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Credit Policies and Procedures

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G.U.T. Co operative Credit Union Ltd
CREDIT POLICIES AND PROCEDURES

CREDIT POLICIES AND PROCEDURES..........................................................................................................................4
1
PREAMBLE............................................................................................................................................................4
2
LOAN GRANTING OBJECTIVES.......................................................................................................................4
Objectives...........................................................................................................................................................5
3
GENERAL POLICIES............................................................................................................................................6
4
LENDING AUTHORITIES AND LEVELS OF APPROVAL...............................................................................7
4.1
General Considerations.............................................................................................................................7
4.2
Specific Authorities and Responsibilities..................................................................................................8
5
MEMBERS’ REPUTATION AND ABILITY TO BORROW.................................................................................9
6
LOAN USE..............................................................................................................................................................9
7
SOURCES OF FUNDS FOR REPAYMENT..........................................................................................................9
8
LOAN SUPERVISION..........................................................................................................................................10
General Considerations.....................................................................................................................................10
8.1
Extensions and Other Credit Facilities....................................................................................................10
8.2
Review of Business Loans......................................................................................................................10
8.3
Modification of Terms and Conditions....................................................................................................11
8.4
Identification of Total Exposure..............................................................................................................11
8.5
Delinquency Reports...............................................................................................................................11
8.6
Notification of Problems.........................................................................................................................11
8.7
Reports about Problem Loans.................................................................................................................11
8.8
Accounting and Administrative Reporting..............................................................................................11
8.9
Policy Exceptions....................................................................................................................................11
8.10
Risk Concentration..................................................................................................................................12
9
FEES AND COMMISSIONS................................................................................................................................12
GENERAL CONSIDERATIONS.....................................................................................................................12
9.1
Interest Collection Frequency.................................................................................................................12
9.2
Delinquent Loan Interest.........................................................................................................................13
9.3
Commissions and Other Charges on External Credit..............................................................................13
10
LOAN DOCUMENTATION............................................................................................................................13
GENERAL CONSIDERATIONS.....................................................................................................................13
10.1
Guarantees...............................................................................................................................................13
10.2
Schedule of Acceptable Securities..........................................................................................................14
10.2a
Character........................................................................................................................................14
10.2b
Share Capital and other Savings of the member borrowing..........................................................14
10.2c
Co-Makers Shares..........................................................................................................................14
10.2d
Non-Member Endorsers or Guarantors.........................................................................................14
10.2e
Life Insurance Policies..................................................................................................................14
10.2f
Certificates of Titles for Land........................................................................................................15
10.2g
Bills of Sale....................................................................................................................................17
10.2h
Company Stocks and Shares..........................................................................................................19
10.2i
Deposit Accounts in Other Organizations....................................................................................20
10.2j
Company Guarantee.....................................................................................................................20
10.2 k Government Salary Bonds.....................................................................................................................20
11
Distribution of Loan Policy.............................................................................................................................20
12
Review and Revision........................................................................................................................................20
13
EXECUTION OF SECURITIES......................................................................................................................20
INTRODUCTION............................................................................................................................................20
13.1
What is "Security"..................................................................................................................................21
13.2
Determination of the Adequacy of Securities.........................................................................................21
13.2a
Character........................................................................................................................................21
13.2b
Borrower's Shares and Deposits with the Credit union.................................................................22
13.2c
Co-Makers.....................................................................................................................................22
13.2d
Non-Member Endorsers and Guarantors.......................................................................................22
13.2e
Bills of Sale....................................................................................................................................22
13.2f
Life Insurance Policies..................................................................................................................23
13.2g
Mortgage on a Certificate of Title for Land...................................................................................24
13.2h
Company Stocks or Shares............................................................................................................26
13.2i
Deposits in Other Institutions.......................................................................................................27
13.2j
Government Salary Bonds.............................................................................................................28

2

13.2k
Company Guarantee......................................................................................................................28
13.2L Other "Securities"..................................................................................................................................29
14
LOANs to officals.............................................................................................................................................29
15
loans to credit union employees........................................................................................................................30
16
credit analysis....................................................................................................................................................30
Character...........................................................................................................................................................30
Capacity............................................................................................................................................................31
Collateral...........................................................................................................................................................32
Capital...............................................................................................................................................................32
Conditions.........................................................................................................................................................32
17
delinquency control...........................................................................................................................................32
17.1
Identification and reporting of Delinquent Loan Accounts.....................................................................32
17.2
Delinquency Control Policy...................................................................................................................33
Definitions.........................................................................................................................................................33
17.3
Policy.......................................................................................................................................................33
18
COLLECTIONS...............................................................................................................................................34
18.1.
Collection Policies..............................................................................................................................34
18.2
Notices or Reminders of Due Dates........................................................................................................35
18.3
Legal Action............................................................................................................................................37
18.4
Transfer to Realized Property..................................................................................................................38
18.5
Disposal of Realized Property.................................................................................................................38
18.6
Evaluation of the Just Value of “Realized Property”..............................................................................38
18.7
Funds Required for the Maintenance and Preservation of Realized Property........................................38
18.8
Arbitration Collection.............................................................................................................................38
18.9
Collection by Court Action.....................................................................................................................38
19 SPECIAL POLICIES FOR DELINQUENT LOAN RECOVERY...........................................................................39
19.1
Extension.................................................................................................................................................39
19.2
Loan Restructuring..................................................................................................................................40
20
LOAN WRITE-OFF.........................................................................................................................................42
21.1a
General Policy...............................................................................................................................42
20.1b
Write-off of Loans to Related Persons...........................................................................................42
20.1c
Authorization by the Board of Directors.......................................................................................42
20.2 Record of Written-off Loans in Suspense Accounts......................................................................................42
Reports...................................................................................................................................................................43
a)
Quarterly Report to the Credit Committee and the Board of Directors..................................................43
20.3
Loans to Borrowers with Written-off Loans...........................................................................................43
20.4
Payment Assignment Policy....................................................................................................................43
20.5
Continued Collection Efforts...................................................................................................................43
20.6
Exceptions...............................................................................................................................................44
21
PROVISION FOR LOAN LOSSES.................................................................................................................44
GENERAL CONCEPTS...................................................................................................................................44
21.1
Loan Provision Policy.............................................................................................................................44
21.2
Periodic Review of the Provisions and Respective Policy......................................................................45
22
Seized/repossessed assets..................................................................................................................................45
23.
Risk assessment – steps for precessing loans.......................................................................................................45

3

G.U.T. Co operative Credit Union Ltd
CREDIT POLICIES AND PROCEDURES
1

PREAMBLE

The G.U.T. Co operative Credit Union offers a variety of loans designed to meet the needs of its
members. Loans are either secured by some form of collateral or by a member's signature.
Loan types are categorized by the security offered, the purpose of the loan or the item to be
purchased with the proceeds of the loan. Some loans such as real estate loans have
complicated procedures that require a great deal of documentation. Other loans require little
documentation and can be made with fairly simple procedures.
The Credit Union’s Policies and Procedures must govern the lending process. The provisions of
the Co-operative Societies Act and Regulations and the credit union's rules were considered
when establishing policies. Credit Committee members and Loan Department personnel shall
familiarize themselves with the Act and Regulations, the credit union's rules and any other
pertinent legislation and how these affect the lending process in a credit union.

2

LOAN GRANTING OBJECTIVES

The purpose of a credit union as a financial institution is to attract financial resources from
people with the ability to save and thereby provide funding for loans.
The lending service shall be efficient and timely, accepting a risk level adequate to the type of
financial transaction at competitive rates for the purpose of satisfying the members’ borrowing
needs, without exposing the safety of the savings held by the credit union.
The purpose of credit is to place at the disposal of members devoted to business, production
and consumer activities the requested capital, while requiring that the principal have a
productive purpose, generate a profit for the member, enabling him to grow his business,
generating possibilities of savings or covering personal or family needs and for the co-operative
to satisfy as a minimum: the cost of funds, operating expenses and overheads, as well as the
creation of reserves to strengthen its institutional capital and generate a surplus which is
returned as a benefit to the member through the creation of new services.
The stated policy of this credit union is to comply with all applicable laws in Grenada and the
regulations promulgated to implement their framework. The specific intent of this policy is to
include all of the facets of loan granting, the management and processing of loan applications,
loan consultations, and data regarding interest rates, terms and credit costs, as well as penalties
for delinquency.

4

No member will be denied service by the credit union on account of race, religion, sex, marital
status, physical disability or age (provided the applicant is capable of executing a binding
contract and meeting any other conditions contemplated by the Law, bylaws and credit
regulations).
No credit union officer or employee may in any way discourage a member from submitting a loan
application. The credit union will accept and process the application of any member wishing to
submit a credit application. These applications must be submitted in writing on the forms used by
the credit union for this purpose. No verbal request will be processed.
Objectives
This policy establishes the guidelines to be followed in the lending process in order to maximize
the achievement of the following objectives:
a)

Granting Loans on a Solid and Recoverable Basis

The credit union’s loan portfolio will consist of a good mix of short, medium and long term
loans. Every effort will be made to maintain a healthy and balanced portfolio, thereby
maintaining adequate liquidity and lowering the risk of the resources channeled into
loans.
b) Investing the Credit union’s funds to maximize their returns while providing
for the protection and safety of the Members’ savings.
The credit union will endeavor to keep risk at a reasonable level. Loan quality will prevail
over business opportunities. Maintaining good loan quality will depend on the granting of
sound loans and following them up with a periodic evaluation of the portfolio quality and
the adoption of measures for timely loan recovery.
c)

Serving the Real Credit Needs of Credit Union’s Members

The credit union will provide timely, adequate and competitive responses to applications
for loans, observing that they represent viable options for the use of funds available for
investment. The credit union will maintain an adequate social response to members in a
manner consistent with sound lending principles.
d)

Carry Out the Credit Process within a Legal and Ethical Framework

The Board of Directors, other decision-making levels, officers and employees of the credit
union will process loans in full agreement with ethical guidelines to avoid possible
conflicts of interest.
e)

Delegation of the Board’s Authority and Responsibility

The lending authorities and the credit union’s approval procedures are based on the
delegation of authority by means of structured levels of authorization. However,
regardless of the individual credit authority delegated or the amount of credit approved,

5

the Board of Directors bears final responsibility for the credit risk assumed by the credit
union.
f)

Updating

The credit union’s lending policies will be reviewed and approved by the Board of
Directors at least once per year. This review will consider the following factors:




Changes in market conditions

Changes in laws and regulations
Changes in the credit union’s financial position and its lending capability

Changes in the credit union’s strategic plans

Any other applicable factors

The appropriate changes, if any, will be made and promulgated by the Board of Directors
and communicated to all staff responsible for financial management and credit
administration.

3

GENERAL POLICIES

The general policies governing the credit union’s lending activities are as follows:
Loans will only be granted to individuals who are members of the credit union, pursuant to
the Co-operative Societies Act.
1.

The loan provided by the credit union will be primarily oriented toward activities to
improve the social conditions and financial stability of the member and/or his
family.

2.

Lending shall be the credit union’s most important service in conjunction with
savings mobilization. To this end, the maximum level of efficiency with regard to
the timeliness of delivery, amounts adjusted to members’ needs and ability to pay,
as well as the credit union’s funds availability, will be sought, with a view to
expanding and diversifying access to credit, while avoiding risk concentration.

3.

Maximum turnover of the loan portfolio must be maintained, while acting prudently
in the establishment of terms, amounts and payment methods and timely collection
management to ensure the lowest level of delinquency.

4.

Ongoing information and advisory action for the members on the proper use of
credit will be maintained.

5.

Credit will be offered under conditions of adjustable and competitive interest rates
within the financial marketplace. However, the credit union will seek margins that
will guarantee the coverage of the finance charges, overheads, portfolio protection,
strengthening of institutional capital and generation of a reasonable surplus.

6

4

6.

The credit union will periodically evaluate the quality of its portfolio and, at the
same time, make adequate provisions for its protection, in addition to writing off
loans rated as irrecoverable.

7.

The term of a loan will be established according to its purpose. To achieve
maximum turnover, an effort will be made to seek the highest percentage of its
portfolio in short-term loans.

8.

The credit union will be vigilant with regard to loan payments. This involves the
preference of collateral, amortization by payroll deduction for those who are
employees and the maintenance of insurance policies over accepted collateral,
whenever the case warrants it. For the acceptance of personal guarantees, the
ability to pay off the surety or sureties must be evaluated in the expectation of
possibly having to turn to them to recover the debt. To this end, the direct and
contingent obligations of the sureties will be taken into account, along with the loan
applicant.

9.

Loans granted must guarantee a positive return. Lending principle dictates that a
loan reduces its recovery risk when it has been granted in an analytical, timely and
efficient manner.

LENDING AUTHORITIES AND LEVELS OF APPROVAL
4.1

General Considerations
Authority and Delegation

The maximum authority over the lending policy is the Board of Directors –any other authority is
appointed by the Board by way of delegation. The delegated lending authorities are:
-

Credit Committee
(General) Manager
Loans Supervisor
Loan Officers

Bases for the Delegation
The delegation of authority is based on: (Define levels of authority)
- The loan amount, term and type
- The nature of the risk
- Experience of the delegated authorities

7

Risk Implementation
Loan disbursement must be authorized by two officers, one of whom must be the loan officer
responsible for the credit relationship with the member.

4.2

Specific Authorities and Responsibilities

To streamline and simplify the loan-granting process, the Board of Directors will delegate
authority to the different levels set forth in item 4.1.above. specify.
The body having jurisdiction over the approval of any loan will be the one that has the
ability to approve loans up to the total amount of the risk, equivalent to the sum of the
balances owed by the applicant, plus debts by him guaranteed in the credit union and the
amount of the loan or restructuring to be approved.?????
The bodies empowered to make decisions regarding loans are the following:
Board of Directors

The Joint Committee will rule on all loan applications for officers and employees above
their savings. The Board will rule on all loan applications that go beyond the powers of the
other decision-making levels.
Credit Committee

The Credit Committee will rule on all loan applications according to the authority assigned
to this body.
The Credit Committee will be the second level of importance with regard to loan
authorization and must be constituted as required in the credit union rules. The
Committee must adhere to the highest ethical principles and possess an adequate
technical knowledge of lending procedures and practices. Refer to basis for loans officers
In addition, it will rule on those loans of an exceptional nature, with this type of loan
consisting of those possessing one or several of the following features:
-

Loans exceeding the risk limit assigned to a borrower who needs cash flow to
preserve production.

-

The property that has been used as collateral does not have the adequate
coverage provided for in the policy.

-

A loan, the purpose of which is an unknown activity or for which the promoter does
not possess experience.

-

A bridge loan, or funding given partially on a larger loan, while the approved loan is
being disbursed.

8

-

A loan granted to a contractor to finance the construction of residences on a
speculative basis, i.e., houses being built to be subsequently sold on the market.
(General) Manager and Loans Manager

The (General) Manager and the Credit Manager will rule on loans within the limits of their
authority.
Loan Officers

Loan Officers will rule on loans within the limits of their authority.

5

MEMBERS’ REPUTATION AND ABILITY TO BORROW

It is the credit union’s policy to grant loans only to members with a good reputation. Members
must provide credit references in order to show their creditworthiness, accompanied by
additional information on their background to verify their reputation. The results of these
investigations must be documented on the members’ files.
The amount of information necessary to show each member’s reputation will vary from case to
case, as he/she is considered by the Loan Officer and other officers analyzing the loan.
However, a credit history on all Members is mandatory.
The reputation and financial condition of each loan applicant and his/her sureties, if any, must be
analyzed by the Loan Officer to determine his/her ability to pay. Ability to pay entails satisfying
on a timely and prompt basis any loan obligation incurred.
It is the policy of this credit union that the value of any real estate property as loan
security be backed up by an authorized appraisal. Any appraisal must be made by
recognized experts accepted by the credit union.

6

LOAN USE

The applicant must state the intended use of the loan in the loan application. It is the
responsibility of the Loans Officer to validate the purpose of the loan requested and verify that
the resources granted will be used to achieve this objective.
The Loan Officer will determine whether the desired loan is for productive purposes and whether
it will be likely to benefit the borrower. Tie in to credit committee

9

7

SOURCES OF FUNDS FOR REPAYMENT

All of the loans will be granted in cash or cheque, with the understanding that they will be
reimbursed in cash. Therefore:
The cash generation sources must be identified in the analysis of the payment ability.
-

There must be a defined and predictable source for the repayment of every loan; this
source must be clearly identified in writing before the loan is approved.
The loan must be structured so that the repayment schedule is realistic and relates to the
member’s cash sources and the credit union’s lending policies.

8

LOAN SUPERVISION
General Considerations

It is the Loan Officer’s responsibility to administer the relations with the member or group of
members that has been assigned to him/her by maintaining frequent and effective contacts with
them.
The Loan Officer will be kept apprised of the member’s financial position, the management and
most important aspects of his business.
In this way, the Loan Officer must be the first to know if a deterioration in the quality of the loan
occurs, and he/she will advise without delay his/her immediate superior, the office of the
(General) Manager and the Credit Committee, according to each level of approval, of any
adverse situation with regard to the portfolio under his supervision. Any new or extended loan, of
any size, will be documented in writing, including therein the justifications and recommendations
necessary for its approval.

8.1

Extensions and Other Credit Facilities

A loan facility will be changed by following a procedure similar to that used to process a
new application. The renewal of a loan or other facility is not acceptable, unless it
conforms to the loan policies or procedures or has been previously approved according to
the provisions governing exceptions to such policy. No loan failing to satisfy the abovementioned criteria will be extended.
The extension of a loan for the express purpose of putting an end to a condition of
delinquency in which it is found is specifically prohibited.

8.2

Review of Business Loans

10

Every business loan must be reviewed at least once every half year. The review of the
loan must explain clearly any adverse classification regarding it during the internal
evaluation. It is mandatory to thoroughly review the risky loans with the necessary
frequency.

8.3

Modification of Terms and Conditions

Any change in the amount (in the event that it is increased), installment term (increase),
rate, due date or other conditions established at the time of the approval must be
approved according to the original approval procedure.

8.4 Identification of Total Exposure
The evaluation of the loan must reflect the total exposure with the member and with the
legally related entities, as well as a list of approved and outstanding loans, including
overdraft privileges, securities granted to the credit union for third-party loans and
endorsements received.

8.5 Delinquency Reports
The loans will be considered in arrears as of the first day they are delinquent.

8.6 Notification of Problems
The Office of the General Manager and the Credit Committee will be notified in a timely
basis by the Loan Officer or the Credit Manager when a potential problem has been
identified regarding a loan or when adverse publicity has been spread about a member.

8.7 Reports about Problem Loans
The department in charge of recoveries, if any or the Loan Officer will be responsible for
preparing a monthly report in which he will list all of those loans which present different
degrees of credit weakness. These reports will be sent to the office of the (General)
Manager.

8.8

Accounting and Administrative Reporting

Loan Portfolio accounting will be governed exclusively by the rules and procedures
indicated by the Chart of Accounts for credit unions.
The Grenada Co-operative League Limited or Registrar of Co-operatives may require at
any time information related to the evaluation and rating of the Credit portfolio, either by
type of security, loan purpose, economic sector, regional distribution or other similar item.

8.9

Policy Exceptions

11

The loan policy approved by the Board of Directors is oriented toward providing
guidelines and criteria for the granting of sound loans. Its intention is not to prohibit or
inhibit the consideration of loan applications that a Loan Officer deems worthy of
consideration, even when it does not meet all of the guidelines set forth.
In these cases, the applications may be treated as exceptions and approved by the Credit
Committee within the scope of its authority or by the Board of Directors. Exceptions may
be submitted to these authorities with the power to approve them, provided:
a)
b)

The loan does not violate any applicable law or legal rule.
The reasons and the justification to recommend the exception or exceptions have
been clearly set forth in writing.

8.10

Risk Concentration

The loan portfolio will be administered in such a way that it will present the greatest risk
diversification possible, according to the expected levels of profitability and the members’
credit requirements.

9

FEES AND COMMISSIONS
GENERAL CONSIDERATIONS

The interest rate on the loans granted by the credit union must cover the following costs:
-

The actual financial cost of savings mobilized for the short, medium and long term.

-

The operating cost incurred in the business carried on by the credit union.

-

The cost of the provisions to protect the loan portfolio.

-

The increase of institutional reserves in proportion to the growth in total

assets.

In setting loan rates, the behavior of the financial market in which the credit union operates with
regard to credit conditions and services offered must also be taken into account.
The interest rate applied to loans for a term greater than one year will be variable and will be
adjusted on the basis of existing standards; however, the adjustments will be made on a yearly
basis.
The credit union will be subjected to any interest rate limitations which, because of current legal
rules, are applicable.

12

9.1

Interest Collection Frequency

Interest will be collected according to the type of loan granted and may accrue on a daily,
weekly, bi-weekly, monthly, quarterly or semi-annual basis.

9.2

Delinquent Loan Interest

In all cases, the penalization for delinquency will be expressly indicated in the loan
contracts/agreements. However, all loans are deemed to be delinquent one day after the
due date for payment.

9.3

Commissions and Other Charges on External Credit
a. Commissions

The credit union, if it deems it advisable, may collect a commission or a percentage of the
approved loan by way of loan implementation expenses, which will be deducted from the
amount of the loan at the time of the disbursement. This commission is excluded in
cases of refinancing of a transaction.
b. Other Charges
The charges associated with the implementation, evaluation, execution, or realization of a
loan facility will be borne by the borrower and the fees of the respective professionals will
be paid. In the event that these professionals are employees of the credit union, these
amounts will be paid to the organization. These charges may include, among other things:
-

Special consulting for the preparation and/or evaluation of feasibility projects.
-

Charges for legal steps necessary to encumber collateral.
-

Charges for the appraisals of property used as security.

The disbursement of the loan proceeds may not be effected until the aforementioned
amounts have been totally paid.

10

LOAN DOCUMENTATION
GENERAL CONSIDERATIONS

All of the basic loan documents, such as promissory notes, loan contracts and other documents
that confirm a member’s indebtedness must be submitted according to legal standards, based
on the opinion of the credit union’s legal counsel.

10.1

Guarantees

13

Policy
For all loan transactions, the credit union will require that the loan is adequately secured
by a signature, pledge, mortgage, insurance policies, cash collateral, and others as
permitted by law.

10.2

Schedule of Acceptable Securities
10.2a Character

Character loans of up to 150% of members’ savings may be granted depending on the
member’s credit history with the credit union. However, the exposure of the credit union’s
assets should not be greater than $25,000.00 per member.
10.2b Share Capital and other Savings of the member borrowing
The member's share capital and other savings in the credit union shall be kept as
collateral on a loan as authorized by the member.
10.2c

Co-Makers Shares

A member may co-make or use his free (unencumbered shares/savings) as security for a
borrower's loan.
A Co-maker(s) is jointly and separately liable for the repayment of the borrower's
entire/total loan plus interest and other charges thereon in case of the borrower's
delinquency.
10.2d

Non-Member Endorsers or Guarantors

The credit union will accept tangible security from non-member endorsers or
guarantors. The non-member endorser/guarantor is required to sign a separate
agreement cross-referenced to the member’s loan agreement and is liable to the credit
union to the extent of the guarantee preferred therein.
The endorser or guarantor is required to sign the relevant loan agreement and is liable to
the credit union for the total loan should it become delinquent.
10.2e

Life Insurance Policies

If a Life Insurance policy is the additional security offered, a statement from the Insurance
Company is required, stating:
i)

Policy number

ii) Type of policy
iii) Date of issue

14

iv) Name(s) of beneficiaries
v) Face value of policy
vi)

Other outstanding loans on the policy

vii) Net cash surrender value of the policy
viii) Status of premium payments
ix)

Date, frequency and amount of next premium

x) Any liens endorsed on the policy
xi) Maturity date, if not a life policy
xii) Life insured
xiii) Policy owner
xiv) If equity-linked policy:
a)
Gross value of units
b)
Value of cashable units
c)
Value effect of cashable units on policy’s face. The unit
value fluctuates based on market conditions. Consequently, 100% of the
unit value should never be taken as collateral security.
Should a loan balance be stated on the statement, such loan balance must be repaid by
Standing Order through the credit union within twelve (12) months of the date of the loan.
The credit union will accept:
a)

b)

75% percentage of the cash surrender value of non equity-linked policies as
collateral security:
60% percentage of the unit value of equity-linked policies as collateral
security.

The policy will be assigned exclusively to the credit union until the loan is repaid.
10.2f Certificates of Titles for Land
Certificates of Title for land registered under the Registration of Titles law may be
accepted as security. If a Registered Title is the additional security offered the following
are required:

15

i)

ii)

Acceptable valuation report from a certified valuator certifying the market and
forced sale values of the property (such valuation report will not be older than six
(6) months if being used by the credit union for the first time, otherwise it will not be
older than two (2) years).
Certificate of Title to be presented for scrutiny.
iii)

iv)

If the property is being purchased, an agreement of sale duly executed by the
parties thereto is also required.

v)

A surveyor’s identification report from a commissioned land surveyor certifying
that:
-

The land being offered is that comprised in the relevant certificate of title;
there are no violations of the restrictive covenants endorsed on the relevant
certificate of title and that there are no encumbrances save and except the
restrictive covenants endorsed on the said certificate of title;

vi)

A Mortgage will be executed on the property.

there are no encroachments affecting the property comprised in the said
Certificate of Title.

A certificate from the Inland Revenue department certifying that all taxes on the
subject property have been paid up-to-date.
For all loans for which real estate is accepted for security, a first or second
mortgage will normally be required on the property. Where a second mortgage is
accepted, the total of both mortgages will not exceed the amount, which could be
realized from a forced sale.
If the Proprietorship on the title indicates any type of ownership other than that of a
Sole Proprietor, a Certificate of consent for the property to be used as collateral,
must be forwarded to the credit union by the other concerned parties.
If there are buildings on the property and they constitute a part of the property
offered and the value of these is to be considered as security for a loan, the
buildings must be covered with a comprehensive insurance policy through an
insurance company acceptable to the credit union. The credit union's interest will
be noted on the insurance policy and premiums paid through the Credit union. If
the building offered is under construction, insurance during construction must also
be effected. In these cases, the Attorney-at-law executing the Mortgage must be
instructed to ascertain by way of a surveyor's identification report that there are no
violations of the restrictive covenants on the title. The cost of the insurance,
valuation, surveyor's report, and mortgage must be borne by the member.

16

Applications for loans to make deposits or part payment on land or houses that satisfies the
credit union because of sound title shall be accompanied by statements/agreement for sale
from the Developers, Agents or Vendors detailing:

a)

The Sub-division and location of the property
b)

Lot number

c)

Size of lot

d)

Purchaser's name

e)

Name of vendor(s)

f)

Purchase price

g)

Deposits required and amounts and timing in each case

h)

Balance outstanding

i)

Liens endorsed on the Certificate of Title

j)

Mortgage arrangements, if any

k)
l)
m)

Approximate monthly mortgage payment
Location of Certificate of Title or anticipated date of
availability of Title.
Schedule of restrictive covenants to be endorsed on the
certificate of Title.

10.2g Bills of Sale
i)

Motor Vehicles

Where motor vehicles are offered as security on loans the following are required:
a)

Make model and type of vehicle

b)

Year of manufacture

c)

Chassis number

17

h)

d)

Engine number

e)

C.C. rating

f)

Seating capacity

g)

Left or right hand drive

Colour of vehicle

i)

Title number

j)

Valuation from a valuator acceptable to the credit union. The cost of the
valuation to be borne by the applicant and will be valid for a period of six (6)
months.

k)

The title to be submitted for verification.

l)

Sale Agreement or Letter of Intent to sell from the owner.

For applications in this category, the following will be applicable:
a) If a motor vehicle, excluding motor cycle, is being offered, the period of
repayment will not extend beyond the tenth year of the manufacture date of
the vehicle.
b) If a motor cycle is being offered the period of repayment will not extend beyond
the second year of the manufacture of the motor cycle.
c)

A Bill of Sale must be executed on the vehicle.

d) The vehicle must be comprehensively insured and the policy endorsed in favor
of the credit union. Insurance premiums must be paid through the credit union.
In all cases where motor vehicles are being offered as additional security, the
following will be applicable.
a)

For vehicles under five (5) years old, no more than 90% of the value of the
vehicle will be accepted as security.

b)

For vehicles between five (5) and seven (7) years old, no more than 75% of
the value of the vehicle will be accepted as security.

c)

Other vehicles may be accepted on such terms as deemed appropriate by
the Credit Union.

d)

In the case of Motor Cycles no more than 50% of the value of the motor
cycle will be accepted as security.

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ii)

Household Equipment, Appliances, Furniture

If furniture or other types of household -equipment or appliances are being offered
as a security, a statement from the dealer or manufacturer giving a description and
the price of the article being bought or manufactured is required. For certain types
of household equipment and appliances, additional information such as serial
number, model number, type and size are required.
Articles of furniture will generally be accepted as additional security when they are
being purchased in the first instance. However, such articles may be taken as
additional security where satisfactory evidence that these articles have been
purchased within the last six (6) months, is presented to the credit union.
Appliances that are clearly identifiable through serial numbers etc. may be taken
as additional security if satisfactory evidence that these appliances have been
purchased within the last twelve (12) months, is presented to the credit union. In
these cases the articles must be appraised by an appraiser acceptable to the credit
union.
The repayment periods for loans which are secured by furniture or appliances will
not extend beyond the second year of the purchase of such furniture or appliance.
Insurance coverage through an insurance company acceptable to the credit union,
may be requested for all chattels accepted as security, but such coverage is
mandatory for amounts in excess of Five Thousand Dollars ($5000.00). The credit
union's interest will be noted on the policy.
.
iii)

Other Equipment

The credit union may accept other equipment as security for a loan.
Equipment offered as security must be properly assessed.
10.2h Company Stocks and Shares
The credit union may accept company stocks and shares as collateral for loans providing
such stocks or shares certificates are transferable or assignable.
The credit union will however accept only 50% percent of the current value of such stocks
and shares.
The credit union will evaluate from time to time the worth/value of these stocks and
shares.
If the value of these stocks and shares falls at/or close to the value accepted as security
on the loan, the borrower is required to provide additional security to secure the loan.

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No more than 75% percent of a loan may be secured by stocks or shares.
10.2i Deposit Accounts in Other Organizations
The credit union may accept deposits held by the borrower/ guarantor/endorser in other
institutions provided that these other institutions are willing to allow the hypothecation of
such deposits upon the instruction of the member/guarantor/endorser.
10.2j

Company Guarantee

A borrowing member may provide a guarantee from a company where he works, or which
he or his spouse, parent or child owns. The company's ability to pay such sum in the
event of the borrowing member's default has to be ascertained and confirmed by the
credit union. A deed of guarantee has to be completed by the company.
10.2 k Government Salary Bonds
The credit union will accept as security on loans, government salary bonds. The credit
union will discount these bonds at 90% percent.

11

DISTRIBUTION OF LOAN POLICY

In keeping with the general objective of striving to keep our membership informed, a copy of this
policy as presently constituted and as it may from time to time be amended will be made
available to all members by at least the conspicuous posting of a copy on the notice Board at
each office of the Credit union.

12

REVIEW AND REVISION

In keeping with our aims and objectives, this general lending policy will be reviewed, at least
annually, by the Board of Directors following the Annual General Meeting. This policy may be
amended at that time or at any duly called meeting of the Board of Directors in the properly
constituted manner.

13

EXECUTION OF SECURITIES

20

INTRODUCTION
In any institution whose main business is to extend credit, the question of "Securities" must be of
paramount importance.
The Loans Officer and Credit Committee must ensure that collateral is of sufficient value to
cover the amount loaned in case of default by the borrower. It must also be ascertained that
there is a viable secondary market for the items should they be repossessed and sold.
The credit union will register its interest on all collateral accepted on members' loans.

13.1

What is "Security"

As applied to loans, the term "Security" means an item deposited as a guarantee of an
undertaking for loan, to be forfeited in case of default.

13.2

Determination of the Adequacy of Securities

a)

The item of security offered must be readily convertible into cash.

b)

The security offered must be accessible and open to inspection at all times.

c)

The item of security must be of sufficient realized value at a forced sale, to
fetch the amount of cash required to repay the amount for which it was accepted as security.

d)

The credit union must have the legal right, as evidenced by a properly executed and
recorded lien or agreement, to dispose of the security in order to satisfy the debt.

e)

The credit union's right as at (d) above must take precedence over all other claims.
13.2a Character
The best and most important safeguard for any loan is that intangible security called
"character", without which all other safeguards can be virtually meaningless. It is
important to note that in determining the character of a borrower, his financial worth is not
the most important consideration. His paying habits and his previous credit record both
with the Credit union and elsewhere, are sometimes of far greater importance.
In evaluating the character of an applicant, all the background information that can be
obtained about him shall be secured and carefully weighed. The following additional
information shall be useful:
a) What is his/her total indebtedness?
b) Does he/she make monthly payments? If so, how much? Are they current or
delinquent?
c) Does he save consistently?

21

d) Are his/her family relationships good?
e) What does his/her employer or his/her close associates think of him/her?
f) How long has he/she been in present job?
g) What has been his/her previous employment record?

13.2b Borrower's Shares and Deposits with the Credit union
The most convenient and readily acceptable form of security in borrowing from a credit
union, is the shares and deposits of the borrower himself. It is therefore to the member's
advantage to build up his share capital and deposits to the point where he can readily
borrow without being required to put any other security. However, the unforeseen credit
demands of the modern world do not always make this possible.
The Co-operative Societies Act gives the credit union the legal right to enforce a lien on
the shares and deposits of any member for his indebtedness to the credit union as a
borrower, or his liability as a co-maker, endorser or guarantor of a loan.
13.2c Co-Makers
The term "co-maker" is generally applied to a credit union member who pledges his
shares and deposits, or a portion thereof, as security for a loan to another member. In a
credit union a member can sign as a co-maker only to the extent of unencumbered
shares and deposits held in the credit union.
The credit union's obligation to protect the co-maker shall also be borne in mind. If the
borrower fails to meet his obligations to repay the loan, the co-maker(s) become liable for
the full amount outstanding. It is therefore the responsibility of the Credit union to advise
the co-maker or co-makers whenever a loan is in default, and to see that there is no
variation in the terms of the loan or the security pledged, without the knowledge and
consent of the co-maker(s). If this is not done, the co-maker(s) may be unwittingly
relieved of his liability.
Co-Makers are required to complete the relevant sections of the loan application and also
to sign the loan agreement.
13.2d Non-Member Endorsers and Guarantors
The essential point to bear in mind is that the mere addition of another signature to the
loan agreement adds nothing to the security unless the Credit union has some effective
means of recovering the debt from such a person if the borrower defaults. It will also be
the responsibility of the Credit Committee to get as much information as possible about a
non-member who offers himself as endorser, or guarantor, before his being accepted as
such. The extent of his responsibility shall also be fully explained. A Special Guarantee
Agreement has to be signed by the Guarantor.

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13.2e Bills of Sale
It shall be remembered that "Bills of Sale" are legal instruments and in order to ensure
their validity, due care must be taken to see that they are properly completed and
recorded.
The following procedure shall be followed in dealing with Bills of Sale:
a)

The Credit union must establish ownership of the article by the person pledging,
and that there are no prior liens.

b)

Decide on the value to be accepted. An independent valuation is necessary if the
item being pledged is not new.

i)

ii)
iii)

Additional points to be borne in mind
The security offered shall be inspected by a representative of the credit union at
regular intervals to ensure that it remains in the possession of the borrower at the
address stated in the Bill of Sale and in good condition.
In some cases it may be advisable if the borrower is married, to have his or her
spouse sign the Bill of Sale as well as the loan agreement.
The credit union will be named as the beneficiary in any insurance policy taken out
to protect these goods.
It is generally known that at a forced sale, household goods realize very little
as compared to their original value and because of the difficulty, and
sometimes impossibility of locating and recovering these goods, our credit
unions will not accept them as adequate security for any loan.

iv)

The insurance on the chattels must be paid through the credit union and endorsed
in the credit union's favour.

v)

If the borrower intends to remove the chattels to another address he must inform
the credit union thereof and of the address to which the chattels are being
removed. This will have implications for the insurance coverage thereon. In
addition any removal of the chattels to another address without notifying the credit
union constitutes a breach of the covenants in the Bill of Sale.
13.2f Life Insurance Policies

The cash surrender value of a Life Insurance Policy is generally considered as acceptable
security for a credit union loan. Care shall however be taken to see that the term “cash
surrender value" is not confused with "face value". The cash surrender value, as the
name implies, is the amount that could be recovered if the policy is surrendered at any
given time, while the face or maturity value is the amount payable at the expiration of the
life of the policy, or on the death of the insured.

23

Procedure to be followed:
a)

b)

c)

The borrower must obtain a letter from the insurance company in which is stated
the cash surrender value of the policy at that time; whether it is assignable;
whether there are any prior assignments outstanding and any loans, and if so, for
how much, the monthly premium payable and if the premiums have been paid up
to date. It shall be noted that some insurance policies have no surrender value,
such as Term Policies, and some cannot be assigned, such as Pension Policies.
An assignment form must be completed by the borrower in favour of the credit
union or policy owner, if the borrower is not the owner of the policy. If any
beneficiaries have been named in the policy, they as well as the borrower shall be
required to sign the assignment form, in the presence of a credit union official or
employee.
This assignment form must be forwarded by the credit union to the insurance
company who will then advise the credit union that the assignment has been
noted.

d)

The credit union must take possession of the policy, issue a receipt therefore and
retain it in its possession until it is satisfied that it can be released, at which time, a
duly executed discharge of assignment shall be forwarded to the insurance
company advising them that the credit union has no further interest in the Policy
and return the policy to the borrower who shall acknowledge receipt thereof by
signing therefore.

e)

The insurance policy must be kept in safekeeping in a fire-resistant environment.

f)

If the borrower seeks to negotiate further credit from the credit union, updated cash
surrender value statements shall be requested from the insurer at least annually or
with every new loan request if such requests are less frequent than annually.
13.2g

Mortgage on a Certificate of Title for Land

Listed below are the steps to be taken in the registration of a Mortgage on a Land Title:
i)

A registered title shall be deposited with the Credit union and if this is not possible,
(as is the case when the loan is being sought to release the title from some other
source) a photocopy of the certificate of title shall be secured, and a written
undertaking from this source that the unencumbered title (save and except the
restrictive covenants endorsed thereon) will be turned over to the Credit union as
soon as the mortgage outstanding on it has been settled.

ii)

The credit union must receive an independent inspection and valuation report on
the property, undertaken by an experienced valuator. The fees in this connection
are to be paid by the borrower.

iii)

If the property is being purchased a sales agreement is required.

24

If the loan is being sought to release the title from another source or is for
purchase from a vendor who owes a mortgage on the title the following applies:
a)

Once the loan has been approved the credit union will refer the transaction
to its attorney-at-law, giving an undertaking to pay the extent of the loan
involved once the credit union's interest has been registered on the title and
the title delivered to the credit union's office.

b)

The attorney-at-law handling the transaction for the credit union will in turn
contact the vendor's attorney (in the case of a purchase) or the other
organization holding the mortgage (if a release is being sought) also giving
an undertaking on the credit union's behalf that the funds will be paid when
the credit union's mortgage has been registered and the title delivered to the
credit union's office.
At this point, the credit union's attorney will request the title from the
vendor's attorney or the organization involved.

iv)

v)

Before the mortgage can be registered the original certificate of title held by the
Titles Office has to be investigated to ensure that the duplicate Certificate of Title is
genuine. Any mortgages, caveats or other interests lodged against the title at the
Titles Office will also be investigated.
If a recent surveyor’s identification report has not been provided by the borrower
one will be commissioned by the credit union’s attorney-at-law to ascertain that
the requirements at section 6.11.2f hereof have been complied with.
These breaches will have to be addressed before the credit union's mortgage can
be lodged.

vi)

If the names of more than one person appear on the title as proprietors, then all
such persons must sign the mortgage agreement.
The credit union must engage the services of a lawyer to draft the mortgage
agreement and execute the transaction.

vii)

viii)

The credit union's attorney-at-law will handle the procedure from the time the credit
union gives its undertaking to pay, to the point where its interest has been noted on
the title and the title delivered to its offices.
Once the title is delivered to the credit union, it must pay the proceeds of the loan
to its attorney-at-law who will in turn pay the vendor's lawyer. (The title will remain
in the credit union's possession until the loan has been repaid).

N.B.: All costs relating to the transaction must be borne by the member.
Discharge of Mortgage
Whenever the loan has been repaid and the borrower wishes to recover his title the
services of the Credit union's lawyer may be utilized.

25

i)

The credit union sends the title to the attorney-at-law along with a letter requesting
that its interest as endorsed on the certificate of title be discharged or prepares a
discharge of mortgage document, have same executed under the credit union’s
corporate seal and submitted to the office of the Registrar of Titles for registration.

ii)

If the services of an attorney-at-law are utilized, the attorney-at-law will prepare the
discharge of mortgage document, send same to the credit union for execution,
under the corporate seal, and on its return lodge same at the office of the registrar
of titles for registration.
All costs in relation to the transaction will again be borne by the member.

i)

Additional precautions to be taken
The amount to be loaned plus the sum of all superior mortgages to which the
property is already encumbered shall not exceed 75% of the appraised value of
the property.

ii)

All rates and taxes must be paid up to date and in the case of property taxes a
certificate must be obtained from the Inland Revenue Department certifying that all
property taxes have been paid up to date.

iii)

The buildings (if any) must be insured against such hazards as fire, flood,
earthquake, etc.

vi)

The credit union must insist that the receipts for all renewal premiums on the
insurance policy, as well as all tax receipts are presented for inspection, as long as
the loan remains in force.

vii)

The credit union’s interest as mortgagee must be noted on the Peril Insurance
Policy.

13.2h

Company Stocks or Shares

Shares or stocks in reputable companies are an acceptable form of Security,
provided they are assignable or transferable. Some company shares are not
transferable while some are transferable only to the Company itself or to another
shareholder of the said Company.
The procedure to be followed, therefore, in dealing with this form of security, is as
follows:
a)

The Share Certificate shall be presented to the credit union.

b)

Decide on how much value to place on the shares.

26

c)

Check with the Company or Registrar of the Trust Company that administers the
stocks, if applicable, to find out if the shares are transferable; if they are fully paid
up, their current market value, and their par value.

d)

If they are transferable, have the borrower complete a transfer agreement that will
enable the credit union to sell the shares if the member defaults on his loan. Issue
to the borrower a receipt for the share certificate.

e)

Notify the company or the registrar of the relevant trust company of the credit
union's lien on the shares and obtain written acknowledgement from them of their
acceptance.

f)

When the credit union no longer has an interest in the share certificate, it shall
advise the company or the registrar of the relevant trust company, if applicable,
that the credit union no longer has any interest in the Shares, and authorize the
cancellation of the lien.

g)

Cancel the transfer agreement, return the share certificate to the borrower who
shall acknowledge the receipt thereof by signing thereafter.
13.2i Deposits in Other Institutions

The credit union must obtain in writing from the other institution information detailing:
i) The amount of the deposit;
ii) The duration of the deposit if any;
iii) The names of all parties holding the deposit;
iv) Their willingness to hypothecate such deposit.
The borrower/guarantor must inform the other institution and give authority in writing and
copied to the credit union, for this institution to hypothecate this deposit against his loan
at the credit union.
If a deposit certificate etc. is held by the borrower/co-maker/guarantor, this must be
deposited with the credit union.
All parties holding the deposit at the other institution must signify to The Credit union in
writing, their willingness to have the deposit used/held as security by the credit union.
N.B. If the deposit held by the borrower/guarantor has a specific time period then the
borrower/guarantor must give both the credit union and the other institution authority to
roll over the deposit as long as the hypothecation is in force.

Discharge of Hypothecation

27

Once The Credit union no longer has an interest in the deposit, this must be
communicated in writing to the other institution and the certificate etc. returned to the
member.
13.2j

Government Salary Bonds

The procedure to be followed in dealing with this form of security is:
a)
b)

The salary bond must be presented to the credit union and its ownership proved.
The face value of the bond to be discounted.

c)

Have the borrower complete a transfer agreement that will enable the credit union
to sell the bond if the member defaults on his loan.

d)

Issue a receipt to the borrower for the salary bond.

e)

Notify the relevant bank or authority of the credit union's lien on the bond and
obtain written acknowledgement from them of their registration of the lien.

f)

When the credit union no longer has an interest in the salary bond, it shall advise
the relevant bank or authority that its lien shall be cancelled.

g)

Return the salary bond to the borrower and cancel the transfer agreement.
13.2k

Company Guarantee

When accepting this type of security the following are required:
i)

The company must write the credit union stating the amount of guarantee and the
period of time of this guarantee.
The credit union will request from the company audited financial statements for the
past three (3) financial years as well as up-to-date unaudited financial statements
to determine the organization's financial stability and its ability to pay the guarantee
should the need arise.
ii)

The credit union will confirm in writing to the company's Managing Director or
General Manager the:


Total loan;



The repayment amount and period;



The amount of the guarantee;



The period of guarantee.

28

iii)

The company will be required to complete the deed of guarantee in duplicate
under its corporate seal, the copy being retained by the credit union and the
duplicate returned to the company.

iv)

The credit union will check from time to time to determine the financial status of the
company in order to ascertain the company's ability to continue to meet the
guarantee should the need arise.

v)

When the credit union no longer requires the guarantee on the loan, it informs the
company and cancels the deed of guarantee.
13.2L Other "Securities"
a.
Super-annulations/Pension Funds
The law relating to these funds prohibits their use as security on a loan.
b.
Payroll Deduction Arrangements
It shall be noted that an authority for payroll deduction is only a means of
collection, and cannot be regarded as security for a loan. It is a fact that among
Credit unions with payroll deduction, the delinquency rate is far less than is the
case with others without this facility. Nevertheless, it shall be remembered that
The Credit union's ability to collect is conditional upon the member remaining in the
employ of the particular organization and his earnings remaining constant. It has
also been proven that it is more difficult to collect from someone who is
accustomed to paying by payroll deduction, after this method of collection ceases,
than is the case with others that never enjoyed this facility.
It is therefore essential that in addition to an authority for payroll deduction, if the
member applies for a loan in excess of his unencumbered share capital, and the
character loan limit (if any) set by the Board of Directors, some form of security
must be produced.
c.
CUNA Mutual Insurance
It is well known that loan protection and life savings insurance, as a form of
security is applicable only in case of death or permanent and total disability.
However, it is an important consideration to the member, the co-maker or
guarantor (if any) and the credit union shall have all alterations and corrections
attested by the borrower, co-maker, guarantor and the witnesses. Indeed, had it
not been for this safeguard, members who have to rely on co-makers as security,
would find it much more difficult to obtain a loan. The co-maker would be more
reluctant to add his signature to a loan agreement knowing that if the member
died, he would become liable for the debt. It is important to the member because
he knows that if he dies he will not be leaving behind a burden on his co- maker(s)
or his estate. It is also important to the credit union because in the event of death
except in exceptional circumstances, it will not have the unpleasant duty of
recovering the debt from his co-makers, or going through the sometimes tedious
process of making a claim against the estate of the deceased.

29

14

LOANS TO OFFICALS

Loans to officials of the credit union, within the limits of their share capital, are approved in the
normal manner.
However, the rules of the credit union specify that loans in excess of shares must be approved
by a 2/3 majority decision of a specially constituted joint meeting comprised of the Board of
Directors, Credit and Supervisory Committees. At least half of the total membership of the three
committees must be present and must include a quorum of the Credit Committee.
An official is not allowed to act on his own loan application and he should not take part in the
meeting when his application is being discussed.

15

LOANS TO CREDIT UNION EMPLOYEES

Employees who are members of the credit union are also eligible for loans. The procedures for
the approval of such loans are usually the same as for the officials of the credit union. The loan
account of employees and volunteers should be subjected to periodic review by the Supervisory
Committee or Auditor.

16

CREDIT ANALYSIS

Being eligible for a loan does not necessarily mean that a member is credit worthy.
A credit profile or evaluation of the borrower should be done to determine whether the applicant
has the willingness, ability, and capacity to repay the loan, and to determine whether the
borrower can offer sufficient security to keep the credit union’s risk at a minimum. In other words,
to determine the 5 C’s of credit – Character, Capacity, Capital, Collateral and Conditions relating
to the borrower.
Character
The character of the borrower is very important as it determines his willingness to repay the
loan. Good character should be the first qualification of a member applying for a loan. The Credit
Committee needs to know as much as possible about the applicant, in order to make a good
judgement, including:
1
The Credit Value of the Borrower
Does the member feel a sense of responsibility to repay his financial obligation? Is this a
firm conviction, is he merely “psyched up” for the occasion?
2
The Maturity and Stability of the Borrower
Is the member mature enough to realize that a financial obligation must be repaid even
though he does not have the ability to do so at the time? Are the member’s values stable
or do they appear to be in a state of flux? Frequent changes in employment or residence
may indicate instability and should be carefully considered.

30

3 Honesty
Is the member honest in filling out his application form? Is he honest with himself in the
need and the amount of the loan?
4 Credit History
What is the applicant’s history of paying on past obligations?
Capacity
A borrower of good character will repay his loan if he can. However, his character alone will not
repay it if he does not have sufficient resources.
The Committee must decide whether the member has the size, source and regularity of income
to repay this loan and other existing obligations.
In order to determine the capacity of the borrower the Committee must find out:
What is the borrower’s net monthly income? How much money does the applicant take home
each pay day? If the spouse is a co-applicant, how much is their combined income? Is the net
take home pay a regular annual wage, or is the applicant employed in a seasonal occupation?
Does the applicant have any other income that should be included?
What are the borrower’s monthly living expenses? How much does it cost for a family living in
his area? What is the number of dependents? Does the member have a budget? How much
does the member spend for shelter including mortgage or rent; utilities; upkeep; food;
transportation; contributions; insurance; medical expenses and clothing?
What are the monthly installment debt payments? What is the total amount that the member is
paying each month on revolving credit accounts? What is the total debt that the applicant is
carrying? What is the debt ratio? Income, expenses and installment debt are the three basic
factors in determining capacity. The member must decide, based on the figures computed for his
monthly living expenses, whether he can afford the increased debt.
Debt Ratio
The debt ratio tells you what percentage of each dollar is committed to short-term installment
debt.
How to Calculate Debt Ratio
Debt Ratio = Total monthly short-term debt payments
Net monthly income

40%

If the member’s net monthly income is $600.00 and has short-term monthly debt payments of
$100.00, then:
$100 = 16.6%
$600
For the purpose of computing the debt ratio, living expenses, including rent or mortgage
payments are ignored.

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Debt Ratio Guidelines (not including rent or mortgage payments)
20% Safe
30% Caution should be exercised
40% Problems are present – correction needed
50% Candidate for bankruptcy
60% Bankruptcy is only a matter of time.
Collateral
Collateral is an item of tangible value (automobile, property, etc.) that, as a security may be sold
or liquidated to repay the balance of the loan, in the event of a default by the borrower.
It is important for the committee to understand that loans should not be granted on the strength
of collateral alone. The character of the borrower and his ability to repay the loan are the most
important factors.
Collateral requirements should serve only to protect the credit union from suffering a loss in the
event of a change in the borrower’s circumstances or attitude. Security on loans is discussed in
another section of this manual.
Capital
Capital is the assets of the member that will be a source of repayment during bad times.
Conditions
Could the geographic area, the nature of his occupation, or industrial conditions impair his ability
to repay his debt?

17
17.1

DELINQUENCY CONTROL

Identification and reporting of Delinquent Loan Accounts

A comprehensive delinquency list shall be produced monthly or not less frequently than
quarterly, showing the member's name, over what period the member has been
delinquent, total loan, total shares, accepted security, date of last transaction, arrears and
action taken. The delinquency report shall also be aged as follows:
AGE OF DELINQUENT
LOAN

NUMBER OF
DELINQUENT
LOANS

$
AMOUNT

2 months – under 3
months
3 months – under 6
months
6 months – under 12
months
Over 12 months

32



Delinquent Loan reports will be submitted to the Board of Directors on a monthly or
quarterly basis. In addition to the information stated above, the reports shall state the
percentage of delinquent loans as against total loans. A copy of the delinquent loan
report will also be submitted to the Credit Committee, the Supervisory Committee, and
to the Department of Co operative.



A list of the balances on all staff and officials' accounts will be presented to the Board
of Directors monthly.

17.2

Delinquency Control Policy
Definitions

Delinquency is delay in compliance with the payment schedule, whether of
principal or interest. In the case of installment loans, delinquency is counted
from the day following the due date of the first delinquent installment and the
total amount of the transaction is considered to have fallen due.
Extension is the extension of the term for the payment of a fixed-term loan or
an installment of an amortizable loan granted by the credit union.
Renewal consists of the replacement of a loan granted previously by another
with the same or a different term or for the same or lower amount of principal
loaned originally.
Restructuring is the agreement through which a new payment plan is agreed to
for the balance of the unpaid loan.
Generally speaking, a loan will be understood to be renewed or restructured
when, through any loan transaction, the credit union maintains or converts the
loan to current.
The renewal or restructuring must be implemented by means of a new loan
contract or an addendum to the original contract.

17.3

Policy

A loan becomes delinquent when an installment (principal and interest) or the entire loan
has not been fully paid. In this case, the following conditions will be enforced:


The credit union will make no other disbursement to a borrower who is delinquent.



The credit union will add to the loan interest rate a surcharge equal to the maximum
allowed by law, applicable to the unpaid principal.



It is the responsibility of the Loan Officer to carry out negotiations with borrowers in
order to avoid, reduce and/or eliminate the existing delinquency. In addition, he will

33

carry out an exhaustive follow-up under the terms of the loan policy and the credit
union’s rules.


Dividends earned on delinquent members shareholdings will be credited to
delinquent loans (principal and interest).

18
18.1.

COLLECTIONS
Collection Policies

Management has the responsibility of administering the credit union’s loan portfolio and
ensuring that collections of delinquent loans are timely.
18.1a Causes for Demanding Payment of an Obligation
The obligation to pay off a loan rises from the time that the transaction is legalized
by the signing of the promissory note and the disbursement occurs. The causes
that require total payment of the debt are summarized below:
Delinquent Payment
The delay in a payment of the agreed-upon installment, gives rise to the loan being
in arrears and constitutes grounds for demanding the total amount owed. This
takes into consideration that the risk maintained by the credit union is for the total
collectible amount, to which end, the agreed-upon acceleration clause shall be
enforced.
Bankruptcy or Liquidation Proceedings
When the credit union has been informed that a debtor member is in the process
of liquidation, the loan must be considered due in its entirety and the immediate
judicial proceeding must be undertaken in order to protect the credit union’s
interests.

Reduction of the Guarantee
When the debtor or one of his sureties has accepted a pledge or a mortgage to
secure several obligations and they have shown deterioration such to the extent
that they no longer adequately secure the risk of the outstanding obligations, or
when the death of one or several of the sureties has occurred, the credit union may
call for the payment of the amounts owed, according to the provisions of the
promissory note or the guarantee instrument or document.
Misuse of Loan Resources
When a member submits a credit application, he must submit a plan, in which he
binds himself to use the resources requested in a specific activity. If in the process,
the resources granted are sidetracked from their original use, the credit union may

34

demand payment of the outstanding amounts, whether or not the obligations are
delinquent.

18.2

Notices or Reminders of Due Dates

The credit union through its officer in charge of the loan will apply collection mechanisms
adequate to the status of the delinquent obligations.
Telephone Call
Starting the first day after an installment falls due, the borrower will be contacted on the
phone notifying him of the delay, using Form no. 1 (below), to leave written evidence of
the collection step taken.
Form #1
Member
No.

Name

Transaction
No.

Account No.

Amount

Due
Date

Remarks

First Collection Note (Form No. 2)
Within fifteen (15) days of the total or partial due date of the obligation, as the case may
be, the first collection note (Form no.2) will be sent, which will not carry a peremptory
payment deadline, but be, instead, a kindly reminder and invitation to make timely
payment.
Form # 2
Dear Member:
If you have already made payment to the Credit union, please excuse this message; it has given us an
opportunity to say hello.
We understand that your activities have kept you very busy and, without this being your intention, you have
overlooked your commitment with us. If you have had a problem, your credit union is here to help you.
Please communicate with ................(name of the Loan Officer) .............by calling the telephone
numbers: .....................
We remind you that the installment amount owed as of ......, 19......, is $ ......................... and .......... days in
arrears.
Sincerely,
...............................................
(Signature)

35

Second Collection Note (Form No. 3)
This communication (Form no. 3) must be sent 30 days after the obligation has fallen
due, i.e., 15 days after the first payment reminder was sent.
Within the note, a maximum deadline for the payment of the delinquent installments of 10
calendar days is granted.

Form # 3
Dear Member:
Since you have failed to heed our collection notice, we are requesting that you pay your installment which fell
due on ............ (date) ........... in the amount of $ .................. according to the following breakdowns:
- Principal: $ ..............................
- Interest: $ ..............................
- Delinquent Interest/penalty: $ .............................
This amount is to be paid by ……………………..
We remind you that your credit union is here to help you.
Sincerely,
.....................................
(Signature)

Third Collection Notice (Form No. 4)
This collection note (Form no. 4) must be sent on the day following the date on which the
period granted in the second collection notice has expired.
The nature of the collection letter is of a formal notification to the main debtor and surety
or sureties of the immediate initiation of legal action against him and simultaneously
against his joint debtors or sureties by the credit union. It is a communication in which an
extreme position is taken - an attitude of turning to the courts for collection; but at the
same time the possibility of reaching payment solutions through institutional channels and
within current settlement policies such as the restructuring of the term is being extended.
A copy of this collection notice must be filed invariably in the debtor’s loan file. The credit
union must have written evidence by means of a certificate or acknowledgment of receipt
of the delivery of the collection notice. The maximum deadline granted to debtors in this
last collection notice may not be greater than 12 calendar days, counted from the date on
which the notice was received by the debtor.
36

Form # 4
Dear Member:
A prudential period has expired for the payment of your obligations and arrears. We are sorry to notify you that
the credit union will initiate the relevant judicial action to recover these amounts.
However, in an effort to protect its interest, as well as safeguard our good relationship, the credit union is
granting you an un extendable period of 12 calendar days to visit us and bring your commitments up to date.
Sincerely,
........................................
(Signature)

18.3
a.

Legal Action

Initiation of Legal Actions

Taking legal action on a loan must be initiated at the latest 90 days after it became
delinquent, unless there is an authorization for the postponement for a maximum period
of 90 additional days, issued by the level of authority above that which approved the loan.
This authorization must be made known to the Credit Committee and/or Board of
Directors and must appear in the debtor’s file, containing as a minimum, the following
information:




Amount of the loan,
 Age of the delinquency,
 Reason and length of time foreclosure has been postponed,
Level of authorization: names, signatures and date of the authorization.
b.

Notification of Legal Action

The initiation of legal action must be communicated by the credit union by means of a
written notice to the borrower and surety.

18.4

Transfer to Realized Property

The transfer of all or part of the balance of a loan to “Realized Property” will take place
when the credit union begins the process of foreclosing on property offered as security.
Real property transferred to “Realized Property” will be recorded at the investment
amount recorded in the loan in question or the market value of the property given as a
security on the date on which the credit union legally obtains ownership thereof,
whichever is lower. All of the property thus possessed will be reviewed at least every 90
days to determine whether its price shall be adjusted.

37

18.5

Disposal of Realized Property

The credit union will dispose of (sell) the “Realized Property” within 360 days following the
date on which it took legal possession thereof.

18.6

Evaluation of the Just Value of “Realized Property”

The “just value” is the cash price expected to be obtained by the sale of property at that
time, under all of the conditions required for a proper sale. This means that both the
purchaser and the seller act prudently, with full knowledge and without any pressure to
purchase or sell; i.e., it does not involve a forced sale or liquidation. At the time of the
sale, the actual market value will be taken to report the deal price, because of which an
updated appraisal of this property must be obtained.

18.7

Funds Required for the Maintenance and Preservation of Realized Property

The funds required to maintain and preserve the realized goods will be approved by the
Board of Directors, which will supervise through management the proper disbursement of
these funds.

18.8

Arbitration Collection

When the period stipulated in the third collection notice has expired, and the realized
property has been taken according to the credit union’s policy, and the debtor still owes
the credit union, it is considered that attempts will be initiated to collect the debt without
going to court. These collection efforts are preparatory to court action for collection.
When an obligation reaches this stage, it must be understood for all purposes that the
collection action or process is handled by in-house or outside legal counsel.
Arbitration is done by making contact with the Co-operative Department and complying
with their requirements for the conduct of arbitration proceedings. An arbitration award is
made at each arbitration proceeding for each debt.

18.9

Collection by Court Action

Once the arbitration award has been made and a deadline not exceeding 20 days has
expired, which was granted in the arbitration stage, a lawsuit is brought through outside
attorneys.
The outside attorney is a qualified collection resource, whose main mission within the
collection scheme is to put into operation all of the legal mechanisms deriving from the
loan guarantees given by the debtor for the purpose of obtaining forced payment of the
money owed to the institution. By legal means, the assets of the delinquent borrower
and/or that of his surety or sureties are pursued - going as far as holding an auction - so
that with the proceeds from the sale of the property making up these assets, all of the
debts owed to the credit union will be satisfied.
Control
38

The activities of collection by court action are abnormal methods of collecting a debt;
these activities involve the establishment of procedural controls and supervision by the
attorneys and thorough accomplishment of the conferred task and mandate.
These controls are exercised through:
-

Visits or direct verifications in the courts where the respective proceedings
are taking place.

-

Periodic reports that will be demanded by Management from the external or
in-house attorneys on the individual status of each case.
-

Periodic scheduled meetings to evaluate the professional activities.
Updates of the calculation of the ordinary and delinquent loan interest.

19 SPECIAL POLICIES FOR DELINQUENT LOAN RECOVERY
These are policies aimed at cleaning up the loan portfolio through negotiation and payment of a
debt.

19.1

Extension



An extension is understood to be a peremptory period granted to the debtor to pay one or
more overdue installments. This extension may not exceed 12 days, when the payment is
monthly or every 30 days or when it is quarterly or with longer intervals.



To grant the extension, the debtor must process the application in writing at the latest the
day before the installment due date, setting forth the reasons for this requests and the
time required for its payment; therefore, it is understood that extensions to delinquent
installments cannot be considered.




The Credit or the (General) Manager are empowered to approve these extensions and
shall make the necessary analysis according to the reasons set forth by the debtor.
The Credit Manager must report the results of the extension to the computer department
using the stationery form, “New Portfolio Items"(Form A), stating the term granted, to
prevent the system from classifying the obligations as being in arrears.

Form A
Member
No.

Name

Transaction
No.

Installment
No.

Due Date

Days of
Extensions

Actual Due Date

Authorized By:
Officer

(General) Manager
39

Furthermore, to grant the extension, the debtor must be up-to-date in their other
obligations incurred with the credit union.



The extension will be granted one time, i.e., the extended period cannot be repeated.
Likewise, the approval of continuous extensions to the same person or debtor shall be
avoided, since this type of negotiation is only for fortuitous and temporary cases of
illiquidity.





When a debtor frequently requests this type of transaction, a thorough analysis must be
carried out to determine the causes and seek other formulas such as restructuring.

19.2

Loan Restructuring

Definition
Restructuring is understood to mean when the credit union decides to grant a debtor new
payment conditions other than those originally agreed to in the promissory notes or loan
contracts of one or more obligations, because, for various reasons, he cannot meet the
original payment obligations.
The changes in the payment conditions require it to be dealt with as a new loan
transaction and require the normal processing of an application and, therefore, the
signing of a new loan contract seeking improvements in the loan collection by
strengthening the previously accepted collateral.
Requirements and Analysis to Consider Restructuring
The following is required before restructuring:
-

Submission by the current debtors and/or new sureties of the loan application and
all of the documentation set forth for the normal processing of the loan.

-

An analysis of the loan when the borrower’s financial position is established, and
the ability of both the debtor and his sureties to adequately pay the amount of the
new loan.
-

In the case of restructuring with collateral, the coverage and suitability of the
collateral will be taken into account, and it will become necessary to order a new
appraisal when significant changes occur in the conditions of the real or personal
property or when the date of the prior appraisal took place more than a year
before.

-

Information on the amount to be restructured, next due date, final due date,
existing collateral, additional collateral offered, reasons for the restructuring,
conditions requested, payment schedule and other information involved in making
the best decision about the approval.

-

Opinion of the Loan Officer and the (General) Manager on the viability of the
restructuring.

40

-

When the obligation to restructure is involved in a collection by legal means, the
attorney’s report about the status of the proceeding, liquidation of the loan
identifying the amount of the fees incurred, collection expenses, etc., must be
annexed.
Restructuring Conditions
The debtor must agree to the following guidelines:

-

When the restructuring only consists of the extension of the originally agreed-upon
term, the debtor must pay all the interest owed and at least 10% of the outstanding
principal.
-

-

When one or more of the originally agreed-upon elements are amended, other
than the term or interest rate, provided these changes involve the change in the
purpose or subject of the loan, or a variation in its financing conditions, the debtor
must pay at least 30% of the accrued interest.

When the restructuring does not conform to the preceding conditions, i.e., the term and the
initially agreed-upon interest rate or all the other financial conditions are changed and/or the
debtor does not make the payments described in the two previous items, the credit union
may not change the loan conditions, which means that it will be kept in its original state.
Approval Powers
The approval of the restructuring must be carried out, by the in-house loans committee or
the Credit Committee within authority levels.

20

LOAN WRITE-OFF
21.1a General Policy

Management will continually review all of the problem loans in order to determine the
possibility of collection. All of the loans classified as "losses" by the independent audits or
in credit evaluations, must be charged off the books. Likewise, any amounts appearing
irrecoverable on the basis of the ongoing evaluation of the problem loans will be charged
off the books, even more so if these problem loans have been in arrears for more than 12
months.
Loan officers will constantly review the portfolios under their responsibility in order to
determine the possibility of collection and will immediately recommend the write-off of any
amount considered irrecoverable
The Loan Officer is responsible for continually tracking each one of the written-off loans
by means of periodic meetings with the (General) Manager or an attorney responsible for
these cases and they will prepare bimonthly reports thereon. In these reports, they must
include the collection status of the loan, as well as any change occurring in the collection
activity; this report will be sent to the Board of Directors.
41

20.1b Write-off of Loans to Related Persons

Loans will not be written off for persons linked or related to staff or volunteers of the credit
union.
20.1c Authorization by the Board of Directors
The write-off of a loan, the balance of which shall not be greater than 1% of the credit
union's reserves, will only occur with the authorization of the Board of Directors.

20.2 Record of Written-off Loans in Suspense Accounts
Loans in arrears for more than one year and which are fully provisioned must be written
off against the created provisions and transferred to suspense accounts and must have
the following documentation:
a)

Report from the Credit Committee on the situation of the loan transaction,
containing balances of principal and interest owed, the specific provision created,
guarantees and an opinion on the degree of recoverability.
b)

c)

Report by the Supervisory Committee regarding whether or not the loan that is
going to be written off is linked to any staff or volunteer of the credit union.
Authorization by the Board of Directors in the respective minutes.

The aforementioned reports and documents will be filed in the respective loan files.

Reports
a)

Quarterly Report to the Credit Committee and the Board of Directors

The Loan Officer will prepare a quarterly report for the Credit Committee and the Board of
Directors, describing the current situation of all problem loans for a significant amount, the
write-offs made and the possible write-offs expected. This report must be reviewed by the
(General) Manager before it is approved by the Credit Committee and the Board of
Directors.
b)
Report to the Annual General Meeting
The write-off of loans the balances of which are equal to or greater than 1% of the credit
union's legal reserves will be disclosed at the Annual General Meeting in the Board of
Directors’ report.

20.3

Loans to Borrowers with Written-off Loans

The Credit union will not grant loans to debtors and sureties who have loans written off by
the credit union, as long as these transactions are not normalized.

42

If, after the loan has been approved and disbursed, the Credit union finds out that the
member has incurred what is described in the preceding paragraph, it will rate it as a Lost
Loan , provisioning it 100%, regardless of the security provided.

20.4

Payment Assignment Policy

When payments are received by the credit union, the following order of priorities must be
taken into account for the allocation of these amounts:
For Agreed-Upon Debts with Overdue Interest


Delinquent interest on the overdue balance.



Legal expenses entered against the debtor.



Amount of the principal payment.

When the debt has been written off and the debtor has to pay professional fees, it is
advisable for these fees to be entered in the books prior to the payment of the loan or for
the debtor to directly pay the professional the fee for the case.

20.5

Continued Collection Efforts

The Loan Officer, together with Management, will continue to make efforts to collect
written-off loans until the benefit expected from these steps does not justify the cost in
time and expense. The Credit Committee will decide when these steps will be terminated.

20.6

Exceptions

Any exception to the policy set forth above must be specifically approved by the Board of
Directors.

21

PROVISION FOR LOAN LOSSES
GENERAL CONCEPTS

The credit union must maintain provisions against possible losses arising from their risk
activities. For credit unions, the most important of these reserves is the one they have to absorb
loan losses. This reserve takes the form of a "provision for irrecoverable loans”. This reserve is
established and renewed by periodic charges against earnings, which generates a reduction
thereof. The process is designed to maintain the provision at such a level that any relatively
unpredictable losses that can be incurred in lending activities during the current period, but
related to loans granted in previous periods, will not generate an undue impact in a particular
financial year.

43

The term, "estimated losses," refers to an estimate of the amount of the portion of the portfolio of
loans outstanding (net of non-accrued interest), the collection of which is unlikely; i.e., the net
write-offs expected to be made for a loan, in view of the situation at the time of its evaluation.
These estimated losses in loans shall be in agreement with the criteria for the accumulation of
provisions against losses contained in generally accepted accounting principles. When there is
sufficient information to confirm that a loan or a portion thereof, is irrecoverable, the accounting
write-off must be made for these amounts as quickly as possible.

21.1

Loan Provision Policy

a)

Maintaining the Provision

The provision for loan losses is established through charges against earnings. The loans
or portions thereof considered irrecoverable are charged against this provision; likewise,
any subsequent recovery, if any, will be credited to the provision.
The Board of Directors will make monthly/yearly allocations of funds to create reserves to
protect it from possible losses in its loan portfolio, subject to an analysis thereof.
b.

Provision Adequacy

The Board of Directors, the (General) Manager, have the responsibility of guaranteeing an
adequate provision for loan losses. Furthermore, the Credit Committee is responsible for
providing adequate and updated information on problem loans to the Board of Directors
on an ongoing basis. The provisions will be such that at all times, they will make it
possible to absorb the following:
AGE OF DELINQUENT LOANS

REQUIRED PROVISION

Over 12 months

100%

Under 12 months

35%

21.2

Periodic Review of the Provisions and Respective Policy

Management and the Credit Committee will review this policy on a yearly basis and
direct any recommendations they deem in order to the Board of Directors. Likewise, they
will submit for its consideration similar recommendations developed by the independent
audits and loan evaluations. On the basis of the preceding, the Board of Directors will
introduce the adjustments relative to this policy.
The Board of Directors will become aware of and, as the case may be, approve the
balance of the reserve at the end of each financial year, taking as a basis the
recommendation submitted by Management and the Credit Committee.

44

22

SEIZED/REPOSSESSED ASSETS

Seized or repossessed assets are collateral repossessed from delinquent members. The credit
union must ensure that these assets are securely stored and controlled prior to their sale and
while they remain in the credit union’s custody.
Once these items are in the credit union’s possession, a report on their condition as well as
serial and other numbers must be prepared. The credit union must maintain a seized asset
register in which details of these assets are recorded. Periodic surprise inventories of these
items must be carried out by the supervisory committee or the internal auditor.
Strict monitoring of their release whether by sale or return to the delinquent member after
payment of arrears must be observed.
The Credit Officer or the (General) Manager can authorize the release of these assets only in
the preceding two (2) circumstances.

23.

RISK ASSESSMENT – STEPS FOR PRECESSING LOANS

Upon receipt of a request for financing, the following steps should be implemented after assessing the
member’s account to ascertain whether he/she qualifies for the loan.
1. Assess the Borrower
Can the borrower pay (assess their ability to repay the loan) Check to see if the member has enough
monies coming in as a deduction to repay the current loan. Should there be a necessity to increase the
payment amount for the current request, find out if the member is willing to increase the amount of their
deductions to the Credit Union. Carryout due diligence on the income as well as the current debts,
where does the member work, how long has the member been employed, is the job stable, how stable
is the income, does it include overtime or bonuses and how much does the member owe?
If the member is allowed “an over the counter” payment, will the member pay? Is the member willing to
repay the loan should it be granted? Review the member tract record on paying debts. Does the
member have a lot of debt, does he/she make payments on time, does he have a lot of credit inquiries,
does he have equity to protect, is the credit maxed out and is there any cash reserves?
What if the member doesn’t pay as agreed to? Is there a fallback position? Does the member have
any assets, it the property easily saleable, is there sufficient net worth, does the member have hard or
soft assets, can the wages be garnisheed and can the member assets be seized?
Should all these questions be answered satisfactorily, the loan officer is now in a position to make a
determination of the member.
2. Assess the Property
Should the amount of loan being requested is more than twice the amount on the member’s savings
account and the member is willing to use property as security the following should be adhered to.
In order to assess the property, the Loan Officer must first review the Credit Union’s policies applicable
for the property type.
45

The Credit Union’s Policy states that 80% of the value of the property will be used as security for a
loan. Chattel houses will be acceptable as security but only for a period up to ten years. Statutory
Declaration will not be an acceptable form of security.
Valuation of the property is very important. The Credit Union will use valuations from persons whom
they have previously approved. Usually appraisals ordered by the Credit Union are not given to the
member requesting the loan. The appraisal should be produced according to the Credit Union’s own
criteria. Appraisals can be misleading since an appraisal for value for the member is different from an
appraisal for value for the Credit Union or an appraisal for value for insurance or even tax purposes.
The appraisal Report
The appraisal report should tell a story to the Loans Officer. The officer should be able to visualize the
property from reading the report and should also be made aware of any and all aspects of the property
or the location that could affect the value of the property. The report should clearly describe the types
of approaches that were used to value the property. Any item that should cause concern to the lender
that became evident to the appraiser during his assignment should be clearly identified in the final
report.
Appraisal Approaches
The report should be easy for the loan officer to follow. The approaches should be:
Cost Approach
Construction cost (renovation or new)
Area of building
Extras (out buildings, back walls, pavements etc.)
Depreciation
Lot value and size
Value

Direct Comparison Approach
Comparisons
Adjustments for time, location, all other differences that affect value
Reconciliation of adjusted values with rationale
Value
Income Approach (for business loans)
Potential gross potential
Vacancy and bad debt allowance
Effective gross income Operating expenses
Net Operating Income

46

Capitalization rate
Value
Should include rationale for capitalization rate used
The final value should be clearly explained as the rationalization of approaches relied upon and why. If
the report is not reasonable, the loans officer should request the appraiser to review the report or order
another report.
3. Assess the Market
In processing a loan which is not savings secured and requires property as additional security, the
market for that property should be assessed. The analysis of the market involves “knowing your
neighbourhood”. The local community has many variables and constants that are the responsibility of
the loans officer. For example if a grisly death has stigmatized a neighbourhood or a home has a
historic significance, the loans office should ascertain the effect of this on the loan. Accessibility is also
a main concern, whether it can be accessed only by foot or by vehicle as well. The resale value is
important, is there a demand for that property?
4. Risk Synthesis
The loans officer must now put all the information together and make a note in the Comments section
of the application. The process requires the loan officer to look for any “red flags”, warnings that could
either cause loss or default. Some red flags require no action when everything else is fine but some
require holdback that would necessitate the upgrading of a service or adjustments. For others the best
way to deal with it is to turn down the application.
The loans officer must go through this process with every loan to assure that they are comfortable that
they are lending a secure loan.

Acknowledgement: Field Service Department: Jamaica Co operative League

Ratified by Board of Directors; Saturday 11 July 2009.

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