Commercial and Member Business Loans

This section of the Examiner's Guide addresses the following topics:

In this introductory section, you will find:

A commercial loan is a loan, line of credit, or letter of credit that a credit union extends to a borrower for a commercial, industrial, agricultural, or professional purpose. (See commercial loan definition.) These loans may be secured or unsecured, and may have a short or long-term maturity. Such loans include commercial real estate loans, as well as commercial and industrial loans (examples include term business loans, working capital lines of credit, and others).

Commercial lending is not appropriate for all credit unions. This type of lending is complex, and involves different risks than consumer lending. Managing commercial lending generally involves a greater cost to a credit union than consumer lending. If a credit union’s leadership (board and management team) does not have the experience, skills, and resources to manage commercial lending, the institution should refrain from making such loans.

To properly manage the risk associated with commercial lending, a credit union should have staff with expertise and more specialized risk management experience. A credit union that offers commercial loans should maintain prudent risk management practices and sufficient capital that is commensurate with the risks associated with its commercial lending activities at all times.

The primary focus of a commercial lending examination is on the effectiveness of a credit union’s risk management process and the aggregate risk profile of a credit union’s loan portfolio. Examiners should assess whether a credit union’s:

Part 723, Member Business Loans - Commercial Lending, is effective January 1, 2017 except for amendatory instruction number 4 adding §723.7(f), which became effective May 13, 2016.

Purpose and Scope of Part 723

Part 723 of NCUA rules and regulations establishes policy and program responsibilities that a credit union must adopt and implement as part of a safe and sound commercial lending program. It also incorporates the statutory constraints in §107A of the Federal Credit Union Act, which limits the aggregate amount of Member Business Loans (MBLs) that a credit union has on its balance sheet to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the Act for a credit union to be well capitalized.

Exemption for Small Credit Unions with Limited Commercial Lending Activities

Part 723 of NCUA rules and regulations applies to all federally insured credit unions. However, a small credit union that holds a relatively small amount of commercial loans compared to its net worth and infrequently originates and sells commercial loans is exempt from §723.3 and §723.4 of the rule. In order to qualify for the exemption, a credit union must satisfy all of the following conditions as established in §723.1(b)(1):

All credit unions must have a board-approved loan policy covering their lending activity in general, including those credit unions that qualify for the exemption. A credit union that meets the criteria outlined above is only exempt from the specific policy and infrastructure requirements of §723.3 and §723.4. Exempt credit unions must ensure their general loan policy (required by Part 701) covers the types of commercial loans the institution makes, including satisfying all other applicable commercial lending requirements in the rule.

Commercial Loan Definition

A commercial loan is any loan, line of credit, or letter of credit (including any unfunded commitments) made to an individual, sole proprietorship, partnership, corporation, or other business enterprise for commercial, industrial, agricultural, or professional purposes (but not for personal expenditure purposes). This includes any interest a credit union obtains in a commercial loan made by another lender (such as a participation) as outlined in §723.2.

Excluded from this definition are loans:

Commercial loans include loans made to members, as well as purchased nonmember loans and participations.

The commercial loan definition excludes loans secured by a vehicle manufactured for personal, family, and household use. However, loans primarily secured by fleet vehicles or vehicles to carry fare-paying passengers are considered commercial loans. In addition, a loan to a vehicle dealership or seller to replenish inventory of vehicles for sale (a so-called “floor plan loan” or “vehicle inventory loan”) secured by those vehicles is a commercial loan.

Loans secured by a 1- to 4- family residential property, whether or not it is the borrower’s primary residence (that is, owner or non-owner occupied), are not commercial loans. However, when such residential properties are used for business or investment purposes, these loans have risk characteristics more similar to commercial real estate loans than those of owner-occupied 1- to 4- family residential loans. A credit union should have credit risk management policies and processes suitable for the risks specific to this type of lending. Underwriting standards and the complexity of risk analysis should increase as the number of properties financed for a borrower and associated borrowers increases. When a borrower finances multiple properties and the repayment of a loan depends on the successful operation of the multiple residential rental units, a comprehensive global cash-flow analysis of the borrower and principal is generally necessary to properly underwrite and administer the credit relationship. In such cases, a credit union should analyze and administer the relationship on a consolidated basis.

Commercial Loans versus MBLs

There are several distinctions between a commercial loan and a statutorily defined member business loan. These apply whether a credit union directly offers a loan or purchases a loan or participation. It is important to understand the differences, as loans recognized as commercial loans must be evaluated based on the risk management principles outlined in Part 723. Loans recognized as member business loans must be reported as such and kept within the statutory limit of the Federal Credit Union Act. In all cases, a credit union should perform appropriate risk assessment to ensure a loan is supported by a reliable and adequate repayment source.

A business loan is any loan, line of credit, or letter of credit (including any unfunded commitments) made to an individual, sole proprietorship, partnership, corporation, or other business enterprise for commercial, industrial, agricultural, or professional purposes (but not for personal expenditure purposes).

Type of Loan MBL Commercial Loan
Loan secured by a 1 to 4 family residential property No No
Business loan secured by a vehicle manufactured for household use Yes, if the aggregate net member business loan balance is equal to or greater than $50,000 No
Business loan secured by a vehicle used in a fleet or to carry fare-paying passengers Yes, if the aggregate net member business loan balance is equal to or greater than $50,000 Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000
Business loan with aggregate net member business loan balance less than $50,000 No No
Business loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions No No
Business loan in which a federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full No Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000
Non-member business loan or non-member participation interest in a commercial loan made by another lender No Yes, if the aggregate outstanding balances plus unfunded commitments less any portion secured by shares in the credit union is equal to or greater than $50,000

Types of Commercial Loans

A credit union should structure a commercial loan consistent with the borrowing need of a borrower. It is critical that a credit union’s loan term and structure match the anticipated cash-flows and repayment sources with the purpose of the loan (see §701.21(c)(4)). Typical types of commercial loans include:

A loan approved by a credit union should be limited to an amount that is necessary to support a borrower’s identified need, while remaining within the borrower’s financial capacity to repay.

Major Commercial Industry Sectors

Each industry has a distinct business model and risk characteristics. The major industry sectors are:

Each major industry sectors includes numerous sub-sectors. The North American Industry Classification System (NAICS) has 20 primary, broad sector codes and thousands of sub-sector codes. Lenders use industry codes to compare a borrower’s business characteristics (financial data) to other businesses in the same industry and to set risk management concentration limits.

Workpapers & Resources

The concepts and principles set forth in this section of the Examiner’s Guide were also derived and adapted from guidance issued by other federal regulatory agencies, including:

Last updated June 21, 2018