NCUA Issues Ruling On Calculating Project's Equity

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In response to an inquiry from a credit union, the NCUA's Office of General Counsel has issued a ruling on calculating market values.

The agency was asked whether the credit union may include closing costs as part of the market value when calculating the amount of equity the borrower has in a construction project.

NCUA's response is "no." The agency noted that under its Member Business Loan (MBL) rule, a credit union may not do so because closing costs do not contribute to the market value of the project. The MBL rule requires a borrower to have a 25% equity interest in the market value of a construction or development project, unless the credit union obtains a waiver from the NCUA or the loan is otherwise exempt. To determine the amount of required equity, a credit union must ascertain the market value of the project at the time the loan is made, the agency said.

The NCUA Board clarified that the equity requirement is based on the cost amount of the project when it incorporated a previous legal opinion issued by the Office of General Counsel into the preamble of the final MBL rule issued in 2003.

NCUA said it believes that a credit union cannot add closing fees, such as points, mortgage fees and finance charges, related to the financing of an MBL to the market value of a construction project.

While these costs are incidental to the financing of a construction MBL and may be part of the acquisition cost for the borrower, they do not increase the project's value.

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