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Compliance Update with Amy K
Story ID:8414  
Date Posted:  June 15, 2017



by Amy Kleinschmit, VP Compliance

Commercial Loan & Call Reports. The National Credit Union Administration (NCUA) recently released its new 5300 Call Report Form and Form Instructions. Credit unions offering commercial lending will want to pay attention to the changes as previous versions of the call report had not been updated to reflect the January 1, 2017, regulatory change. Take note of the new distinction between commercial loans and member business loans, and the new Call Report is updated to enable credit unions to report commercial loans and MBLs as separate categories on the form. Looking at page 71 of the Form Instructions, the NCUA does define “commercial loan” and also provides a table to differentiate between Member Business Loan and Commercial Loan. The instructions also include a number of examples, such as:
 
A member has $35,000 in commercial purpose loans and the credit union grants this member an additional $40,000 in a commercial purpose line of credit, the credit union should report both loans as commercial loans as of the date of the second loan is granted regardless of whether the line is drawn on.
 
In this example, the same member subsequently paid down the $35,000 commercial purpose loan to $15,000 and has a $34,000 balance on the business line of credit, making the total outstanding balance $49,000.The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is still $55,000. The credit union is required to list both of these loans as commercial loans.
 
If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and the credit union reduces the line of credit to $34,000. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans.
 
If, in the case above, the member subsequently pays down the $35,000 commercial purpose loan to $15,000 and makes no change to the $40,000 business line of credit, but adds $6,000 to a secured share account at the credit union. The aggregate outstanding balance plus unfunded commitments less any portion secured by shares in the credit union or other financial institutions is $49,000. The credit union will not list either of these loans as commercial loans.

Please note that these examples only relate to reporting commercial loans – member business loan is defined separately and reported in a separate area.

The instructions also explain reporting subcategories of commercial loans – specifically, construction and development loans; commercial loans or participation interest secured by farmland; secured by multifamily residential property; secured by owner occupied, non-farm, non-residential property; secured by non-owner occupied, non-farm, non-residential property; loans to finance agricultural production and other loans to farmers; commercial and industrial loans; unsecured commercial loans; and unsecured revolving lines of credit granted for commercial purposes. There are also additional fields for reporting miscellaneous commercial loan information.

MBL FAQs. Still on the topic of Member Business Lending (MBL) and the January 1, 2017, regulatory change, the NCUA also recently issued a number of FAQs on implementing this regulatory change – that was effective 6 months ago. These FAQs can be found here. A number of the FAQs direct credit unions to additional information in the Examiner’s Guide, which if you offer commercial loans you are hopefully already familiar with this resource.

Credit unions engaged in commercial lending/member business lending should adhere to active risk-management principles for sound lending. A well-developed program with appropriate monitoring and controls, and appropriate audit and oversight, should best prepare credit union management for the next examination.

For example, at a loan’s inception, a credit union should perform a comprehensive risk assessment and assign an initial credit risk rating. The risk assessment and risk rating justification should be documented in the credit approval document.

After the loan closes, a credit union should reevaluate the risk level of the borrower relationship through regular contact with the borrower and regular reviews of the borrower’s financial condition. A change in risk should be addressed immediately and be reflected appropriately in the risk rating. Senior management and the board can verify the practices are appropriate by requiring regular independent loan reviews that evaluate the adequacy of the policy and procedures and the accuracy of the assigned risk grades.

Additionally, putting an action plan in place to address any issues identified in the loan review will demonstrate proactive risk management to the exam team.

If your credit union disagrees with the findings of an examiner, the NCUA encourages immediate dialogue with the individuals most closely associated with your credit union. First, you should approach your examiner. This is the most effective method to resolve any issue. You have a right to question the conclusions and receive supporting information. Be sure you have support for your position that is reasonable and consistent with accepted risk-management practices.

Second, if you cannot arrive at an agreement with the examiner, the next step is to contact and express your concerns to the supervisory examiner. They are required to provide an objective review of the facts. They can review your examination in context with the standards applied to other examinations.
Finally, you may appeal formally in writing to the regional director and follow through with NCUA’s appeal process.

Cybersecurity Risk Assessment Tool. Shifting gears from commercial lending to cybersecurity, the FFIEC issued an update to the Cybersecurity Assessment Tool (Assessment). This update to the Assessment addresses changes to the FFIEC IT Examination Handbook by providing a revised mapping in Appendix A to the updated Information Security and Management booklets. The updated Assessment will also provide additional response options, allowing financial institution management to include supplementary or complementary behaviors, practices and processes that represent current practices of the institution in supporting its cybersecurity activity assessment.

You can find the latest information about cybersecurity risk management, including the updated cybersecurity assessment tool, at www.ffiec.gov/cybersercurity.htm

Compliance Solution. CU PolicyPro has over 230 completely developed model policies written and researched by credit union experts and ready for your credit union to customize. This policy management system allows credit unions to edit policies within the system, and publish and post manuals and related documents, allowing easy access for staff, management and the Board.

All CUAD affiliated credit unions have unlimited access to this resource. Access your credit union’s CU Policy Pro manual here. Need help navigating CU policy pro? Contact Amy Kleinschmit at akleinschmit@cuad.coop to set up a demo.