1. (a) A member business loan is defined as any loan, line of credit, or letter of credit (including any unfunded commitments), the proceeds of which will be used for a commercial, corporate, business investment property or venture, or agricultural purpose, except that the following shall not be considered a member business loan for the purposes of this rule:

   1. (1) A loan fully secured by a lien on a 1- to 4-family dwelling that is the member's primary residence;
   2. (2) A loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions;
   3. (3) Loan(s) to a member or associated member which, when the net member business loan balances are added together, are equal to less than $50,000; or
   4. (4) A loan where a federal or state agency or one of its political subdivisions fully insures repayment, or fully guarantees repayment, or provides an advance commitment to purchase in full.
2. (b) This section does not apply to loans made by a credit union to other credit unions and credit union service organizations.
3. (c) Any interest a credit union obtains in a loan that was made by another lender to the credit union's member is a member business loan, for purposes of this section, to the same extent as if made directly by the credit union to its member.
4. (d) Any interest a credit union obtains in a nonmember loan, pursuant to Section 91.805 (relating to loan participation investments) shall be treated the same as a member business loan for purposes of this section, except that the effect of such interest on a credit union's aggregate member business loan limit will be as set forth in subsection (f) of this rule.
5. (e) A credit union with a net worth ratio greater than 6% may make member business loans subject to the conditions of this section. The aggregate limit on a credit union's net member business loan balances is the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets. Loans that are exempt from the definition of member business loans are not counted for the purpose of the aggregate loan limit.

6. (f) If a credit union holds any nonmember loan participation investments that would constitute a member business loan if made to a member, those loans will affect the credit union's aggregate limit on net member business loan balances as follows:

   1. (1) The total of the credit union's net member business loan balances and the nonmember participation investments must not exceed the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets, unless the credit union has first received approval from the commissioner.

   2. (2) To request approval from the commissioner, a credit union must submit a letter application that:

      1. (A) Includes a current copy of the credit union's member business loan policies;
      2. (B) Confirms that the credit union is in compliance with all other aspects of this rule;
      3. (C) States the credit union's proposed limit on the total amount of nonmember loan participation investments that the credit union may acquire if the application is granted; and
      4. (D) Attests that the acquisition of nonmember loan participation investments 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. (3) If the commissioner approves the request, the commissioner will promptly forward the request to Region IV of the NCUA for decision under NCUA rules at 12 C.F.R 723.16. The commissioner's approval is not effective until the regional director of the NCUA approves it in accordance with NCUA Rule at 12 C.F.R. 723.16.

   4. (4) The commissioner shall deny a request to exceed the aggregate limit on a credit union's net member business loan balances, or may revoke a previously approved increased aggregate limit, if the commissioner determines that:

      1. (A) the treatment of loan purchases or participations interest will or has resulted in circumvention of the aggregate limit;
      2. (B) the credit union's level of capital is not commensurate with that needed to support the additional risks that will be or has been incurred; or
      3. (C) the performance of the activity by the credit union will or has adversely affected the safety and soundness of the credit union, or poses a material risk to the share insurance fund.
7. (g) The aggregate amount of net member business loan balances to any one member or group of associated members shall not be more than 15% of the credit union's net worth (less the Allowance for Loan Losses account) or $100,000.00, whichever is higher.

8. (h) All member business loans must be secured by collateral in accordance with this section, except the following:

   1. (1) a credit card line of credit granted to nonnatural persons that is limited to routine purposes normally made available under such lines of credit; and

   2. (2) a loan made by a credit union under the following conditions:

      1. (A) the aggregate of the unsecured outstanding member business loans to any one member or group of associated members does not exceed the lesser of one hundred thousand dollars or 2.5% of the credit union's net worth;
      2. (B) the aggregate of all unsecured outstanding member business loans does not exceed ten percent of the credit union's net worth; and
      3. (C) the credit union has a net worth of at least seven percent.

9. (i) The maximum loan-to-value (LTV) ratio for a member business loan may not exceed eighty percent, except when:

   1. (1) the loan is secured by collateral on which the credit union will have a first mortgage lien, and the loan is covered by private mortgage or equivalent type insurance, or insured, guaranteed, or subject to advance commitment to purchase, by any federal or state agency or any political subdivision of this State, but in no case may the LTV ratio exceed ninety-five percent; or
   2. (2) the loan is to purchase a car, van, pickup truck, or sport utility vehicle and is not part of a fleet of vehicles, but the LTV ratio and the term for this type of vehicle loan must be consistent with the depreciation schedule of any vehicle used for a particular type of business.

10. (j) A credit union that engages in this type of lending shall adopt specific member business loan policies and review them at least annually. In addition to the general lending provisions of this subchapter, the member business loan policies, at a minimum, shall address all of the following areas:

    1. (1) Types of business loans to be made and collateral requirements for each type of loan.
    2. (2) The maximum amount of net member business loan balances relative to the credit union's net worth.
    3. (3) The maximum amount of any given category or type of member business loan relative to the credit union's net worth.
    4. (4) The maximum amount that will be loaned to any one member or group of associated members, subject to subsection (g) of this section.
    5. (5) The qualifications and experience requirements for personnel involved in making and servicing business loans, subject to subsection (k).
    6. (6) A requirement for analysis of the member's initial and ongoing financial capacity to repay the debt.

    7. (7) Documentation sufficient to support each request for an extension of credit or an increase in an existing loan or line of credit, except where the board of directors finds that the required documentation is not reasonably available for a particular type of loan and states the reasons for those findings in the credit union's written policy. At a minimum, the standard documentation must include the following:

       1. (A) A balance sheet;
       2. (B) An income statement;
       3. (C) A cash flow analysis;
       4. (D) Income tax data;
       5. (E) Analysis of operating performance ratios, and comparison with industry averages, when applicable; and
       6. (F) Receipt and the periodic updating of financial statements, income tax data, and other documentation necessary to support the borrower's ongoing repayment ability.

    8. (8) Collateral requirements which include all of the following:

       1. (A) Loan-to-value (LTV) ratios;
       2. (B) Appraisal, determination of ownership, and insurance requirements;
       3. (C) Environment impact assessment, when applicable; and
       4. (D) Steps to be taken to secure various types of collateral.
    9. (9) Identification, by position, of the officials and senior management employees who are prohibited from receiving member business loans which, at a minimum, shall include the credit union's chief executive officer, any assistant chief executive officers, the chief financial officer, and any associated member or immediate family member of such persons.
    10. (10) Guidelines for purchase and sale of member business loans and loan participations, if the credit union engages in that activity.
11. (k) The board of directors must use the services of an individual with at least two years direct experience with the type of lending the credit union will be engaging in. The experience must provide the credit union sufficient expertise given the complexity and risk exposure of the loans in which the credit union intends to engage. A credit union can meet the experience requirement through various approaches, including the services of a credit union service organization (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.

12. (l) Any third party used by a credit union to meet the requirements of subsection (k) must be independent from the transaction and is prohibited from having a participation in the loan or an interest in the collateral securing the loan that the third party is responsible for reviewing, with the following exceptions:

    1. (1) the third party may provide a service to the credit union related to the transaction, such as loan servicing;
    2. (2) the third party may provide the requisite experience to the credit union and purchase a participation interest in a loan originated by the credit union that the third party reviewed; or
    3. (3) a credit union may use the services of a CUSO that otherwise meets the requirements of subsection (k) 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.

13. (m) Loans granted for the construction or development of commercial or residential property are subject to the following additional requirements:

    1. (1) The aggregate of the net member business loan balances for all construction and development loans must not exceed 15% of the credit union's net worth. To determine the aggregate balances for purposes of this limitation, a credit union may exclude any loan made to finance the construction of a single-family residence if a prospective homeowner has contracted to purchase the property and may also exclude 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. (2) The member borrower on such loans 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 this requirement will not apply in the case of a loan 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. Instead the collateral requirements of subsection (i) will apply; and
    3. (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.

14. (n) The commissioner, consistent with safety and soundness principles, may grant a waiver of a requirement imposed by this Section only in the following areas:

    1. (1) Aggregate construction or development loan limits under subsection (m);
    2. (2) Minimum borrower equity requirements for construction or development loans under subsection (m);
    3. (3) LTV ratio requirements for member business loans under subsection (i);
    4. (4) Maximum aggregate net member business loan balances to any one member or group of associated members under subsection (g); and
    5. (5) Maximum unsecured member business loan limits under subsection (h).

15. (o) A waiver request authorized under subsection (n) must contain the following:

    1. (1) A copy of the credit union's member business lending policy;
    2. (2) The higher limit or ratio sought;
    3. (3) An explanation of the need to raise the limit or ratio;
    4. (4) Documentation supporting the credit union's ability to manage this activity; and

    5. (5) An analysis of the credit union's prior experience making member business loans, including as a minimum:

       1. (A) the history of loan losses and loan delinquency;
       2. (B) volume and cyclical or seasonal patterns;
       3. (C) diversification;
       4. (D) concentrations of credit to one borrower or group of associated borrowers in excess of 15 percent of net worth;
       5. (E) underwriting standards and practices;
       6. (F) types of loans grouped by purpose and collateral; and
       7. (G) the qualifications of personnel responsible for underwriting and administering member business loans.

16. (p) In determining action on a waiver request made under subsection (n), the commissioner will consider the credit union's:

    1. (1) Condition and management, including compliance with regulatory net worth requirements. If significant weaknesses exist in these financial and managerial factors, the waiver normally will be denied.
    2. (2) Adequacy of policies, practices, and procedures. Correction of any deficiencies may be included as conditions, as appropriate, if an approval decision is made.
    3. (3) Record of performance. If the member business loan record is less than satisfactory or otherwise problematic, the waiver normally will be denied.
    4. (4) Elevated level of risk. If the level of risk posses safety and soundness problems or material risks to the insurance fund, the waiver normally will be denied.
17. (q) The commissioner will provide the NCUA regional director with a copy of each waiver request made under subsection (n). The regional director will be consulted on all waiver requests. The regional director will provide NCUA's views within 30 calendar days, or NCUA will be deemed to have concurred with the commissioner's decision. The thirty days will begin to run once the commissioner and the regional director agree that the waiver request is complete.
18. (r) A credit union may not 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.
19. (s) 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.
20. (t) If a credit union makes a member business loan as part of a Small Business Administration guaranteed loan program with loan requirements that are less restrictive than those required by Commission Rules, then the credit union may follow the loan requirements of the relevant Small Business Administration guaranteed loan program.

21. (u) For the purposes of this section, the following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

    1. (1) Associated member--means any member with a common ownership, investment, or other pecuniary interest in the business or agricultural endeavor for which the business loan is being made.
    2. (2) Construction or development loan--a financing arrangement for acquiring property or rights to property, including land or structures, with the intent of converting the property into income-producing property such as residential housing for rental or sale; commercial use; industrial use; or similar use.
    3. (3) Loan-to-value ratio--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 used to secure the loan.
    4. (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 or deposits 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 sold as a participation interest without recourse and qualifying for true sales accounting under generally accepted accounting principles.
    5. (5) Net Worth--means retained earnings as defined under Section 702.2 of the National Credit Union Administration's Rules and Regulations (12 CFR, Chapter VII, Part 702).

Source Note:The provisions of this §91.709 adopted to be effective August 9, 1999, 24 TexReg 6023; amended to be effective February 23, 2003, 28 TexReg 1377; amended to be effective March 6, 2005, 30 TexReg 1065.