Code of Vermont Rules › Agency 21 - DEPARTMENT OF FINANCIAL REGULATION › Sub-Agency 010 - BANKING DIVISION › Chapter 015 - CREDIT UNION MEMBER BUSINESS LOANS › Section 21 010 015 - CREDIT UNION MEMBER BUSINESS LOANS

Current through June, 2024
Section 1 Authority, Scope and Purpose
This regulation is promulgated pursuant to
				  8 V.S.A. §§
											30203 and
				  32401 for the purpose
				  of setting guidelines for credit unions to make member business loans. This
				  regulation provides the basis for a system of member business lending that is
				  consistent with safe and sound credit union practices. The objective of this
				  regulation is to ensure that member business loans are made in such a way as to
				  minimize the controllable risks inherent in this type of
				  lending.
Section 2
				Definitions
As used in this regulation:
(1) "Associated member" means any member of
				the credit union with a common ownership, investment, or other pecuniary
				interest in the business or commercial endeavor for which the business loan is
				being made.
(2) "Construction or
				development loan" means a financing arrangement for acquiring property or
				rights to property, including land or structures, with the intent to use it for
				or convert it to income producing property such as residential housing for
				rental or sale; commercial use; industrial use or similar uses. A construction
				or development loan also includes a financing arrangement for the major
				renovation or development of property already owned by the member that will
				convert the property to income producing property, that will convert the use of
				income producing property to a different use, or that is a major expansion of
				its current use. A construction and development loan does not include a loan to
				finance maintenance, repairs, or improvements to an existing income producing
				property that does not change its use.
The following examples illustrate when a loan is or is not a
				  construction or development loan:
Example 1. If a member borrows money to repair a roof on a
				  barn on an existing farming operation, this is a member business loan but is
				  not a construction or development loan. A construction or development loan does
				  not include a loan for routine maintenance of a member's existing business or a
				  loan to enhance or expand a member's existing business unless those renovations
				  convert the property to a different use or are so major as to be considered the
				  equivalent of converting the use of the property.
Example 2. A loan to convert a movie theater into a
				  restaurant is a construction or development loan. A loan to convert a large
				  Victorian home used for residential purposes into a six-room inn also would be
				  a construction or development loan. In both instances, the loans are for the
				  purpose of converting the use of the properties. By contrast, a loan to repair
				  the roof or replace the carpet and wallpaper of an operating inn would not be a
				  construction or development loan as it neither converts the use of the
				  property, nor is so major a renovation to be considered the equivalent of
				  converting the use of the property.
Example 3. A loan to expand the parking lot of a small strip
				  shopping center would not be a construction or development loan, but a loan to
				  renovate the small strip shopping center into a mega-mall would be a
				  construction or development loan as it would be viewed as a major renovation
				  that converts the use of the property.
Example 4. A hotel with a fair market value of $ 10 million
				  borrows $ 1 million to build an exercise facility in the hotel to enhance the
				  property. The loan amount is 10% of the fair market value of the property. This
				  is not a construction or development loan. It is a member business loan to
				  improve or renovate an existing income producing property, but it is not so
				  major a renovation as to be considered the equivalent of converting the use of
				  the property. In another scenario, a hotel with a fair market value of $ 10
				  million borrows $ 5 million to build a luxury health spa on the hotel grounds.
				  The loan amount is 50% of the fair market value of the property. This is a
				  construction or development loan, even if the use of the property has not been
				  converted, as the renovation is so major as to be considered the equivalent of
				  converting the use of the property.
(3) "Loan-to-value ratio" means the aggregate
				amount of all sums borrowed including outstanding balances plus any unfunded
				commitment or line of credit from all sources on an item of collateral divided
				by the market value of the collateral.
(4) "Member business loan" means any loan,
				line of credit, or letter of credit, (including any unfunded commitments) the
				proceeds of which will be used by the member for any of the following purposes:
(a) commercial;
(b) corporate;
(c) agricultural; or
(d) other business investment property or
				venture;
A member business loan also includes any interest a credit
				  union obtains in a loan made by another lender where the proceeds of the loan
				  will be or are used by the member for any of the purposes described in (a) -
				  (d) above.
Provided however, the following shall not be considered a
				  member business loan for the purposes of this regulation:
(i) A loan that is fully secured by a lien on
				a 1 to 4 unit dwelling that is the member's primary residence.
(ii) A loan that is fully secured by shares
				in the credit union or by perfected security interests in federally insured
				deposits in other financial institutions.
(iii) A loan, the repayment of which is fully
				guaranteed or fully insured by the federal government or by the state of
				Vermont or any of its political subdivisions. A binding advance commitment to
				purchase a member business loan in full by any such entity shall be considered
				a guarantee for the purposes of this paragraph.
(iv) One or more business purpose loans as
				described in (a) - (d) above (excluding loans described in (i), (ii), or (iii)
				of this subsection
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				) to a member or associated members, which in the aggregate do not exceed $
				50,000.00. The entire amount of such a loan that exceeds $ 50,000.00, or the
				entire amount of the loan that causes the aggregate amount to exceed $
				50,000.00, is a member business loan.
For purposes of any risk based net worth calculation, once a
				  loan is classified as a member business loan it remains a member business loan
				  until the loan is paid in full or otherwise discharged.
(5) "Net worth" means
				retained earnings at quarter end as determined under Generally Accepted
				Accounting Principles. Retained earnings normally include undivided earnings,
				regular reserves and any other appropriations designated by management or
				regulatory authorities. Only undivided earnings and appropriations of undivided
				earnings are included in net worth. For low income designated credit unions,
				net worth also includes secondary capital accounts that are uninsured and
				subordinate to all other claims, including claims of creditors, shareholders,
				and the National Credit Union Share Insurance Fund ("NCUSIF"). For any credit
				union, net worth does not include the allowance for loan and lease losses
				account.