In the matter of
Lending Policy and Procedures
Issued and entered
this 10th day of June 2005
By Linda A. Watters Commissioner
The purpose of
this bulletin is to establish minimum lending procedures to ensure safe and
sound credit union operation. Section 401(2)(i) and Article 4, Part 2 of the
Michigan Credit Union Act , 2003 PA 215, as amended, MCL 490.402(2)(i), MCL
490.421-490.424, authorize credit unions to grant loans, while Section 342(3)(n),
MCL 490.342(3)(n), requires the Board of Directors to adopt policies necessary
for credit union operations. Lending procedures must also comply with R 490.113,
R 490.116, and R 490.117 of the Michigan administrative code. Loans normally
represent a material segment of the credit union's assets and significantly
impact its risk profile.
Loan
Policies
The Board of Directors must develop and adopt comprehensive, written loan policies
which define each type of loan product offered. These policies must promote
safety and soundness within the credit union. At a minimum, the loan policy
should address the following:
| • |
Individual,
aggregate, and portfolio limits for each type or class of loan. |
| • |
Loan application
and underwriting documentation requirements, and loan approval criteria.
Loan approval criteria must include such factors as debt ratios, loan-to-value
ratios, disposable income, recent verification of income and employment,
credit history, tax returns, and financial statements. |
| • |
Procedures
and documentation to approve exceptions to the loan policy. |
| • |
Payment terms,
amortization periods, and maximum maturity for each loan type. |
| • |
Collateral
requirements and valuation methods, including criteria and procedures for
substitution and release of security. |
| • |
Criteria
for real estate and commercial lending, including approved loan structures
and participations, loan-to-value limitations, trade areas, assumption criteria,
appraisals and valuation requirements, title and hazard insurances, annual
monitoring, and other risk management factors. |
| • |
Controls
and practices to ensure compliance with all applicable State and Federal
regulations governing disclosure and underwriting requirements. |
| • |
Policies,
procedures, and tracking systems to ensure receipt of perfected liens, recorded
mortgages, current insurance, and loss payee status. |
| • |
Criteria
and timeframes for classifying and charging off various loan types. |
| • |
Collection
procedures and timeframes. |
| • |
Extension
and refinancing criteria and limitations. |
Applications
Credit applications must contain sufficient information to determine
the purpose for the loan, to carefully analyze the character and financial condition
of each loan applicant, cosigner and guarantor, and to ascertain their ability
to repay fully and promptly. Members must sign credit applications. Unsigned
requests for advances under an open-end revolving credit plan or pre-approved
line-of-credit plan may be honored as provided in the underlying contract and
policies adopted by the Board of Directors. Each credit application must be
retained until disposition is authorized by the Board of Directors. Applications
may not be disposed until the latter of:
| • |
Twenty-five
months after the date of the application |
| • |
The date
the loan is repaid in full |
| • |
The date
the line of credit is closed |
Approval
No loan, line of credit, renewal of a loan or line of credit,
extension agreement, deferral of payments, release of security, or substitution
of security on a loan may occur until approved in writing by a majority of the
members of the credit committee, the Board of Directors, or a loan officer to
whom such authority has been properly delegated. Credit union records must document
who granted the approval.
Loans
to Officials
A loan officer may be delegated the authority to approve only the
following classes of loans to officials:
| • |
Loans
fully secured by shares and deposits |
| • |
Loans under
an existing open-end revolving credit agreement provided a specific amount
has been pre-approved by the credit committee or the Board of Directors,
if there is no credit committee. |
No official may
act as cosigner or endorser for borrowers, except as permitted by law.
Contracts
and Receipts
Each
loan or other extension of credit must be evidenced by a promissory note or
other binding agreement signed by the borrower. Each disbursement must be as
directed by the borrower and evidenced by a proper voucher, receipt, check,
or draft. Disbursements under a pre-approved line of credit agreement may be
honored remotely if the borrower can be authenticated.
Lending
Review
Management
shall review lending activities throughout the year to ensure conformity with
the loan policy adopted by the Board of Directors. Examiners will evaluate the
lending function and associated controls to ensure appropriate risk management
practices are present to maintain public confidence in Michigan-chartered credit
unions.
Any questions
regarding this bulletin should be directed to:
Office of Financial
and Insurance Services
Credit Union Division
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720
Phone: (517) 373-6930
Toll Free: (877) 999-6442
Signed: Linda
A. Watters
Commissioner of Financial and Insurance Services
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