This document provides guidance on conducting annual staff training for member business loans. It outlines key topics to cover including loan policy, types of loans, underwriting processes, risk assessment, multi-family housing loans, loan closing procedures, and periodic reviews. Staff should be trained on analyzing loan requests, documenting borrower repayment ability, updating financial statements, collateral requirements, interest rates and maturities, general loan procedures, and identifying prohibited recipients. The training ensures compliance with regulations and helps staff properly underwrite, close, and review member business loans.

1. Member
Business
Annual Staff Training
By: Sarfaraz Ali

2. Key Topics
Policy Loan Types
Loan
Requirement
Member Collateral
Business Credit
Analyzing Loan
Request Loan Underwriting
Risk Matrix MBL Loan Closing
Audit Periodic
Review Review

3. Business Loan Policy
At a minimum, loan policy must address the following:
TYPES Types of business loans
TRADE AREA Your Trade Area
Max Amount Max $ of Assets, in relation to Net Worth, that invest in Business
Total Business Loan Loans, Given category or Type of Business Loan, to any One Member
Type of Business Loan or group of associated members.
One Member/Group
Qualifications/experience of personnel (minimum of 2 years) involved
LO EXPERIENCE
in making and administering business loans;
A requirement to analyze and document the ability of the borrower to
REPAY
Repay the loan;
Receipt and periodic Updating of financial statements and other
UPDATING FS
documentation, including tax returns;
Cont.….

4. Business Loan Policy
A requirement for sufficient documentation supporting each request to
DOCUMENTATION extend credit, or increase an existing loan or line of credit (except where the
board of directors finds that the documentation requirements are not
generally available for a particular type of business loan and states the
reasons for those findings in the credit union’s written policies). At a
minimum, your documentation must include the following:
(1) Balance sheet; (2) Cash flow analysis; (3) Income statement; (4) Tax data;
(5) Analysis of leveraging; and (6) Comparison with industry average or similar analysis;
COLLATERAL The collateral requirements must include:
(1) Loan-to-value ratios; (2) Determination of value; (3) Determination of ownership; (4)
Steps to secure various types of collateral; and (5) How often the credit union will
reevaluate the value and marketability of collateral;
INT RATE/MATURITY The interest rates and maturities of business loans;
General loan procedures which include:
LOAN PROCEDURES
(1) Loan monitoring; (2) Servicing and follow-up; and (3) Collection
Identification of those individuals prohibited from receiving member
PROHIBITED
business loans

5. Other NCUA 723’s
How Much May One Member, or a Group of Associated Members, Borrow?
15% of NET WORTH Amount of out-standing member business loans (including
Or any unfunded commitments) to any one member or group of
associated members must not exceed the greater of:
$100,000 (a) 15% of the credit union’s net worth; or (b) $100,000.
What is the Aggregate Member Business Loan Limit for a Credit Union?
The aggregate limit on a credit union’s outstanding member
business loans (including any unfunded commitments) is the
1.75 Times of NET WORTH
lesser of 1.75 times the credit union’s net worth or 12.25% of Or
the credit union’s total assets. 12.25% of ASSETS

6. Business Structure
• Sole Proprietorship (1040 Schedule C)
• Limited Liability Company (1120)
• Corporation (1120)
• Partnership (1065)
• S-Corporation (1120S)

7. • Business Acquisition Loans • Revolving Check Credit
• Debt Financing • SBA Commercial Loans
• Franchise Start-Up Loans • Secured Working Capital Loan
• Line of Credit • Short Term Loan
• Long-Term Loans • Start-Up Loans
• Micro-Loans • Unsecured Working Capital Loan
• Professional Loan (CPA, Dentist etc.)

8. General Loan Requirement
Loan Request/Application Notes Payable Schedule.
History of Business Profit and Loss Projection
• To be completed by all applicants
including location analysis, Management Resume.
competitive analysis and future of
the business. Personal Financial Statement
• each proprietor, or
Legal Business Documents • each limited partner who owns 20% or
• Certificate of Incorporation/ more interest and each general partner,
Partnership Agreement or
• Articles of Incorporation/ Certificate • each stockholder owning 20% or more
of Partnership voting stock and each corporate officer
• Corporate By-Laws and director, or
• County Assumed Name Certificate • any person or entity providing a
• State Assumed Name Certificate ( if guaranty of the loan.
Corporation)
• Tax Identification No (TIN) Certificate Personal Cash Flow Statement
IRS Form 4506-T.

9. Additional Loan Requirement
Business Plan Cash/Equity Injection.
(start-up business or business expansion). Include a Include the last 3 months of bank
description of management, feasibility analysis, statements showing the source of cash
assumptions, site evaluation, and demographics for /equity injection.
each location.
Interim Profit & Loss and Balance Sheet Proposed Purchase Agreement or
Current within 45 days of application for business Executed Purchase Agreement
being: Must include cost allocation of all assets being
(1) acquired, purchased
(2) existing/expanded, and
(3) all affiliates of applicant (20% or more ownership Notes or Loan Agreements
interest by any of the owners/partners/shareholders (Refinanced Loan Only)
of proposed borrower).
Personal Tax Returns.
Business Financial Statements and Tax For the past three years on each individual
Returns. (Last 3 years)
Existing or Proposed Lease Agreement

10. Collateral and
Security Requirement
LTV Type of Collateral
Commercial Real Estate Loan
Maximum
80% • 1st security lien on property, land & building
Example:
All Liens
Rental shopping strip, Convenience store, Storages,
Churches, Farm Land, Other commercial properties.
95% Business Loan Against Equipment
Maximum
• 1st priority lien UCC on equipment, machinery,
inventory etc.
If covered through
Private Mortgage Example:
or Equivalent Farm Equipment, C-Store Equipment, Any kind of
Insurance business inventory, commercial equipment etc.

11. Analyzing Loan Application
Can my Will my What do I do if my
borrower pay? borrower pay? borrower doesn’t pay?
Character &
Cash Flow Collateral
Circumstances
Sources of Repayment Financial Analyses
• The Borrower’s Profits or Cash Flows • Common Size Ratios of Members
Over Time
• Business Assets Pledged as
Collateral • Financial Ratio Analysis of
• Strong Balance Sheet With Ample Member’s Financial Statements
Marketable Assets and Net
• Current and Pro Forma Sources
Worth and Uses of Funds Statement
• Guarantees Given By Businesses

12. Credit Underwriting
One of the most important factors used to determine the fund-ability for
a commercial loan request is the Debt Service Coverage Ratio,
commonly referred to as the Debt Coverage Ratio (DCR) or Debt
Service Coverage Ratio (DSCR).
The DSCR is a ratio used to determine the amount of debt that can be
supported by the revenues generated from the commercial property.
Very simply it’s the net income generated by the commercial business
divided by the new commercial loan payment. DSCR is calculated both
on Business and Individual borrows financial data. Global debt service
Coverage Ratio gives an overall aspect of the business.
Recommended
DSCR of 1.25

13. Credit Underwriting
XYZ Corporation Mr. & Mrs. Smith
DSCR DSCR
Average Income of 2011 & 2010 Average Income of 2011 & 2010
Income 137,000 Salary/Wages 90,000
+ Depreciation Expense 26,000 Est. 45% Tax & Living Expense 40,500
+ Interest Expense 15,000 Net Cash Available for D/S 130,500
+ Amortization Expense 6,000
EBITDA 178,000 Total Debt Per Credit Report 54,000
Debt Service - Current Obligation 25,000 DSCR 2.42
Debt Service - Proposed Loan 101,263
Total Business Debt Service 126,263 Global Cash Flow
DSCR 1.41 Net Cash - Business 178,000
Net Cash - Personal 130,500
Note: Proposed Loan of 1 Million $ amortize over 15 Total Net Cash Available for D/S 308,500
year with an interest rate of 6%
D/S - Business 126,263
D/S - Personal 54,000
Total Debt Service 180,263
Global Surplus/(Deficit) 128,237
Global DSCR 1.71

14. Loan Risk Matrix

15. Loan Risk Matrix

16. Loan Risk Matrix
Financial
This section consists of 5 considerations based on the type of information provided and,
the actual financial results. Only one option under each consideration is to be chosen
(for ease of reference each component is color coded).

17. Factors Change Loan Decision
Appraisal Environmental
Appraisal requirements under Phase I Phase II
NCUA § 722.3.
Phase I cover initial site Phase II cover detail
Normally at Commercial Real inspection and basic site inspection where
Estate transactions required sampling for Phase I show
Appraisal from a State Certified or environmental related environment related
Licensed Appraiser contamination hazard found in the
first report
Commercial Real Estate transactions
required Environmental Report
• Convenience Store Business
• Dry Cleaning Business
• Any other environmental related
businesses

18. Closing Checklist
Promissory Note Title Insurance Commitment
& Endorsements
Deed of Trust
Environmental
Corp. Guaranty
Report/Assessment
Individual Guaranty
Contract documents to
UCC-1’s Lender
Security Agreement Appraisal
Assignment of Rents/Leases Survey
Insurance f/b/o Lender Environmental Report

19. Audit Review
EXECUTED & • 1. Are the following items properly executed and recorded:
RECORDED a. Note? b. Security Agreement? c. Contracts? d. Liens?
PRINCIPLES OF • Are the principals in the business identified?
BUSINESS
FINANCIAL • Are complete financial statements in file with supporting
STATEMENTS schedules and tax returns?
COLLATERAL • Are collateral conditions and value determined by
independent qualified appraisers?
PERIODIC REVIEW • Is periodic review of the financial condition documented?

20. Audit Review
SITE INSPECTION • Do loan officers make regular on-site inspections of business
sites and collateral?
25% EQUITY • For construction and development loans, does the borrower
CONSTRUCTION have a minimum of 25% equity interest in the project being
financed? 723.3(b) If Yes: NCUA Approval 9. If no, has the
credit union obtained NCUA approval?
PRE-APPROVAL • For construction and development loans, does the credit
DRAW union release funds according to a pre-approved draw
schedule and only after on-site written inspections by
qualified personnel? 723.3c

21. Periodic Review
(g) A requirement to analyze and
Financial Statement document the ability of the borrower to
repay the loan consistent with
appropriate underwriting and due
Credit Reports diligence standards, which also
addresses the need for periodic
financial statements, credit reports,
Business Site Visit and other data when necessary to
analyze future loans and lines of credit,
such as, borrower’s history and
Environmental Impact experience, balance sheet, cash flow
Assessment analysis, income statements, tax data,
environmental impact assessment,
and comparison with industry averages,
Tax Data
depending upon the loan purpose;

22. s