November 30, 1998
Raymond J. McConaghy, Jr., President
Greenwood Credit Union
2669 Post Road
Warwick, Rhode Island 02866
Dear Mr. McConaghy:
You have asked a number of questions regarding
the collateral requirements for member business loans. After
a telephone conversation with Staff Attorney Michael McKenna of
this office, we were able to narrow down your questions. Your
questions concern §701.21(h)(2)(ii)(A) of NCUA's previous
member business loan regulation. That provision of the prior
regulation stated that "loans shall be granted on a fully
secured basis by collateral" and set out certain loan-to-value
requirements. You have asked for clarification of the phrase
"fully secured" and whether business loans must be secured
by real estate.
As you may know, the NCUA Board recently issued
a new interim final business loan rule in September, a copy of
which is enclosed. 12 C.F.R. Part 723. The new interim rule
eliminates the words "fully secured." Instead, it states
that "all member business loans must be secured by collateral"
and then sets out the loan-to-value requirements. 12 C.F.R. §723.7.
Loan-to-value is defined in the regulation. 12 C.F.R. §723.21.
Briefly summarized, the loan-to-value ratio is a measurement
of the permissible loan amount in relation to the value of the
collateral. Under the new interim rule, unless the loan is exempt
from the definition of a member business loan or the credit union
has a waiver from NCUA, a member business loan must be secured
and meet the loan-to-value ratios set forth in §723.7. The
collateral on a member business loan does not have to be real
estate. For example, if a credit union makes a $100,000 loan
to a member to buy farm equipment, then the collateral will most
likely be the farm equipment being purchased.
You have also provided us with a copy of your
business lending policies and asked if they were legal. You should
consult with your attorney to determine whether they meet Raymond
J. McConaghy, Jr.
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the requirements of the member business loan
rule. NCUA's Office of General Counsel does not conduct individual
reviews of credit unions loan policies.
Sincerely,
Sheila Albin
Associate General Counsel
GC/MJMcK:bhs
SSIC 3501
98-0715
Enclosure