account Guidelines