12 Cfr 723 (1-1-20 Ed)

National Credit Union Administration

§ 723.1

(e) Be performed by State licensed or
certified appraisers in accordance with
requirements set forth in this subpart.
[60 FR 51894, Oct. 4, 1995]

§ 722.5

Appraiser independence.

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(a) Staff appraiser. If an appraisal is
prepared by a staff appraiser, that appraiser must be independent of the
lending, investment, and collection
functions and not involved, except as
an appraiser, in the federally related
transaction, and have no direct or indirect interest, financial or otherwise, in
the property. If the only qualified persons available to perform an appraisal
are involved in the lending, investment, or collection functions of the
credit union, the credit union shall
take appropriate steps to ensure that
the appraisers exercise independent
judgment. Such steps include, but are
not limited to, prohibiting an individual from performing an appraisal in
connection with federally related
transactions in which the appraiser is
otherwise involved.
(b) Fee appraisers. (1) If an appraisal
is prepared by a fee appraiser, the appraiser shall be engaged directly by the
credit union or its agent and have no
direct or indirect interest, financial or
otherwise, in the property or the transaction.
(2) A credit union also may accept an
appraisal that was prepared by an appraiser engaged directly by another financial services institution; if:
(i) The appraiser has no direct or indirect interest, financial or otherwise,
in the property or transaction; and
(ii) The credit union determines that
the appraisal conforms to the requirement of this regulation and is otherwise acceptable.

(b) Competency. All staff and fee appraisers performing appraisals in connection with federally related transactions must be state-certified or -licensed as appropriate. However, a
state-certified or -licensed appraiser
may not be considered competent solely by virtue of being certified or licensed. Any determination of competency shall be based upon the individual’s experience and educational
background as they relate to the particular appraisal assignment for which
he or she is being considered.
§ 722.7

Enforcement.

Credit unions and institution-affiliated parties, including staff appraisers
and fee appraisers, may be subject to
removal and/or prohibition orders,
cease-and-desist orders, and the imposition of civil money penalties pursuant to section 1786 of the Federal Credit Union Act, or any other applicable
law.

PART 723—MEMBER BUSINESS
LOANS; COMMERCIAL LENDING
Sec.
723.1 Purpose and scope.
723.2 Definitions.
723.3 Board of directors and management
responsibilities.
723.4 Commercial loan policy.
723.5 Collateral and security.
723.6 Construction and development loans.
723.7 Prohibited activities.
723.8 Aggregate member business loan
limit; exclusions and exceptions.
723.9 Transitional provisions.
723.10 State regulation of business lending.
AUTHORITY: 12 U.S.C. 1756, 1757, 1757A, 1766,
1785, 1789.
SOURCE: 81 FR 13554, Mar. 14, 2016, unless
otherwise noted.

[55 FR 30207, July 25, 1990, as amended at 60
FR 51895, Oct. 4, 1995]

EDITORIAL NOTE: Nomenclature changes to
part 723 appear at 84 FR 1608, Feb. 5, 2019.

§ 722.6 Professional association membership; competency.

§ 723.1 Purpose and scope.
(a) Purpose. This part is intended to
accomplish two broad objectives. First,
it sets out policy and program responsibilities that a federally insured credit
union must adopt and implement as
part of a safe and sound commercial
lending program. Second, it incorporates the statutory limit on the aggregate amount of member business

(a) Membership in appraisal organization. A state-certified appraiser or a
state-licensed appraiser may not be excluded from consideration for an assignment for a federally related transaction solely by virtue of membership
or lack of membership in any particular appraisal organization.

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§ 723.2

12 CFR Ch. VII (1–1–20 Edition)

loans that a federally insured credit
union may make pursuant to Section
107A of the Federal Credit Union Act.
The rule distinguishes between these
two distinct objectives.
(b) Credit unions and loans covered by
this part. (1) This part applies to federally insured natural person credit
unions. However, a federally insured
natural person credit union is not subject to §§ 723.3 and 723.4 of this part if it
meets all of the following conditions:
(i) The credit union’s total assets are
less than $250 million.
(ii) The credit union’s aggregate
amount of outstanding commercial
loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus
any outstanding commercial loan balances and unfunded commitments sold
and serviced by the credit union total
less than 15 percent of the credit
union’s net worth.
(iii) In a given calendar year the
amount of originated and sold commercial loans the credit union does not
continue to service total less than 15
percent of the credit union’s net worth.
(2) This part does not apply to loans:
(i) Made by a corporate credit union,
as defined in part 704 of this chapter;
(ii) Made by a federally insured credit union to another federally insured
credit union;
(iii) Made by a federally insured credit union to a credit union service organization, as defined in part 712 and
§ 741.222 of this chapter; or
(iv) Fully secured by a lien on a 1- to
4-family residential property that is a
member’s primary residence.
(c) Other regulations that apply. (1)
For federal credit unions, the requirements of § 701.21(a) through (g) of this
chapter apply to commercial loans
granted by a federal credit union to the
extent they are consistent with this
part. As required by § 741.203 of this
chapter, a federally insured state-chartered credit union must comply with
§ 701.21(c)(8) of this chapter concerning
prohibited fees, and § 701.21(d)(5) of this
chapter concerning non-preferential
loans.
(2) If a Federal credit union makes a
commercial loan through a program in
which a federal or state agency (or its

political subdivision) insures repayment, guarantees repayment, or provides an advance commitment to purchase the loan in full, and that program has requirements that are less restrictive than those required by this
rule, then the Federal credit union
may follow the loan requirements of
the relevant guaranteed loan program.
A federally insured state-chartered
credit union that is subject to this part
and that makes a commercial loan as
part of a loan program in which a federal or state agency (or its political
subdivision) insures repayment, guarantees repayment, or provides an advance commitment to purchase the
loan in full, and that program has requirements that are less restrictive
than those required by this rule, then
the federally insured state-chartered
credit union may follow the loan requirements of the relevant guaranteed
loan program, provided that its state
supervisory authority has determined
that it has authority to do so under
state law.
(3) The requirements of § 701.23 of this
chapter apply to a Federal credit
union’s purchase, sale, or pledge of a
commercial loan as an eligible obligation.
(4) The requirements of § 701.22 of this
chapter apply to a federally insured
credit union’s purchase of a participation interest in a commercial loan.
EFFECTIVE DATE NOTE: At 80 FR 66723, Oct.
29, 2015, § 723.1 was amended in paragraph (d)
by removing the words ‘‘and the risk
weighting standards of part 702 of this chapter’’; and in paragraph (e), by removing the
words ‘‘and the risk weighting standards
under part 702 of this chapter’’, effective Jan.
1, 2019. At 83 FR 55467, Nov. 6, 2018, the effective date was delayed until Jan. 1, 2020. At 84
FR 68781, Dec. 17, 2019, the effective date was
further delayed until Jan. 1, 2022.

§ 723.2 Definitions.
For purposes of this part, the following definitions apply:
Associated borrower means any other
person or entity with a shared ownership, investment, or other pecuniary
interest in a business or commercial
endeavor with the borrower. This
means any person or entity named as a
borrower or debtor in a loan or extension of credit, or any other person or
entity, such as a drawer, endorser, or

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National Credit Union Administration

§ 723.2

guarantor, engaged in a common enterprise with the borrower, or deriving a
direct benefit from the loan to the borrower. Exceptions to this definition for
partnerships, joint ventures and associations are as follows:
(1) If the borrower is a partnership,
joint venture or association, and the
other person with a shared ownership,
investment, or other pecuniary interest in a business or commercial endeavor with the borrower is a member
or partner of the borrower, and neither
a direct benefit nor a common enterprise exists, such other person is not an
associated borrower.
(2) If the borrower is a member or
partner of a partnership, joint venture,
or association, and the other entity
with a shared ownership, investment,
or other pecuniary interest in a business or commercial endeavor with the
borrower is the partnership, joint venture, or association and the borrower is
a limited partner of that other entity,
and by the terms of a partnership or
membership agreement valid under applicable law, the borrower is not held
generally liable for the debts or actions
of that other entity, such other entity
is not an associated borrower.
(3) If the borrower is a member or
partner of a partnership, joint venture,
or association, and the other person
with a shared ownership, investment,
or other pecuniary interest in a business or commercial endeavor with the
borrower is another member or partner
of the partnership, joint venture, or association, and neither a direct benefit
nor a common enterprise exists, such
other person is not an associated borrower.
Commercial loan means any loan, line
of credit, or letter of credit (including
any unfunded commitments), and any
interest a credit union obtains in such
loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business
enterprises for commercial, industrial,
agricultural, or professional purposes,
but not for personal expenditure purposes. Excluded from this definition
are loans made by a corporate credit
union; loans made by a federally insured credit union to another federally
insured credit union; loans made by a
federally insured credit union to a

credit union service organization; loans
secured by a 1- to 4-family residential
property (whether or not it is the borrower’s primary residence); loans fully
secured by shares in the credit union
making the extension of credit or deposits in other financial institutions;
loans secured by a vehicle manufactured for household use; and loans that
would otherwise meet the definition of
commercial loan and which, when the
aggregate outstanding balances plus
unfunded commitments less any portion secured by shares in the credit
union to a borrower or an associated
borrower, are equal to less than $50,000.
Common enterprise means:
(1) The expected source of repayment
for each loan or extension of credit is
the same for each borrower and no individual borrower has another source
of income from which the loan (together with the borrower’s other obligations) may be fully repaid. An employer will not be treated as a source of
repayment because of wages and salaries paid to an employee, unless the
standards described in paragraph (2) of
this definition are met;
(2) Loans or extensions of credit are
made:
(i) To borrowers who are related directly or indirectly through common
control, including where one borrower
is directly or indirectly controlled by
another borrower; and
(ii) Substantial financial interdependence exists between or among
the borrowers. Substantial financial
interdependence means 50 percent or
more of one borrower’s gross receipts
or gross expenditures (on an annual
basis) are derived from transactions
with another borrower. Gross receipts
and expenditures include gross revenues or expenses, intercompany loans,
dividends, capital contributions, and
similar receipts or payments; or
(3) Separate borrowers obtain loans
or extensions of credit to acquire a
business enterprise of which those borrowers will own more than 50 percent
of the voting securities or voting interests.
Control means a person or entity directly or indirectly, or acting through
or together with one or more persons
or entities:

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§ 723.2

12 CFR Ch. VII (1–1–20 Edition)

(1) Owns, controls, or has the power
to vote 25 percent or more of any class
of voting securities of another person
or entity;
(2) Controls, in any manner, the election of a majority of the directors,
trustees, or other persons exercising
similar functions of another person or
entity; or
(3) Has the power to exercise a controlling influence over the management or policies of another person or
entity.
Credit risk rating system means a formal process that identifies and assigns
a relative credit risk score to each
commercial loan in a federally insured
credit union’s portfolio, using ordinal
ratings to represent the degree of risk.
The credit risk score is determined
through an evaluation of quantitative
factors based on financial performance
and qualitative factors based on management, operational, market, and
business environmental factors.
Direct benefit means the proceeds of a
loan or extension of credit to a borrower, or assets purchased with those
proceeds, that are transferred to another person or entity, other than in a
bona fide arm’s-length transaction
where the proceeds are used to acquire
property, goods, or services.
Immediate family member means a
spouse or other family member living
in the same household.
Loan secured by a 1- to 4-family residential property means a loan that, at
origination, is secured wholly or substantially by a lien on a 1- to 4-family
residential property for which the lien
is central to the extension of the credit; that is, the borrower would not have
been extended credit in the same
amount or on terms as favorable without the lien. A loan is wholly or substantially secured by a lien on a 1- to
4-family residential property if the estimated value of the real estate collateral at origination (after deducting any
senior liens held by others) is greater
than 50 percent of the principal amount
of the loan.
Loan secured by a vehicle manufactured for household use means a loan
that, at origination, is secured wholly
or substantially by a lien on a new and
used passenger car and other vehicle
such as a minivan, sport-utility vehi-

cle, pickup truck, and similar light
truck or heavy-duty truck generally
manufactured for personal, family, or
household use and not used as a fleet
vehicle or to carry fare-paying passengers, for which the lien is central to
the extension of credit. A lien is central to the extension of credit if the
borrower would not have been extended
credit in the same amount or on terms
as favorable without the lien. A loan is
wholly or substantially secured by a
lien on a vehicle manufactured for
household use if the estimated value of
the collateral at origination (after deducting any senior liens held by others)
is greater than 50 percent of the principal amount of the loan.
Loan-to-value ratio means, with respect to any item of collateral, the aggregate amount of all sums borrowed
and secured by that collateral, including outstanding balances plus any unfunded commitment or line of credit
from another lender that is senior to
the federally insured credit union’s lien
position, divided by the current collateral value. The current collateral value
must be established by prudent and accepted commercial lending practices
and comply with all regulatory requirements. For a construction and development loan, the collateral value is
the lesser of cost to complete or prospective market value, as determined
in accordance with § 723.6 of this part.
Net worth means a federally insured
credit union’s net worth, as defined in
part 702 of this chapter.
Readily marketable collateral means a
financial instrument or bullion that is
salable under ordinary market conditions with reasonable promptness at a
fair market value determined by
quotations based upon actual transactions on an auction or similarly
available daily bid and ask price market.
Residential property means a house,
condominium unit, cooperative unit,
manufactured home (whether completed or under construction), or unimproved land zoned for 1- to 4-family residential use. A boat or motor home,
even if used as a primary residence, or
timeshare property is not residential
property.

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National Credit Union Administration

§ 723.4

§ 723.3 Board of directors and management responsibilities.
Prior to engaging in commercial
lending, a federally insured credit
union must address the following board
responsibilities and operational requirements:
(a) Board of directors. A federally insured credit union’s board of directors,
at a minimum, must:
(1) Approve a commercial loan policy
that complies with § 723.4 of this part.
The board must review its policy on an
annual basis, prior to any material
change in the federally insured credit
union’s commercial lending program or
related organizational structure, and
in response to any material change in
portfolio performance or economic conditions, and update it when warranted.
(2) Ensure the federally insured credit union appropriately staffs its commercial lending program in compliance
with paragraph (b) of this section.
(3) Understand and remain informed,
through periodic briefings from responsible staff and other methods, about
the nature and level of risk in the federally insured credit union’s commercial loan portfolio, including its potential impact on the federally insured
credit union’s earnings and net worth.
(b) Required expertise and experience. A
federally insured credit union making,
purchasing, or holding any commercial
loan must internally possess the following experience and competencies:
(1) Senior executive officers. A federally insured credit union’s senior executive officers overseeing the commercial lending function must understand
the federally insured credit union’s
commercial lending activities. At a
minimum, senior executive officers
must have a comprehensive understanding of the role of commercial
lending in the federally insured credit
union’s overall business model and establish risk management processes and
controls necessary to safely conduct
commercial lending.
(2) Qualified lending personnel. A federally insured credit union must employ qualified staff with experience in
the following areas:
(i) Underwriting and processing for
the type(s) of commercial lending in
which the federally insured credit
union is engaged;

(ii) Overseeing and evaluating the
performance of a commercial loan
portfolio, including rating and quantifying risk through a credit risk rating
system; and
(iii) Conducting collection and loss
mitigation activities for the type(s) of
commercial lending in which the federally insured credit union is engaged.
(3) Options to meet the required experience. A federally insured credit union
may meet the experience requirements
in paragraphs (b)(1) and (2) of this section by conducting internal training
and development, hiring qualified individuals, or using a third-party, such as
an independent contractor or a credit
union service organization. However,
with respect to the qualified lending
personnel requirements in paragraph
(b)(2) of this section, use of a thirdparty is permissible only if the following conditions are met:
(i) The third-party has no affiliation
or contractual relationship with the
borrower or any associated borrowers;
(ii) The actual decision to grant a
loan must reside with the federally insured credit union;
(iii) Qualified federally insured credit
union staff exercises ongoing oversight
over the third party by regularly evaluating the quality of any work the
third party performs for the federally
insured credit union; and
(iv) The third-party arrangement
must otherwise comply with § 723.7 of
this part.
§ 723.4 Commercial loan policy.
Prior to engaging in commercial
lending, a federally insured credit
union must adopt and implement a
comprehensive written commercial
loan policy and establish procedures
for commercial lending. The board-approved policy must ensure the federally
insured credit union’s commercial
lending activities are performed in a
safe and sound manner by providing for
ongoing control, measurement, and
management of the federally insured
credit union’s commercial lending activities. At a minimum, a federally insured credit union’s commercial loan
policy must address each of the following:
(a) Type(s) of commercial loans permitted.

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§ 723.4

12 CFR Ch. VII (1–1–20 Edition)

(b) Trade area.
(c) Maximum amount of assets, in relation to net worth, allowed in secured,
unsecured, and unguaranteed commercial loans and in any given category or
type of commercial loan and to any one
borrower or group of associated borrowers. The policy must specify that
the aggregate dollar amount of commercial loans to any one borrower or
group of associated borrowers may not
exceed the greater of 15 percent of the
federally insured credit union’s net
worth or $100,000, plus an additional 10
percent of the credit union’s net worth
if the amount that exceeds the credit
union’s 15 percent general limit is fully
secured at all times with a perfected
security interest by readily marketable
collateral as defined in § 723.2 of this
part. Any insured or guaranteed portion of a commercial loan made
through a program in which a federal
or state agency (or its political subdivision) insures repayment, guarantees repayment, or provides an advance
commitment to purchase the loan in
full, is excluded from this limit.
(d) Qualifications and experience requirements for personnel involved in
underwriting, processing, approving,
administering, and collecting commercial loans.
(e) Loan approval processes, including establishing levels of loan approval
authority commensurate with the individual’s or committee’s proficiency in
evaluating and understanding commercial loan risk, when considered in
terms of the level of risk the borrowing
relationship poses to the federally insured credit union.
(f) Underwriting standards commensurate with the size, scope and complexity of the commercial lending activities and borrowing relationships
contemplated. The standards must, at
a minimum, address the following:
(1) The level and depth of financial
analysis necessary to evaluate the financial trends and condition of the
borrower and the ability of the borrower to meet debt service requirements;
(2) Thorough due diligence of the
principal(s) to determine whether any
related interests of the principal(s)
might have a negative impact or place
an undue burden on the borrower and

related interests with regard to meeting the debt obligations with the credit
union;
(3) Requirements of a borrower-prepared projection when historic performance does not support projected
debt payments. The projection must be
supported by reasonable rationale and,
at a minimum, must include a projected balance sheet and income and
expense statement;
(4) The financial statement quality
and the degree of verification sufficient
to support an accurate financial analysis and risk assessment;
(5) The methods to be used in collateral evaluation, for all types of collateral authorized, including loan-tovalue ratio limits. Such methods must
be appropriate for the particular type
of collateral. The means to secure various types of collateral, and the measures taken for environmental due diligence must also be appropriate for all
authorized collateral; and
(6) Other appropriate risk assessment
including analysis of the impact of current market conditions on the borrower and associated borrowers.
(g) Risk management processes commensurate with the size, scope and
complexity of the federally insured
credit union’s commercial lending activities and borrowing relationships.
These processes must, at a minimum,
address the following:
(1) Use of loan covenants, if appropriate, including frequency of borrower
and guarantor financial reporting;
(2) Periodic loan review, consistent
with loan covenants and sufficient to
conduct portfolio risk management.
This review must include a periodic reevaluation of the value and marketability of any collateral;
(3) A credit risk rating system. Credit risk ratings must be assigned to
commercial loans at inception and reviewed as frequently as necessary to
satisfy the federally insured credit
union’s risk monitoring and reporting
policies, and to ensure adequate reserves as required by generally accepted accounting principles (GAAP); and
(4) A process to identify, report, and
monitor loans approved as exceptions
to the credit union’s loan policy.

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§ 723.6

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§ 723.5 Collateral and security.
(a) A federally insured credit union
must require collateral commensurate
with the level of risk associated with
the size and type of any commercial
loan. Collateral must be sufficient to
ensure adequate loan balance protection along with appropriate risk sharing with the borrower and principal(s).
A federally insured credit union making an unsecured loan must determine
and document in the loan file that
mitigating factors sufficiently offset
the relevant risk.
(b) A federally insured credit union
that does not require the full and unconditional personal guarantee from
the principal(s) of the borrower who
has a controlling interest in the borrower must determine and document in
the loan file that mitigating factors
sufficiently offset the relevant risk.
(1) Transitional provision. A federally
insured credit union that, between May
13, 2016 and January 1, 2017, makes a
member business loan and does not require the full and unconditional personal guarantee from the principal(s)
of the borrower who has a controlling
interest in the borrower is not required
to seek a waiver from the requirement
for personal guarantee, but it must determine and document in the loan file
that mitigating factors sufficiently offset the relevant risk.
(2) [Reserved]
§ 723.6 Construction and development
loans.
In addition to the foregoing, the following requirements apply to a construction and development loan made
by any federally insured credit union.
(a) For the purposes of this section, a
construction or development loan
means any financing arrangement to
enable the borrower to acquire property or rights to property, including
land or structures, with the intent to
construct or renovate an income producing property, such as residential
housing for rental or sale, or a commercial building, such as may be used
for commercial, agricultural, industrial, or other similar purposes. It also
means a financing arrangement for the
construction, major expansion or renovation of the property types referenced in this section. The collateral

valuation for securing a construction
or development loan depends on the
satisfactory completion of the proposed construction or renovation where
the loan proceeds are disbursed in increments as the work is completed. A
loan to finance maintenance, repairs,
or improvements to an existing income
producing property that does not
change its use or materially impact the
property is not a construction or development loan.
(b) A federally insured credit union
that elects to make a construction or
development loan must ensure that its
commercial loan policy includes adequate provisions by which the collateral value associated with the project
is properly determined and established.
For a construction or development
loan, collateral value is the lesser of
the project’s cost to complete or its
prospective market value.
(1) For the purposes of this section,
cost to complete means the sum of all
qualifying costs necessary to complete
a construction project and documented
in an approved construction budget.
Qualifying costs generally include onor off-site improvements, building construction, other reasonable and customary costs paid to construct or improve a project, including general contractor’s fees, and other expenses normally included in a construction contract such as bonding and contractor
insurance. Qualifying costs include the
value of the land, determined as the
lesser of appraised market value or
purchase price plus the cost of any improvements. Qualifying costs also include interest, a contingency account
to fund unanticipated overruns, and
other development costs such as fees
and related pre-development expenses.
Interest expense is a qualifying cost
only to the extent it is included in the
construction budget and is calculated
based on the projected changes in the
loan balance up to the expected ‘‘ascomplete’’ date for owner-occupied
non-income producing commercial real
estate or the ‘‘as-stabilized’’ date for
income producing real estate. Project
costs for related parties, such as developer fees, leasing expenses, brokerage
commissions, and management fees,
are included in qualifying costs only if
reasonable in comparison to the cost of

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§ 723.7

12 CFR Ch. VII (1–1–20 Edition)

similar services from a third party.
Qualifying costs exclude interest or
preferred returns payable to equity
partners or subordinated debt holders,
the developer’s general corporate overhead, and selling costs to be funded out
of sales proceeds such as brokerage
commissions and other closing costs.
(2) For the purposes of this section,
prospective market value means the
market value opinion determined by an
independent appraiser in compliance
with the relevant standards set forth in
the Uniform Standards of Professional
Appraisal Practice. Prospective value
opinions are intended to reflect the
current expectations and perceptions of
market participants, based on available data. Two prospective value opinions may be required to reflect the
time frame during which development,
construction, and occupancy occur.
The prospective market value ‘‘as-completed’’ reflects the property’s market
value as of the time that development
is to be completed. The prospective
market value ‘‘as-stabilized’’ reflects
the property’s market value as of the
time the property is projected to
achieve stabilized occupancy. For an
income producing property, stabilized
occupancy is the occupancy level that
a property is expected to achieve after
the property is exposed to the market
for lease over a reasonable period of
time and at comparable terms and conditions to other similar properties.
(c) A federally insured credit union
that elects to make a construction and
development loan must also assure its
commercial loan policy meets the following conditions:
(1) Qualified personnel representing
the interests of the federally insured
credit union must conduct a review and
approval of any line item construction
budget prior to closing the loan;
(2) A credit union approved requisition and loan disbursement process is
established;
(3) Release or disbursement of loan
funds occurs only after on-site inspections, documented in a written report
by qualified personnel representing the
interests of the federally insured credit
union, certifying that the work requisitioned for payment has been satisfactorily completed, and the remaining
funds available to be disbursed from

the construction and development loan
is sufficient to complete the project;
and
(4) Each loan disbursement is subject
to confirmation that no intervening
liens have been filed.
§ 723.7

Prohibited activities.

(a) Ineligible borrowers. A federally insured credit union may not grant a
commercial loan to the following:
(1) Any senior management employee
directly or indirectly involved in the
credit union’s commercial loan underwriting, servicing, and collection process, and any of their immediate family
members;
(2) Any person meeting the definition
of an associated borrower with respect
to persons identified in paragraph (a)(1)
of this section; or
(3) Any compensated director, unless
the federally insured credit union’s
board of directors approves granting
the loan and the compensated director
was recused from the board’s decision
making process.
(b) Equity agreements/joint ventures. A
federally insured credit union may not
grant a commercial loan if any additional income received by the federally
insured credit union or its senior management employees is tied to the profit
or sale of any business or commercial
endeavor that benefits from the proceeds of the loan.
(c) Conflicts of interest. Any third
party used by a federally insured credit
union to meet the requirements of this
part must be independent from the
commercial loan transaction and may
not have a participation interest in a
loan or an interest in any collateral securing a loan that the third party is responsible for reviewing, or an expectation of receiving compensation of any
sort that is contingent on the closing
of the loan, with the following exceptions:
(1) A third party may provide a service to the federally insured credit
union that is related to the transaction, such as loan servicing.
(2) The third party may provide the
requisite experience to a federally insured credit union and purchase a loan
or a participation interest in a loan
originated by the federally insured

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National Credit Union Administration

§ 723.8

credit union that the third party reviewed.
(3) A federally insured credit union
may use the services of a credit union
service organization that otherwise
meets the requirements of § 723.3(b)(3)
of this part even if the credit union
service organization is not independent
from the transaction, provided the federally insured credit union has a controlling financial interest in the credit
union service organization as determined under GAAP.

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EFFECTIVE DATE NOTE: At 80 FR 66723, Oct.
29, 2015, § 723.7 was amended in paragraph
(c)(1) by removing the words ‘‘as defined by
§ 702.102(a)(1)’’ and adding in their place the
words ‘‘under part 702’’, effective Jan. 1, 2019.
At 83 FR 55467, Nov. 6, 2018, the effective date
was delayed until Jan. 1, 2020. At 84 FR 68781,
Dec. 17, 2019, the effective date was further
delayed until Jan. 1, 2022.

§ 723.8 Aggregate member business
loan limit; exclusions and exceptions.
This section incorporates the statutory limits on the aggregate amount of
member business loans that may be
held by a federally insured credit union
and establishes the method for calculating a federally insured credit
union’s net member business loan balance for purposes of the statutory limits and NCUA form 5300 reporting.
(a) Statutory limits. The aggregate
limit on a federally insured credit
union’s net member business loan balances is the lesser of 1.75 times the actual net worth of the credit union, or
1.75 times the minimum net worth required under section 1790d(c)(1)(A) of
the Federal Credit Union Act.
(b) Definition. For the purposes of
this section, member business loan
means any commercial loan as defined
in 723.2 of this part, except that the following commercial loans are not member business loans and are not counted
toward the aggregate limit on a federally insured credit union’s member
business loans:
(1) Any 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; and
(2) Any non-member commercial loan
or non-member participation interest

in a commercial loan made by another
lender, provided the federally insured
credit union acquired the non-member
loans and participation interests in
compliance with all relevant laws and
regulations and it is not, in conjunction with one or more other credit
unions, trading member business loans
to circumvent the aggregate limit.
(3) Any loan that is fully secured by
a lien on a 1- to 4- family dwelling.
(c) Exception. Any loan secured by a
vehicle manufactured for household
use that will be used for a commercial,
corporate, or other business investment property or venture, or agricultural purpose, is not a commercial loan
but it is a member business loan (if the
outstanding aggregate net member
business loan balance is $50,000 or
greater) and must be counted toward
the aggregate limit on a federally insured credit union’s member business
loans.
(d) Statutory exemptions. A federally
insured credit union that has a low-income designation, or participates in
the Community Development Financial Institutions program, or was chartered for the purpose of making member business loans, or which as of the
date of enactment of the Credit Union
Membership Access Act of 1998 had a
history of primarily making commercial loans, is exempt from compliance
with the aggregate member business
loan limits in this section.
(e) Method of calculation for net member business loan balance. For the purposes of NCUA form 5300 reporting, a
federally insured credit union’s net
member business loan balance is determined by calculating the outstanding
loan balance plus any unfunded commitments, reduced by any portion of
the loan that is secured by shares in
the credit union, or by shares or deposits in other financial institutions, or
by a lien on a 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 subject to an advance
commitment to purchase 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

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§ 723.9

12 CFR Ch. VII (1–1–20 Edition)

true sales accounting under generally
accepted accounting principles.
[81 FR 13554, Mar. 14, 2016, as amended at 83
FR 25882, June 5, 2018]

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§ 723.9 Transitional provisions.
This section governs circumstances
in which, as of January 1, 2017, a federally insured credit union is operating
in accordance with an approved waiver
from NCUA or is subject to any enforcement constraint relative to its
commercial lending activities.
(a) Waivers. As of January 1, 2017, any
waiver approved by NCUA concerning a
federally insured credit union’s commercial lending activity is rendered
moot except for waivers granted for
borrowing relationship limits. Borrowing relationships granted a waiver
will be grandfathered however the debt
associated with those relationships
may not be increased.
(b) Enforcement constraints. Limitations or other conditions imposed on a
federally insured credit union in any
written directive from NCUA, including but not limited to items specified
in any Document of Resolution, any
published or unpublished Letter of Understanding and Agreement, Regional
Director Letter, Preliminary Warning
Letter, or formal enforcement action,
are unaffected by the adoption of this
part. Included within this paragraph
are any constraints or conditions embedded within any waiver issued by
NCUA. As of January 1, 2017, all such
limitations or other conditions remain
in place until such time as they are
modified by NCUA.
§ 723.10 State regulation of business
lending.
(a) State rules. Federally insured state
chartered credit unions in a given state
are exempted from compliance with
this part if the state supervisory authority administers a state commercial
and member business loan rule for use
by federally insured credit unions chartered in that state, provided the state
rule at least covers all the provisions
in this part and is no less restrictive,
upon determination by NCUA.
(b) Grandfathering of NCUA-approved
state rules. A state supervisory authority that administers a state commercial and member business loan rule

previously approved by NCUA may continue to administer that rule in its current NCUA-approved format. Any
modification of that rule must be consistent with this rule, but modification
of one part of an existing NCUA-approved state rule will not cause other
parts of that rule to lose their grandfathered status.

PART
724—TRUSTEES
AND
CUSTODIANS OF CERTAIN TAXADVANTAGED SAVINGS PLANS
Sec.
724.1 Federal credit unions acting as trustees and custodians of certain tax-advantaged savings plans.
724.2 Self-directed plans.
724.3 Appointment of successor trustee or
custodian.
AUTHORITY: 12 U.S.C. 1757, 1765, 1766 and
1787.
SOURCE: 55 FR 30211, July 25, 1990, unless
otherwise noted.

§ 724.1 Federal credit unions acting as
trustees and custodians of certain
tax-advantaged savings plans.
A federal credit union is authorized
to act as trustee or custodian, and may
receive reasonable compensation for so
acting, under any written trust instrument or custodial agreement created or
organized in the United States and
forming part of a tax-advantaged savings plan which qualifies or qualified
for specific tax treatment under sections 223, 401(d), 408, 408A and 530 of the
Internal Revenue Code (26 U.S.C. 223,
401(d), 408, 408A and 530), for its members or groups of its members, provided
the funds of such plans are invested in
share accounts or share certificate accounts of the Federal credit union.
Federal credit unions located in a territory, including the trust territories,
or a possession of the United States, or
the Commonwealth of Puerto Rico, are
also authorized to act as trustee or
custodian for such plans, if authorized
under sections 223, 401(d), 408, 408A and
530 of the Internal Revenue Code as applied to the territory or possession
under similar provisions of territorial
law. All funds held in a trustee or custodial capacity must be maintained in
accordance with applicable laws and

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