ALEXANDRIA, Va. — NCUA recently advised that credit unions may reclassify a construction and development loan as a member business loan when the level and kinds of risks for which those limits exist are no longer present.
A query sent to NCUA asked when can a credit union reclassify a C&D loan as simply a member business loan so the loan is not subject to the additional C&D loan requirements in NCUA's member business lending rule.
Factors NCUA may consider in determining if reclassification is permissible include whether the speculative project tied to the loan has been completed and is a viable business with sufficient cash flow to service the debt on an ongoing basis or can be sold for an amount sufficient to fully repay the loan, wrote NCUA Associate General Counsel Sheila Albin in a March 17 opinion letter. NCUA will also consider, if the loan was refinanced, whether it would still be classified as a C&D loan under the member business lending rule, she added.
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Because C&D loans are the riskiest kind of member business loans, Albin wrote, they are subject to even more stringent regulatory limits. For example, a C&D loan borrower must have a minimum of 25% equity interest in the project being financed, the aggregate cap on C&D loans a credit union may make is limited to 15% of the credit union's net worth, and the funds may only be released after onsite inspections by the credit union and in accordance with a preapproved draw schedule, Albin said.
The additional regulatory limits on C&D loans address safety and soundness concerns by enhancing underwriting standards and limiting a credit union's exposure to the additional risks associated with this kind of business lending, Albin wrote.
"Safety and soundness considerations make it critical that credit unions recognize and evaluate the true level of C&D loan risk, and report that risk to NCUA on their quarterly call reports," Albin wrote. "This means a credit union may not reclassify a C&D loan as an ordinary MBL unless the loan no longer poses the risks associated with C&D loans."
Albin said the success or failure of a development project depends on particular facts and circumstances, and "we cannot provide a single, bright-line test or formula to determine when a C&D loan may properly be reclassified. Rather, a credit union will have to analyze C&D loans on a case-by-case basis to determine if and when a loan can be reclassified."
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