Growing Loans by Partnering with the United States Department of Agriculture (1/11/2017)

Kathryn Baxter: Good afternoon, everyone Welcome to our first webinar for 2017

And this one is a very interesting and informative webinar that we have for the credit union industry My name is Kathryn Baxter; I will be your moderator today And I'm joined by Lauren Bethea; she's our host So we're talking today about a partnership that NCUA has with the US Department of Agriculture, and we really think that this is an excellent partnership to benefit credit unions Before I turn the console over to Lauren, I want to go over a few housekeeping items

Those of you that have listened to our webinars before, this is the same that we do every time We want you to adjust the volume on your computer so that you can hear this webinar If you'd like to resize the screen, just grab the right bottom corner of the slide to do that From this site, you'll need to allow pop-ups And also, what we'd like you to do during the webinar is to ask us questions using the Ask a Question feature on the left-hand corner of your console

In fact, if you don't mind, please ask us questions throughout the webinar and address your question to the particular speaker that you'd like to ask the question – answer the question, rather Also, at the end of the webinar we have a brief survey that we'd really like you to fill out because this is going to help us improve the quality and quantity of the webinars that we put on for the credit union industry And also, as always, in approximately three weeks we will close caption this webinar for on demand viewing As I mentioned, I'm joined today by our host, Lauren Bethea, and Lauren is going to give you some specifics on this particular webinar On this webinar, too, we're going to offer a certificate of training so I'm going to tell you the things that you need to do in order to get the certificate, and then Lauren's going to repeat it

You need to stay on this particular webinar for at least 45 minutes There are going to be five poll questions; you have to answer three out of the five poll questions And you'll answer them on your screen; you don't need to send them via chat And then for the quiz you'll need to answer 12 of the 15 quiz questions correctly And that is how you can receive the certificate

There are two magenta icons at the bottom of your screen One will have your quiz in it and the one right next to it will have your progress; it'll let you know if you've been on the line for 45 minutes, if you've answered three of the five poll questions and, once you've completed the quiz, it'll let you know if you passed So without further adieu, I'm going to turn the console over to Lauren Bethea Lauren? Lauren Bethea: Thank you, Kathryn Good afternoon, everyone

As Kathryn said, my name is Lauren Bethea and I'm your host for today's webinar We have a terrific webinar put together and it's presented by four distinguished team members We very much want you involved and, as Kathryn said, we want to hear from you throughout this webinar We're going to be presenting poll questions and also posing questions to our speakers Before we get started I have to read the NCUA disclaimer and that is, this webinar is offered for informational and educational purposes only

NCUA doesn't endorse any credit union or vendor, their employees, products or services So what are we going to be discussing today? We're going to talk about partnerships with the USDA, how it's a wonderful opportunity for credit unions which can help them improve the bottom line We've invited three representatives from the USDA who will discuss each of their program areas We've also invited Jeremy Gilpin, who is a VP with Greater Nevada Credit Union; he's going to share with you his experience with the USDA from a credit union's perspective I also want to mention that the USDA awarded Greater Nevada Credit Union the 2016 National Lender of the Year Award, and that's why we asked Jeremy to participate in this webinar today

As Kathryn mentioned, we will be offering a certificate of completion for your participation in this webinar To get it, you must be on the line for 45 minutes; you have to answer the poll questions, and correctly answer 12 out of the 15 quiz questions We'll leave the console open for one hour after the webinar to allow you sufficient time I'm going to introduce to you our webinar team Our first speaker is Nathan Chitwood, who is a Regional Coordinator of the Community Facilities Program, Rural Housing Services

It's my pleasure to welcome Nathan to our webinar today Our second speaker is Kristina Zehr, who is a Finance and Loan Analyst for the Single Family Housing Guaranteed Loan Division It's my pleasure to welcome her to the webinar Our third speaker, Jeremy Gilpin, again, Vice President with the Greater Nevada Credit Union He's going to be presenting, again, from the credit union's perspective

And our fourth speaker is Laurel Leverrier, who is Assistant Deputy Administrator of the USDA's Rural Business Cooperative Services, and she's been in that position since August of 2016 It's a pleasure to welcome Laurel to the webinar Let me catch up with the slides Before we start the presentation we want to know who's on the line, so our first question is: What is your credit union's asset size? Please select the radio dial that best describes your credit union And if you're not from a credit union, please select NA

Take a few seconds to respond Okay, look at those results, Kathryn So 225% of our audience members fall in the $10 to $50 million asset category The second largest category is $100 million but less than $250 million, with 18%

And then we have 18% greater than $250 million Kathryn Baxter: Yes, so we have a good selection today on the call Excellent Lauren Bethea: Okay, so Nathan Chitwood is going to begin the presentation Nathan, before you begin, please tell our audience a little bit about yourself and then jump right into the presentation please

Nathan Chitwood: Okay, thank you, Lauren My name's Nathan Chitwood I am a Regional Coordinator for the Community Programs Section of the Rural Housing Service I'm actually physically located in the state of Missouri I've been with the National Office staff for a couple of years and been in the Community Facilities Program for about 20 years, and I was one of the team members that helped create our Community Facilities Re lending Program this past fiscal year, so I want to share some of the highlights of that program and maybe give you some information and let you know if this would be a program that you'd like to participate in

First of all, as I mentioned, last year was the first year that we've done the Re-lending Program, and there you see some numbers Over $400 million of re-lending funds were obligated in fiscal year 2016, 26 re-lenders in 17 states One of those re-lenders was Hope Credit Union, and they received $30 million And as an example of how the re-lending program works, Hope Credit Union will be able to access those $30 million in funds to provide loans to community facility-type projects in their service area They don't have to use the money all at once, and they have five years to find projects and draw down that $30 million

There is a map showing where all of the re-lenders from across the country are located Some of them may be near where you are located and, if you are familiar with those organizations, then feel free to reach out to them to get their perspective of how the re-lending program is working for them Just a brief overview of our structure, of our organization As I mentioned, I'm with the National Office in Washington, DC

We have state offices The area offices may cover multiple counties or parishes, depending on where you're located And those area offices, more than likely you already have a relationship with or know somebody that works in that office, and they'd also be a great resource for you to reach out and contact So how does the re-lending program work and what can the funds be used for? As I mentioned in the example of Hope Credit Union accessing $30 million, they can then work with local organizations, public bodies, nonprofits, Indian tribes, to provide essential community facilities in their area It may be a city wanting to build a city hall, a hospital wanting to add on or build a new hospital, a medical office building

Maybe a college wants to build an education building or dormitories, a museum Maybe a community needs a fire truck, a fire station, ambulance Those are all the types of projects that can be funded using the re-lending funds that are available through the re-lender This past cycle the interest rates that were made available to our re-lenders was 2 and 3/8ths That's a 40 year term, fixed interest rate

What's unique about the program is that, in Hope Credit Union's example, they're borrowing the moneys from us at 2 and 3/8ths They may, when they loan to a community or a volunteer fire department or a hospital to provide loans for an infrastructure project, they can charge a higher interest rate in order to cover their costs, so they may charge 3% to 4%, which is still a pretty good rate for that type of project, and so it helps the credit union cover their costs and maybe actually have some money for other investments It's a long-term, 40 year – long-term, fixed interest rate loan, a 40-year term so that there are monies available for a long period of time which allow the re-lender credit unions to loan the money a little bit longer period than you might normally be able to do so Just a little bit about how our funding has gone through the years You can see in 2007 we had just under $300,000- $300 million, sorry – and in 2016 we had over $2 billion, so we expect that funding to continue at that level; however, we are seeing a strong demand for these funds so it may become fairly competitive in the near future

But we do have excess funds and we are hoping to actually maybe get an additional appropriation from Congress Here's a pie chart just showing examples of how our portfolio is invested As you can see, healthcare in the blue is the largest part of our portfolio; the other three are about equal in public safety, public buildings and educational facilities So how does the re-lending program work? In July of 2016 we amended our existing regulations, which has allowed us to make funds available to re lenders How the program is regularly set up is we actually loan the monies directly to the communities, the nonprofits or the Indian tribes

And we also published a notice with additional guidance as to how to fill out an application and how funds would be awarded, and we implemented that program this past summer and funds were obligated right at the end of the fiscal year in September of 2016 So the NOSA, as we call it – the Notice of Solicitation of Application – goes through and tells you who's eligible to apply Basically, since you're a member of NCUA, you're automatically eligible Another benefit of being a member of NCUA is that you have a streamlined process that you go through in order to become eligible and get funds approved Entities that were not members of NCUA or FDIC or other types of similar organizations actually had to go through an underwriting process where their entire application packet had to be underwritten, whereas that's not the case if you're a member of NCUA

The basic security for the loan that we make to the re-lender is an irrevocable letter of credit that you give to us for the first five years that you have a loan, and that amount is based upon the principal and interest of each draw So in Hope Credit Union's example, they have $30 million; maybe the first year they come in and ask for a $5 million loan to build a medical office building We would calculate the principal and interest for five years on that $5 million and that's the amount that the irrevocable letter of credit would need to be for It does not have to cover the full $30 million if the full funds have not been obligated In many cases we partner with Bank of America, and they issue a letter of credit for a lot of our re-lenders

You can obtain them locally if you have access to that, and the fees available for that letter of credit is negotiated between the re-lender and the institution that's issuing the letter of credit So as I mentioned, NCUA automatically makes you eligible The other thing that we're looking for is entities that are working in low-income markets We're trying to get these funds out to areas that may not have access to capital, and so that's why we're partnering with credit unions, banks, CDFIs and other entities that already have relationships in the rural poverty areas We have two categories of poverty that we're looking at

One is a persistent poverty county, and this map here in red shows where most of those counties are As you can see, most of them are in the southern part of the country In addition to that, we also have what we call high poverty areas, which is determined by census, and so this map has many more areas of the country that have poverty areas And so we're not looking for a facility that has to be located in any of these areas but, if you have a hospital, for example, that covers two or three counties, if any area in those two or three counties is highlighted on one of these two maps, it would be deemed to be serving a high poverty area It does not have to be physically located in those areas

So what can you loan money for and who is eligible? As a re-lender, you can make loans to public bodies, cities or towns; they cannot exceed 20,000 in population If you have a nonprofit, that entity has to have ties to a local community Maybe their board members are appointed by a city council or county government, those kinds of things Or you can also loan to a federally recognized Indian tribe We can't use any of the funds for for-profit entities

So what's the eligibility of the projects? First of all, they must be located in rural areas I mentioned towns of less than 20,000- and they must comply with all the eligibility requirements and I'm not going to go through a litany of those, but basically a rule of thumb is any facility that a local unit of government would normally provide for its citizens is an eligible project It can be a domestic violence center, an animal shelter, medical buildings, fire and rescue, all those things We like to say we have about 100 different types of projects that we can fund with our Community Facilities Program Once again, it can't be for facilities that house for profit grocery stores, factories, any of those things; it's essential community facilities only And once again listing the categories there to give you some ideas of the types of projects that we can finance – transportation; we can do bridges, we can do roads, various different things, museums for cultural services, maybe an outdoor pavilion for family reunions and those kinds of things

All kinds of projects we can use the funds for And we're always looking for partnerships with credit unions especially Many times we get a request directly for larger projects, and we're always looking for entities to partner with us, so if you do have interest, maybe not through re-lending or just simply providing loans directly in partnership and we make a loan to an entity, we would certainly be glad to talk to you about partnering with you on projects such as that If you'd like more information, I'm one of about six people that serves on the team that administers the re-lending program Feel free to reach out to us at the email address there listed

There's about six of us monitoring that email address, so we'd love to hear from you if you have more questions Of course, the big question is when are we going to have another round and, with the change in administration, we don't know what the timing of that will be, but we are working toward having documents ready to go once we get the green light So thanks for the opportunity to quickly bring you an overview of the re-lending program and if it's something you might be interested in, please feel free to reach out to us We would love to talk to you more about our program With that, Lauren, I will turn it back over to you

Lauren Bethea: Okay Thank you so much, Nathan That was a great overview of the Community Facilities Program I'd like to say, too, I want to emphasize that this is a great opportunity for credit unions By entering into a partnership with the USDA, credit unions can help your communities by providing financing for medical facilities, courthouses, airport hangars, police and fire vehicles, a number of things that I have to say I wasn't aware of

And of course, when credit unions make these loans and provide the financing, it does help improve the bottom line, so that's the reason for presenting this information to you all today Let's switch over to our second poll question And the question is, has your board of directors considered a partnership with the USDA in the past? The choices are yes, no or maybe Take a few seconds to respond to that question please Okay, so you see our results, Kathryn? Kathryn Baxter: I do; 59% say no, they had never considered a partnership with the USDA, so this is going to be a very, very interesting webinar for our credit unions to listen to

Lauren Bethea: Okay So our next speaker, I'd like to introduce to you Kristina Zehr Kristina is a Single Family Housing Coordinator for Illinois Kristina, before you begin your presentation, please tell the audience a little bit about yourself and then jump right in please Kristina Zehr: Hi

Well, thank you for the invitation to speak today and thank you for attending I have almost 13 years with the USDA, all with the Single Family Housing Guarantee Loan Program And while I did start in Illinois, I do now work for the National Office in Washington, DC Before I was with USDA, I was a mortgage loan originator with National City Mortgage Corporation, and 80% of my business if not more was all in government lending, including the USDA Rural Development Program

And again, while I work for DC, I am located in Illinois I'm proud to be a member of a local credit union here in my town, and I'm confident that if you would like to serve more of your members with increased flexibility and reduced risk, the Guaranteed Loan Program can certainly help you do that Rural Development's mission and the mission of the Guaranteed Loan Program is to help improve the economy and quality of life in rural America

It is a perfect example of government supporting the private sector to help sustain and build communities And of course, without home ownership, there's likely not going to be much of a community there So far in fiscal year 2016 we guaranteed over 116,000 loans to individuals and families, and that equated to over $163 billion that we guaranteed for private sector lenders, including credit unions In FY 2017, which we are currently in, we've already surpassed 36,000 loans and guaranteed over $5 billion

We anticipate a total allocation of $24 billion for our program this year, so plenty of funds available If you're new to the Guaranteed Loan Program – and based on that last slide, I would say most of you may be – here are a few highlights that set our program apart It is 100% financing; no down payment is required We do serve low- to moderate-income applicants We offer only 30-year loan terms

It must be a fixed rate of interest We do have expanded qualifying ratios Applicants may use gift and grant funds as well as mortgage credit certificates And we allow for purchase, new construction, and refinance transactions Purchase loans can be made for existing dwellings, which may also include modular homes which are either new or existing

Manufactured homes, we limit that to new units only And we also do condominiums that have been accepted by Fannie, Freddie, HUD or VA The maximum loan amount for purchase transactions is 100% of the appraised value, plus we allow the upfront guarantee fee that is due to also be rolled into the loan as well Existing dwellings must meet the HUD Handbook 40001 current minimum property requirements, and new dwellings or new construction are also encouraged and they must be built to an acceptable building code, have evidence of required inspections or Certificate of Occupancy, and they must also have a minimum of at least a 1-year builder's warranty or have an acceptable 10-year insured builder's warranty

We do offer refinance transactions as well, but it will only be available to a current Section 502 direct or guaranteed loan, so loans from other programs are ineligible to be refinanced into ours We do have three refinance options which are streamlined, non streamlined, and of course we have a streamlined-assist Additional highlights of the loan is that they may be eligible or, sorry, they may be, they are eligible for Ginnie Mae pools They do qualify for Community Reinvestment Act credits, and you have the ability to either retain the loan servicing or you can sell that loan after it's closed to an approved USDA lender, which can be quite a lucrative revenue source for your credit union Those are in very high demand

And of course the best part is we offer a 90% loan note guarantee on that loan, which helps reduce your lending risk while growing your portfolio That 90% loan note guarantee offers a maximum loss claim payout of either the lesser of 90% of the original principal amount or a little equation that I'm probably not going to spend a ton of time on but I can tell you this, no one's ever been sad with their payout and either way you slice it and dice it, a 90% loan note guarantee beats the coverage of any private mortgage insurance program coverage that you may currently have Whether you elect to retain or sell the closed loans, this is a small sample of a few of our largest servicing lenders, so if you've ever done business with them in selling your mortgage loans to them, here are about five that carry the majority of our portfolio right now for servicing I did mention that an upfront guarantee fee and an annual fee apply Currently for fiscal year 2017, which began on October 1, 2016 and will end on September 30 of this year, our upfront guarantee fee for purchase and refinance transactions is 1% of the total loan amount and our annual fee is 0

35% This fee schedule may change each fiscal year; the fees are adjusted to ensure that our program remains subsidy neutral What that means is that the program is not funded with taxpayer dollars; therefore, USDA is able to pay our losses with the fees that we have collected We do offer an online calculator off of USDA LINC to assist you with the calculation of these fees You can see that you can select the calculator

When you complete the information on the left side of the screen in those boxes, the information on the right side of the screen will automatically be calculated and then you'll see an amortization schedule available for you to view If you also notice, at the bottom of this calculator there are four potential options available that may be useful when you're originating these loans or when one pays off This is an example of an annual fee schedule because that annual fee is going to be due each year that the loan is effective Now the regulation states that these fees are due from the lender but they may be passed along to the borrower, and I can't think of a lender that doesn't pass them along to the borrower You will remit the upfront guarantee fee to USDA at closing and then you can escrow the annual fee monthly from the borrower, similar to how you escrow for real estate taxes and insurance

USDA will send the annual fee bill that is due to the servicing lender of record So again, if you sell these loans post-closing, this will all be taken care of from that servicing lender of record, and the servicing lender will then remit the annual fee payment electronically to USDA To help determine property eligibility, we have another fantastic online site If you'll click on Single Family Housing Guarantee as I have highlighted in this slide and then Property Eligibility, a disclaimer will pop up; you can click Accept and move forward on that site In the upper left-hand side you'll see I have highlighted where you can enter an exact address to determine if it is eligible

Eligible areas are typically going to be in populations of less than 35,000 depending upon their proximity to a Metropolitan Statistical Area, but other factors do apply This particular tool will render an absolute determination of property eligibility This is an example of a property that is located in an eligible area; this next slide shows you a property that is not located in an eligible area But you can see the darker orange areas are ineligible and then you can see some of the eligible areas that surround it, so this is an excellent tool to help you get an idea of what's eligible in your area You may also get an unable to determine recommendation, which could be due to a new construction property that doesn't yet have its address mapped or maybe we've entered an erroneous number or an incorrect address

This same eligibility site will also help you view income limits When you return back to the home page, you can select the highlighted area I have here that says Income Limits Then it's going to present you a map of the United States where you can then select the state where you would like to view those income limits In this example we're going to look at Illinois Ensure that you look at the correct line

I have highlighted the MODINC- GUARLOAN line, which of course stands for moderate income guaranteed loan And when you look at this, you'll also notice that the Metropolitan Statistical Areas are listed on here first rather than just individual counties in alphabetical order

If you are looking for a county and you can't find it, it is more than likely going to be part of an MSA area and those are going to be easier to determine than you may think Also keep in mind that these are the adjusted annual income limits, which means after we allow for deductions for dependents, childcare or eligible medical or disability expenses, which help more applicants qualify This is the number that you're trying to get down to It simply determines program eligibility There's a lot of information about that and more in our program regulations

We are governed under 7 CFR Part 3555 and that is our regulation, which means it is where the buck stops, but we do have a technical handbook, HB 13555, that is also available to help clarify the regulation This, too, is available online If you go to our regulations and guidelines website, you can select Instructions under that bulleted list under Rural Development, and once you select the correct handbook – which, again, was HB-1-3555- everything you see displayed on the slide here is going to show up And if you wish to review the actual regulation, it is noted under Appendix 1, 7 CFR Part 3555 So here's everything you need on this page to underwrite, originate and submit loans

We also offer a Guaranteed Underwriting System or, as we refer to it, GUS It is our own automated underwriting system and it only underwrites loans or assists in the underwriting for guaranteed loans at this time Over 98% of our loans are submitted through GUS to the agency; this allows us a much more streamlined and paperless loan processing system We also offer an import feature that is available that you can import your files from an eligible LOS, Loan Origination System that you may use directly into GUS And GUS is also free at this time to use

Now GUS is not the great and power Oz; it does not render loan approval decisions But it does provide an underwriting recommendation based on the data entered, and it provides you with a map in the underwriting findings report to help you not only make a prudent loan decision but also provide you with the guidance you need to help you submit a complete loan file to USDA in order to obtain your commitments and your loan note guarantees So what does it look like if you participate in originating mortgage loans with USDA? You will originate and underwrite the loan, hopefully through GUS as most of them are You will also submit that complete application package to USDA, hopefully again through GUS although we do accept manually underwritten packages USDA will simply review the application, obligate loan funds, and then we will issue you a conditional commitment which tells you what you need to do in order to close the loan properly and then obtain your loan note guarantee

You will then close the loan, you will submit a loan closing package to us through our online lender loan closing system, and then USDA will issue the loan note guarantee So as you can see, working with USDA for mortgage lending is quite easy We are only a part of it for about 5% of the time and the other 90% to 95% is clearly within your coffers there So if this sounds good and you with to become an approved lender, we would love to welcome you aboard Everything you need to know is located in the regulation under 3555

51 or in this screenshot that I've provided here, Handbook Chapter 3, which will walk you through the process We also have as part of the handbook Attachment 3- A, which is a lender approval checklist and this will help you submit a complete application for USDA to review This slide shows you Pages 2 and 3 of that; I know that's kind of small, but just know that being a member of the NCUA you're automatically under a federally-supervised umbrella there so you're eligible to become an approved lender, and this will guide you through the other information to submit If you currently do business in one state only, you may wish to submit your application to only that one state but, if you operate in multiple states, we encourage you to send your application to the National Office in DC

so that you can gain national approval We have additional online resources such as USDA LINC, where you'll be able to access many training and documentation and resource items in reference to the reg, status reporting if you are going to retain servicing, the GUS system, as well as our other online systems that we utilize for the origination and the servicing and the loss claim aspects of the program We also have a Loan Basics website which you can access from the link shown here that has not only some additional information on the program but also has a Forms and Resources tab On this slide I have highlighted where you can actually contact a Guaranteed Loan Specialist in a particular state If you click there it's going to take you to this site, where each state will have a contact listed along with their phone number, fax number, and email, so getting in touch with us is easy

I would also encourage you to sign up for GovDelivery messages We only send out an update when we have something new or new information to convey You can sign up for origination and GUS messages or you can also sign up for servicing And with that, I thank you very much for the opportunity to review very briefly the Guaranteed Loan Program We would again love to partner with you and help you serve more rural homebuyers with reduced risk to your portfolio

My information is here and I'm happy to assist you in any way that I can And with that, I'll turn it back over to Lauren Thank you Lauren Bethea: Thank you so much, Kristina, for providing the overview about the single family housing program I just wanted to recap a couple points that Kristina made during her presentation and the first one is what she said was in 2016 the USDA provided over $16

3 billion in loan guarantees and last year the USDA made over 116,000 single family mortgages I think this is an excellent opportunity for credit unions to help them improve their bottom line, so I just really wanted to reiterate that for our credit unions Next we have a poll question before I introduce our next speaker And the poll question is: Do you see partnering with the USDA as an opportunity for your credit union to grow your loans? Take a few seconds to answer Kathryn Baxter: One thing's for sure

I think this is something very new for a lot of our credit unions according to what the poll question said, so let's see if – Lauren Bethea: The result says 70% – Kathryn Baxter: Let's go back to the poll Lauren Bethea: We're going to go back to the poll Okay Kathryn Baxter: There you go Lauren Bethea: 61% say yes, our credit union audience sees this as an opportunity for credit unions to help grow loans, and 37

7% say maybe Only a small percentage say no, they don't see it as an opportunity, 13% So that's some good results Okay, we're going to move on to our next speaker and our next speaker is Jeremy Gilpin, who is a Vice President with Greater Nevada Credit Union in the Business Services Division

And I just want to reiterate, in 2016 Greater Nevada Credit Union won the USDA National Lender of the Year Award, so Jeremy's got a lot of great information for credit unions to hear Go ahead, Jeremy Jeremy Gilpin: Thank you, Lauren A little bit about Greater Nevada Credit Union and myself I have over 23 years of commercial lending experience

For over 20 years I've been a champion of the USDA and their programs I've been at Greater Nevada for 35 years and since that time we've really focused on USDA and made that our staple, with approximately 80% of all of our commercial loan originations coming from the programs that you're learning about today as well as the Renewable Energy and Emerging Energy Programs So with that, we'll start walking through and just show the benefit from the credit union perspective of how this USDA program can benefit us as a governing body We're going to go over the history of business services with credit unions, current game changers, and where credit unions are going as far as next generation of business services

Traditionally, the history of sources of revenue in the member business loan category was funding traditional member business loans and purchasing participations from other institutions Deposit products were really for members, not a significant source of revenue, just really needed for member satisfaction However, with the introduction of commercial lending into credit unions, you can diversify not only the lending side of your balance sheet but also the depository side by allowing more commercial deposits, also helping your efficiency ratio and creating some additional revenue income that maybe wasn't there before Some of the drivers for change that really caused credit unions to start focusing on business services Additional expenses caused by regulatory changes in consumer lending, especially on the mortgage side; earnings pressure in a changing rate environment and we're starting to realize that as we witnessed our first rate increase in almost a decade in December; and then of course the diminishing number of community banks, leading credit unions to offer products once held by these institutions

Our communities that we serve as well as our members are now looking to us to be their primary financial institution of choice, not only for their personal but also for their business The changes in credit unions as a result of these drivers New products, services and sources of revenue are now open to credit unions that have not historically been offered And then also this has caused a dramatic shift in credit unions' cultural view as well as the regulators, as we've noticed, with the change of the MBL policy to a commercial loan policy in January of this year Sources of revenue from lending activities, now we're looking at, with these programs and the assistance of USDA, utilizing government guarantees and the availability to sell them on the secondary market, loan origination fees, documentation fees, servicing fees – there is some servicing income derived from the ongoing servicing of the sole portion of the USDA loan and now lastly interest income

So we've seen a dramatic shift to a fee-based potential or non interest income potential on our balance sheets versus our traditional interest income alone We're going to walk through a sample of a USDA variable rate loan sale that Greater Nevada Credit Union did and this was a retail professional building that houses medical professionals The loan balance was $403,000 with an 80% USDA Business & Industry guarantee The guaranteed portion was $322,400 We sold this on the secondary market and realized a premium of 12

05% plus an annual servicing fee of 50 basis points This 50 basis points annual servicing fee is net of the annual USDA fee We at Greater Nevada Credit Union offer a higher servicing; we take 100 basis points back on our servicing on the secondary market in order to capture that annual USDA fee versus invoicing the customer or the member on an annual basis, which I'd be more than happy to walk through the differences in that in the question-and-answer portion The unguaranteed portion remaining on Greater Nevada Credit Union's books was $80,600 so, as you can see, we've been able to reduce the credit risk on our balance sheet from $403,000 to $80,600 held by our credit union Our Year 1 return on investment was $46,079 or a 57

17% return on our investment That is non interest income The premium sold on the sale was $38,84920 The servicing fee on the guaranteed portion was $806

And this is $806 annually, and this was a 30-year loan And this is net of the annual USDA fee The interest income on the unguaranteed portion of the loan is $6,424 and this represents only 139% of the Year 1 return Still, the majority of the Year 1 return on investment actually goes straight to the bottom line in that year as fee income or non interest income

Of course, this model does exclude the 1% origination fee that was charged on this loan at inception Going forward, we spoke about interest rate risk and how the USDA program can help mitigate some of that moving forward, our Year 2 estimated ROl was $7,230 or 897% That's the interest income plus the servicing fee So because of this model we are able to offset some of the interest rate risk on our books as well

So who uses the USDA programs? We utilize all three, us being the lender, Greater Nevada Credit Union There are packagers that specialize in these types of programs and that are very knowledgeable in walking through the application process and the underwriting process in the states where your credit unions reside, and we utilize those on a regular basis for some of our more complicated transactions And then as well as borrowers and/or future members or current members, they call USDA state offices They may call your credit union asking for a business loan to purchase some equipment, inventory, fire trucks, hospital equipment, so on and so forth So all three of these are utilized and are very much available in the market for all of us

Now, we do have a part that we have to speak about and it's common mistakes by lenders making USDA loans The largest mistakes are failure to disclose a material fact regarding a guaranteed loan, significant changes in balance sheet, tangible net equity of the borrower prior to closing, those types of items, failure to obtain or maintain liens on collateral, releasing liens without USDA prior approval, or failure to obtain those liens when the loan is at inception And then loan serviced in a manner inconsistent with prudent lending practices With a few minor nuances, really the USDA from our experience is looking for credit unions to service those commercial loans as you would your traditional commercial loans that you currently have on your books in accordance with your policy that you have So to highlight some of the benefits of USDA lending at credit unions, we have higher returns with increased efficiency, increased geographic diversification, wider availability of products and services, reallocated resources from purchasing participations to originating – creating some income – and members continue to receive quality service

We're able to provide more dollars in our communities, not affecting our capital base and offsetting some of those risks that we spoke about earlier And just to show some of the diversity, the projects that you can do with USDA financing, these are two business and industry projects that we did in 2016 One is a riverboat cruise ship that is located in Louisiana, and the other is a Hampton Inn & Suites that is located in Colorado And that concludes my portion of the presentation Lauren, again, thank you for having us on

Lauren Bethea: Thank you so much, Jeremy, for sharing with us the experience that Greater Nevada has had partnering with the USDA I also want to mention that Jeremy has provided our audience a white paper which can be found in our Resource widget It's a paper that was written about the USDA's Business & Industry loan program and it was written by the Office of Comptroller of the Currency, OCC So I just want you all to know that you can go to that widget on the bottom of your screen and find that as a resource document that will help you and provide more information about the Business & Industry Program Okay, we're going to turn to our next poll question, and the question is, after hearing most of this webinar, are you interested in a possible partnership with the USDA? The choices are yes, no, or maybe you're still unsure

Take a few seconds to answer that question and we'll look at the results shortly Kathryn Baxter: We want to remind our audience, Lauren, that we'd like you to send in your questions and send in as many as you'd like We have some already for our previous speakers but we'd like to get more questions, so send your questions in now Thank you So what do our results say? Lauren Bethea: Okay, there's our results

Okay So it's pretty close We've got 496%, nearly half of you, are unsure about a possible partnership with the USDA, and 487% of you say yes, you are interested in a partnership with the USDA

And a very small percentage, 18%, say no Okay Thank you for answering our poll question We're going to move on to our next speaker, and our next speaker is Laurel Leverrier

I'm sure I'm messing up her last name; I apologize, Laurel Laurel is the Assistant Deputy Administrator in the Business and Industry Program Laurel, tell the audience a little bit about yourself and then begin your presentation please Laurel Leverrier: Great Thank you so much

Good afternoon, everyone My name is Laurel Leverrier and I'm the Assistant Deputy Administrator of the USDA Rural Development Business Program I'm originally from Kansas City and went to college in Missouri I spent the last decade in Washington, DC

working with the USDA's Rural Development Program Rural Development administers over 40 programs focused on improving the economy and quality of life in rural America Today I'm here to speak with you about our Business and Industry Loan Guarantee Program or the B&I Program, as we like to call it The B&I Program is authorized by the Consolidated Farm and Rural Development Act The program helps to bolster the existing private credit market through the guaranteeing of loans for rural businesses, allowing private lenders to extend more credit than they would typically be able

Loans are made by private lenders for the purpose of creating new businesses, expanding existing businesses, and for other purposes that help create employment opportunities in rural America The program is not intended for marginal or substandard loans During the 2016 fiscal year, under the B&I Program we obligated over $129 billion in funds, providing 379 loan guarantees which helped to create or save over 13,000 jobs We're very proud that in fiscal year 2017 Lender of the Year was the Greater Nevada Credit Union, with over $120 million in loan guarantees

Today we are under a Continuing Resolution (CR) which provides funding for the program through April of 2017 Under the CR, the program has $511 million in funds available, and we've used just over $155 million of that in the first three months Now I'm going to get into the eligibility requirements of the program First with respect to eligible lenders, credit unions can be eligible lenders under the program as long as they're subject to a credit examination and supervision by the National Credit Union Administration or a state agency Non-regulated lenders may apply for eligibility under the program which, if granted, is good for a three-year period

The program can work with a wide variety of borrowers, from for profit corporations to Indian tribes to individuals The key here is that the borrower must be engaged or proposing to engage in a business located in an eligible community So what's an eligible community? The program is focused on improving the quality of life in rural America, so it makes sense that a community must be located in a rural area, but what is rural under this program? To be honest with you, within Rural Development there's a wide variety of definitions and a lot of that ties back to the actual statutes that are in place that authorize those programs For the B&I Program, rural areas include any community or town with a population less than 50,000 that are not adjacent or contiguous to an urbanized area of 50,000 or more I've also provided a link on this slide where you can check the eligibility of a specific location

Now, there is one exception under the program to the rural area requirement and that is for locally or regionally produced agricultural food projects Such projects can be located in urban or rural areas Loan proceeds can be used for real estate purchases and improvements, machinery and equipment, working capital, local foods projects, or even debt refinancing Ultimately, to be eligible the loan must help to create or save jobs Now there are certain exceptions with respect to debt refinancing, and I'll get into that more in depth on the next two slides

First, the refinancing must be required to improve the cash flow of the business and create or save jobs Also, the debt must be for the borrower and reflected on their balance sheet Additionally, the debt to be refinanced must have been for an eligible loan purpose; so for instance, we couldn't refinance debt used to construct a luxury hotel in DC because that would not have been an eligible purpose to begin with

Existing lender debt may be refinanced as long as it does not exceed 50% of the total loan amount The loan must have closed and be current for the last year, and the lender must be providing better rates or terms than they currently are The program is authorized to approve loans up to $40 million $10 million is available for loan guarantees up to $10 million is available for qualified borrowers Loans up to $25 million are available at the administrator's discretion

These projects, in order to get this funding, must be high priority projects and the lender must document that the project would not be able to move forward without the guarantee Loans up to $40 million are available, but only for rural cooperative organizations Additionally, there is a borrower loan limit of $50 million in loan guarantees to any one entity During the 2016 fiscal year, loans ranged from $62,000 up to $24 million The agency does charge an initial 3% fee along with a 0

5% annual renewal fee We do have a reduced fee of 1% for certain priority projects like serving tribal communities, but I would note that that funding is very limited The agency will guarantee up to 80% for loans of $5 million or less, up to 70% for loans between $5 and $10 million and up to 60% for loans over $10 million Lenders may establish fees on the loan, including prepayment penalties and late payment fees, as long as they are in line with what is charged to similar borrowers However, the loan note guarantee will not cover prepayment penalties or late payment fees

So you're allowed to charge those type of fees, but our loan note guarantee won't particularly cover them Additionally, I would note that credit unions can charge prepayment penalties as long as it is listed under the terms granted in the USDA's conditional commitment Interest rates on the loans are negotiated between the lender and borrower Rates must be in line with those rates charged to other similar borrower and loans Rates are also subject to agency review and approval

Interest rates may be variable as long as they are tied to a published rate Rates cannot be changed more than quarterly and the rate must be stated within the promissory note Loan terms are tied to the type of project and collateral on the loan Up to 30 year terms are available for real estate, up to 15 years for machinery and equipment based on the useful life of the facility, and up to 7 years is available for working capital loans The term of a loan must be the same for the guaranteed and unguaranteed portion of the loan

Additionally, balloon payments are not allowed under the program and interest-only payments are permissible but only as long as the principal payments are scheduled to begin within three years from the date of the promissory note So you can provide interest-only periods, but we need to see principal payments beginning within three years Lenders are responsible for ensuring the credit quality of the loan This program is not intended as a lender of last resort Lenders must conduct thorough financial analysis to assess a company's past performance, present condition and future viability

Additionally, lenders must ensure that the collateral on the loan has a documented value sufficient to protect the lender and the agency The discounted collateral value must equal the loan amount And as identified on this slide, we do have standards for discounting of collateral In no case can intangible assets serve as primary collateral on the loan The agency does have a minimum equity requirement for borrowers under the program

At loan closing the business must have tangible balance sheet equity equal to at least 10% for existing businesses and at least 20% for new businesses or startups Lenders may sell all or part of the guaranteed portion of the loan to holders on the secondary market The secondary market enables lenders to enhance liquidity and increase profitability while limiting financial exposure Lenders are allowed to charge servicing fees to holders, but I would point out that lenders must hold a minimum of 5% of the total loan amount The B&I Program is primarily administered out of our 47 state offices located around the country

If you're interested in submitting an application to the B&I Program, I highly recommend that you reach out to your local state office, and I've provided a link on this slide where you can get contact information for each of our 47 state offices I've also provided contact information for our acting B&I Program Director, Brenda Griffin, who works with me here in Washington, DC and is happy to answer any program-related questions as well With that said, that's the end of my presentation and I just want to say thank you so much to Lauren and everyone at NCUA

This has been a great opportunity and thank you for making this opportunity available for us at USDA Lauren Bethea: Thank you, Laurel Very good information I'd like to say that the B&I Program is another opportunity for credit unions to provide MBL financing and the reason that we wanted to bring this information to you is it will help you improve your bottom line, so that was the whole purpose in presenting these three program areas of the USDA So we're going to turn to our next poll question

And the question is, what USDA program would your credit union like to participate in? We talked about the community facilities program, the single family housing program, business and industry Perhaps you're interested in all of the above, or maybe none of the above Take a few seconds to answer the poll question please Kathryn Baxter: So let's let them think about that for a couple of seconds, Lauren, before we push out the answer because that's quite a bit to think about All of the programs sound fantastic, and I'm sure – we really appreciate the USDA working with us on this particular webinar because it's really a benefit to the credit union community

So let's see what the results say Lauren Bethea: Okay, let's see A little too fast, a little too fast, wait a minute Okay, there's our results Okay, so the single family housing program, 37

5% of our audience are interested in that program; that's the first The second area, all of the above, 288% of our audience are interested in all three program areas, so I'm really happy that we were able to bring this information to our credit unions because there's pretty good interest in the programs Okay Thank you so much for responding to our poll question

And so what are some of our key takeaways from this presentation? We heard from our four speakers today and learned there are many opportunities for credit unions to grow loans by partnering with the USDA Did you know that the USDA's mission is providing loans, grants and guarantees to rural America, to help improve rural America? Credit unions are eligible to partner with the USDA, but partnering with the USDA may require a change in the board of director's vision and strategy A little different than the way we were thinking about our income for credit unions in prior periods Lastly, I'd like to make an announcement about our CDFI initiative CDFI is a branch of the United States Treasury

We encourage credit unions to explore the benefits of becoming CDFI certified On June 23, 2016 we conducted a joint webinar with the CDFI which explained the two methods a credit union may use for becoming CDFI certified Also, the CDFI has a video explaining the benefits of CDFI certification and they provide guidance for credit unions using the traditional application Again, we're encouraging our entire credit union community to explore the opportunity The next slide is our contact information

We are in the Office of Small Credit Union Initiatives and at any time if you want to reach out to our office, here's our email address and our contact phone number With that, I'm going to turn the webinar over to Kathryn She's going to facilitate our question-and-answer session Kathryn Baxter: Okay, thank you, Lauren So what I'm going to do is push out to the audience our survey and take a few moments please to do our survey because you're going to help us to be able to improve on the content and quality of our webinars

We have quite a few questions for all of our speakers, so I want to make sure that we have all of our speakers on Jeremy, are you there? Jeremy Gilpin: Yes, I am Kathryn Baxter: Okay Kristina, are you there? Kristina Zehr: I am on Kathryn Baxter: All right

Laurel? Laurel Leverrier: Yes Kathryn Baxter: All right And Nathan? Nathan Chitwood: Yes, I'm here Kathryn Baxter: Okay, fantastic So we're going to start with Nathan, as a matter of fact, but before I go to you, Nathan, I'm going to give you a few minutes to sweat

What we're going to do is remind everyone about the qualifications to take the quiz and get a certificate You needed to be on this call for at least 45 minutes, you needed to answer three of the five poll questions, and you need to pass the quiz with 12 correct answers out of the 15 Once you do that, in the Progress widget which is next to the one that has the quiz in it – both of them are magenta colored – once you've made all the requirements and you've taken the quiz, you'll see the little Quiz icon within the progress one light up That's your certificate You may get your certificate and print it out

So Nathan, you're going to get the first question and the question from the credit union had to do with a map so, Nathan, I'm going to refer you back to that They said looking over the map they didn't notice any partnering in the Northeast; is that correct? Nathan Chitwood: The maps, we did have a group out of New York, I believe I don't know how farther north and east that we had requests from, but I know we have a project LISK, I believe, is headquartered in New York and serves a large area So, yes, the map is just showing where the actual entities are headquartered and many of those cover multiple states

But no, there's no particular reason why there wasn't one farther north and east than that It's just a matter of who we received applications from Kathryn Baxter: Okay, sounds good So next I'm going to skip to Kristina Kristina, here's a question that one of the credit unions had, so listen carefully

I'm going to try to sort of summarize this They said that you mentioned that it's easy to sell the loans Their credit union is a small credit union, its $6 million, and they would not be able to retain most of the kinds of loans and would need to sell these to a licensed servicer How easy are these loans to sell, is their question Kristina Zehr: They're pretty easy because the investors are very eager to get their hands on them, so we could certainly help provide a list of eligible servicing lenders that are looking to purchase the loans and then they would be able to see the terms and the payouts that they're offering

They're quite lucrative Kathryn Baxter: Okay, fantastic All right So let me jump over to Jeremy All right, so Jeremy, here's what a credit union asked

Jeremy Gilpin: Okay Kathryn Baxter: They said how much staffing do you have to handle these specialized loans? Jeremy Gilpin: Most business and industry loans are, for example, typical loans that you'd find in your community, so really no additional staffing is needed If you venture out into these larger types of credit, then you really need somebody that's very qualified in servicing and someone that's very qualified in underwriting, with servicing probably being the most important function because you can contract and find USDA loan packagers that will assist with the underwriting and the submission for you Kathryn Baxter: Okay, fantastic So now for Laurel, Laurel, here's a question for you

You handled the B&I guaranteed loans so they said is the underwriting on a B&I guaranteed loan fully the credit union's responsibility or is there guidance available from USDA? Laurel Leverrier: That's a great question It is the responsibility of the credit union to do underwriting and to determine the creditworthiness of the project Within our regulation we do have some guidance, but in general we're really looking for you to follow your normal procedures that you would when underwriting any commercial loan But I would also point out that our staff here in DC

and around the country also reviews the creditworthiness as well so, if we're looking through the package provided and we have concerns, we will certainly go back to them Kathryn Baxter: Fantastic Okay, so now I'm going to give a general question to the USDA speakers, all right? So here's what a credit union asked They said it appears many of these programs are designed for rural areas; is that correct? Anyone can step in Nathan Chitwood: Yes, this is Nathan and I'll speak on behalf of the community facilities program in general

Yes, we are limited to where we can provide funding and, as I mentioned in my presentation, the definition for community facilities is communities of less than 20,000 people Housing and business and industry have different definitions of rural so, yes, we are the rural Many of the programs and many projects that we fund in the rural areas could be funded possibly through HUD or block grants in the urbanized areas, so we are restricted to communities of 20,000 or less and I can let B&I and housing speak about their restrictions as far as rural areas Kristina Zehr: This is Kris and I can speak about housing briefly Again, we too are limited to rural areas; they're typically defined as areas not exceeding 35,000 but, again, depending upon the proximity to a metropolitan statistical area, I can guarantee you that if you're thinking little small towns without any stop lights, that's not going to fit the bill at all

We make loans in areas where you probably would not place a rural definition on them because over like 90% of the United States by definition is considered rural So there are lots of eligible areas and if you go to our property eligibility online tool that I gave you the link to as part of my presentation and take a look around, use the zoom-in, zoom-out tool, I think you'll be quite surprised at how much of a business could be built in these areas with mortgage lending Laurel Leverrier: This is Laurel Leverrier and I'll just round it out Yes, I mean, we work for Rural Development so the purpose of our programs are primarily geared towards helping rural communities As noted in my presentation for the B&I Program, the rural area definition is communities of 50,000 or less, so we can actually work with much larger communities than even some of our sister groups within RD

We also have authority to do projects in urban areas if there is a regional food distribution component to it So there is some exception but, yes, I think the answer is yes, in general; that's the point of our programs And part of the background on that is wanting to ensure that rural areas have access to private capital just like as is available in urban areas But as I think some of the other speakers have pointed out, you really have to kind of look at the individual programs to consider what type of communities the programs can work with Kathryn Baxter: Fantastic

So now here's another question with respect to the single family loan program, so that's Kristina Okay, Kristina, here's your question The credit union says what is the first step to begin offering the single family loan program to our members? Kristina Zehr: The first step you would want to do is make sure that you complete an approved lender application and you receive a certification letter back from USDA, whether that's from an individual state office – if you are only going to be doing business in one state, again, you only have to apply with that state Or, if you would like to do business in multiple states, it's the same application; you just send it to Washington, DC

And once you've received your notice that you are an approved lender and you have completed the proper paperwork, then you can begin offering it as part of your portfolio to loans to your lenders We are getting ready to roll out 28 individual training modules on different topics We have training available for an overview of the program online at USDA LINC which is also included as part of my presentation And you can also reach out to your states and see if they have any additional training for you But again, you can originate those loans

We do have our guidelines in the 3555 and the handbook but, if you have any overlays that you do as well – like for example let's say we'll go down to a 640 credit score but you don't, that's fine One of best things that I can tell you about partnering with the credit unions in the single family housing program is your quality of loans and the performance that they have are almost second to none, which is why we are also extremely eager to partner with more credit unions because you do an exceptional job of weighing the risk and making good, solid, prudent underwriting decisions And so once you originate that file and your underwriter underwrites it and approves it, you will then send it to the state office of the state where the property is located, they will review it, obligate your funds, and issue you a conditional commitment And once you receive that commitment, that is basically telling you now you may close the loan Then you close the loan at your discretion and give us a closing package, and we will issue you the loan note guarantee

Once you have that loan note guarantee, that is typically when you will then contact your investors who either purchase the loan from you or you can start to place those in Ginnie Mae pools and retain the servicing yourself, it's really up to you Kathryn Baxter: Fantastic Okay, so now from these, here's a question that we have for our speakers today, so this is another general question The credit union apparently is very interested in the programs that we discussed today so they said do you have any marketing materials available for these programs? Nathan Chitwood: Once again, this is Nathan I'll speak quickly on our re-lending

We don't have any specific to re-lending yet just because it's so new, but definitely we do have a website with some information on it and that can be found at www rd – which is the abbreviation for Rural Development – and then dot USDA dot gov Laurel Leverrier: Yes, and this is Laurel Leverrier and I would just reinforce that I think there certainly is a lot of marketing materials available for our programs and the state office is probably a great place to pick up some of the details if you want them But really an easy resource for all of you is to go to that exact website that Nathan just mentioned

Through that website you can find information on all the programs we've spoken about today Kristina Zehr: And I would echo that for single family housing as well We do have some brochures that we've made and if you contact your state office they may be able to provide those to you The one thing we have to be careful of is you can't put like your logo right next to ours; there's a lot of legal issues with certain brochures and handouts that we have been warned about in the past So again, utilizing the website is usually one of the best places for you to get your information and then be able to build your own brochure with your logo, your contact information on it, with some highlights of the program

Kathryn Baxter: Okay, sounds good So let me jump back to Nathan Nathan, when you talked about your program, the credit union said here they want to know if the credit union has to have a commercial lender on staff to underwrite the loan Nathan Chitwood: You know, that's a decision that the re lender has to make We don't put any requirements on the underwriting that the re-lender has to do

We take security with the re lender and so however they wish to underwrite their loans or what security they take with their loans is strictly up to the re-lender If they want to possibly even contract out for expertise, I think that would be possible, but we don't put any additional requirements on how the re lender underwrites or makes their loans Kathryn Baxter: Okay Let me jump over to Jeremy at this point in time Jeremy, are you still there? Jeremy Gilpin: Yes, ma'am

Kathryn Baxter: All right Now here's a question that a credit union has for you with regard to the risks that a credit union would assume The credit union said what risk does a credit union assume when holding USDA-backed loans in their investment portfolio? That's question number one And then they said what types of due diligence activities should be in place specifically related to these loans? So what do you do? Jeremy Gilpin: Yes Unlike the SBA, which is always a conditional guarantee whether you hold it in your portfolio or you sell it, say, to another credit union and put it in their investment portfolio, the USDA loans become unconditional and irrevocable at the point of sale, so that is a benefit that the USDA secondary market enjoys that other guaranteed programs do not

Outside of just negligence, USDA will not pull a guarantee Second of all, the due diligence that you would perform in looking at buying these credits, look for lenders that provide credit analysis with the guaranteed portion that is up for sale Not all lenders do; not all brokers require it We, for example, provide our underwriting and entire credit analysis to all the potential buyers of our paper in the secondary market as well as we provide them annual reviews as we would the USDA or anyone else participating on the loan side of our credits And those are a few of the best practices that I would recommend

That way you get a real feel for what you're putting in your portfolio But the guarantees once purchased on the secondary market do behave somewhat differently than a typical SBA, for example, would, to the benefit of the buyer putting it in their investment portfolio Kathryn Baxter: Fantastic Did any of our other USDA speakers, did you want to add anything to what Jeremy said? If not, I'm going to move on to Kristina Kristina, are you there? Kristina Zehr: I am

Kathryn Baxter: All right So here's a question from a credit union They said if they retain servicing, do they have to provide escrows for insurance and taxes? Kristina Zehr: Our regulations would prefer that you escrow for taxes and insurance but, in Handbook Chapter 4, there are some guidelines if you are not going to escrow for those items and it has sort of an example waiver or an example type of attachment that you would need to complete that you sign as well as the borrower would sign to say hey, I know I'm on the hook for these And then also if you are going to retain the servicing but you're not escrowing, you will have to acknowledge that if those items are not paid, you will pull up and do advances to pay those on their behalf while you then go try to collect them from your borrower So there is an option to not escrow

We don't have a lot of lenders that do not escrow, but we obviously offer that option and flexibility for a reason, so it is there if you need it Kathryn Baxter: Okay, wonderful Laurel, you're next Are you ready? You still there with us, Laurel? Laurel Leverrier: Yes Kathryn Baxter: Okay

So here's a question from the credit union It says does the USDA require certain loan covenants to be included in an MBL in order to obtain the guarantee? Laurel Leverrier: There are certain basic requirements that we would require in general but nothing that I would say would be unusual in terms of what you perhaps would have there otherwise I don't know if Jeremy maybe has some good insights on that one? Jeremy Gilpin: Really the major one is going back to the tangible net equity requirements That's always going to be a requirement by the USDA and it's going to be included in the conditional commitment as a covenant upon loan closing And then there are a few leverage ratios that the USDA has set guidelines for so, as long as you fall anywhere in between those

And then of course when the USDA looks over your credit, because it will be reanalyzed by the state office, they could add covenants as they see fit You know, a best practice again is when you get that conditional commitment back when you have your loan agreement that the USDA approves as well, make sure you cut-and-paste their covenants verbatim into your loan agreement in addition to yours and that should protect you going forward Kathryn Baxter: Okay All right, I'm going to jump back down to Nathan So Nathan, this is a kind of concise question that the credit union had

They just want to know if there is a dollar limit per credit union for your program Nathan Chitwood: You know, last year we did not have a dollar limit per re-lender but that is something that if we had limited funds we might implement But the last cycle we did not have any Kathryn Baxter: Okay, great Now here's another question

We've had a couple of these from credit unions that are state chartered So this credit union – and this is to Kristina – Kristina, this credit union is state chartered but they're NCUA insured Their question is if they were to transition to private insurance, would they still be eligible for the programs described today or do they have to be NCUA insured? Kristina Zehr: Well, there are many ways that you can qualify to become an approved lender, and by virtue of being recognized under NCUA, that's only one of them If they happen to also have a Fannie Mae or a Freddie Mac approval or a HUD approval or a VA approval, Chapter 3 is going to outline the myriad of options that they have to qualify to become an approved lender, so it's a pretty wide berth Also if they are recognized by their state housing authority, federal home loan bank, those are also included under that umbrella

So there are other avenues and they're certainly available and you can review them again in Handbook Chapter 3 Kathryn Baxter: Fantastic Great answer So now I'm going to jump to Jeremy I'm going to try to get to Jeremy's question and then I want to make sure that Laurel has an opportunity to get a question

Jeremy, here's what the credit union said They wanted to know how many business loans you granted in 2016 Jeremy Gilpin: USDA business and industry loans, we granted 17 Kathryn Baxter: Okay Jeremy Gilpin: Total business loans, including traditional and SBA, 104

Kathryn Baxter: Okay Fantastic And Laurel, I'm going to jump to you; here's a question for you The credit union says for USDA-guaranteed MBLs, is there certain information that the USDA would like to have included in the credit write-up? Laurel Leverrier: You know, I would just go back to the same standard that you're looking for when you're typically underwriting and, you know, obviously looking back at the overall credit quality Now we do have some specific requirements with respect to our program; for instance, the tangible net balance sheet requirement, which is sort of a minimum financial threshold

So there is certain documentation that we're going to want to see in terms of meeting our thresholds and our requirements, but in general I would just keep going back to sort of your standard what does that underwriting look like, what is the typical documentation that you're putting together Kathryn Baxter: Fantastic Now this is our last question for all of our speakers, and this is a good question The credit union wants to know if they're able to get their board to allow them to enter into any of these programs, does the USDA offer any training to help a loan officer to get to a point that they're able to underwrite in accord with the requirements that USDA set forth? Do you offer any training, in other words? Laurel Leverrier: This is Laurel Leverrier and I can't speak on behalf of all the programs with this, but I can tell you that with our B&I Program, a lot of our work is more outreach focused We want to make sure people are aware of our programs

But we do occasionally do training along with what we like to call our stakeholders So like for instance a couple months ago we did some training for our staff as well as stakeholders or lenders that we work with on new market tax credits and how you can use the new market tax credit program as well as our B&I Program So it does happen I would say more often than not a lot of the work that we're doing is when people have questions about our program we really kind of sit down with them and hash out some things, but we do from time to time offer training And we try to make a lot of folks aware of that and certainly we would be willing to figure out a way to make sure you all at NCUA are tied into those things

Kathryn Baxter: Okay Kristina Zehr: This is Kris with single family housing, and we certainly do offer many training opportunities online at your convenience on USDA LINC, which is one of the websites in the presentation And as I mentioned, I've just completed 28 individual modules that are going to be short, little chunks of training on various topics We hope to have those posted very soon, but we're in the final stages of clearance for that But if you contact the state office, we have given them permission to sort of share some of those upon request until we get them fully out in the open

And if you contact your state office, sometimes they are offering training as well or they will do a training here or there kind of throughout the state and one may be really close to your area or they may be doing a webinar training and you would certainly be able to join that at any time as well So we do have many training opportunities available for the mortgage side, for single family housing Kathryn Baxter: Awesome And what about you, Nathan? Nathan Chitwood: Sure We do webinars, at least we did for the re lending, you know, how to make application, what's required to be on the application, and those kinds of things

As far as the underwriting of the loans, we don't get involved in how the credit union underwrites their loans They would underwrite it as they normally do They don't even have to submit their underwriting to us What they submit to us is documentation to show that the group that they want to make a loan to is an eligible group, they provide us with what the funds will be used for so we know it's for an eligible purpose, and that's basically all that they supply to us They do the underwriting as they would as if we weren't involved, so there's no difference in how the credit union underwrites a particular loan as far as the re lending program

Kathryn Baxter: Okay Well, thank you We are fresh out of time, everyone We appreciate our USDA speakers joining us and our credit union speaker; we thank you so much On behalf of Lauren Bethea and the NCUA crew and Franz Ayento, who is our back behind-the-scenes person, we thank you

Don't forget to join us next month when we have our second half of our SBA webinar and we can talk about more opportunities that the Small Business Administration has for the credit union community If you're still taking the quiz, we're going to leave the console open so take your time This is Kathryn Baxter signing off We'll see you next month Have a wonderful afternoon and a great week