[Federal Register Volume 60, Number 31 (Wednesday, February 15, 1995)]
[Rules and Regulations]
[Pages 8526-8538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3363]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 32
[Docket No. 95-03]
RIN 1557-AA72
Lending Limits
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
comprehensively revising its rules governing national bank lending
limits as part of its Regulation Review Program. The final rule amends,
clarifies, and reorganizes the OCC's lending limit rules.
The final rule eliminates inefficient and unduly burdensome
regulatory requirements and refocuses the lending limit rules on the
areas of greatest safety and soundness concern. The new rule enhances
the ability of national banks to lend while protecting against
situations where excessive loans to a borrower or related borrowers
present safety and soundness concerns.
EFFECTIVE DATE: March 17, 1995.
FOR FURTHER INFORMATION CONTACT: William C. Kerr, National Bank
Examiner, or Frank R. Carbone, National Bank Examiner, Credit and
Management Policy, (202) 874-5170; P. Moni SenGupta, Attorney
Legislative and Regulatory Activities Division, (202) 874-5090; Aline
J. Henderson, Senior Attorney, or Laura G. Goldman, Attorney, Bank
Activities and Structure Division, (202) 874-5300; Office of the
Comptroller of the Currency, 250 E St. SW, Washington, D.C. 20219.
[[Page 8527]]
SUPPLEMENTARY INFORMATION:
Background
Although the limitations on a national bank lending to one borrower
can be traced to the Currency Act of 1863,1 the Garn-St Germain
Depository Institutions Act (Act), Pub. L. 97-320 (1982), represents
the most recent major revision of the statutory lending limits. Section
401(a) of that Act amended 12 U.S.C. 84 to raise the amount that a
national bank may lend to a single borrower from 10 to 15 percent of
the bank's unimpaired capital and unimpaired surplus. It also added new
exceptions, defined key terms, and provided express authority for the
OCC to issue regulations to implement the statute, including
regulations to define or further define terms and to establish limits
or requirements other than those contained in the statute for
particular classes or categories of loans.
\1\Act of Feb. 25, 1863, 12 Stat. 665 et seq., R.S. Sec. 5200.
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The OCC implemented the amended 12 U.S.C. 84 with a final rule
published on April 12, 1983 (48 FR 15844). The final rule created a new
part 32 in title 12 of the Code of Federal Regulations which replaced
and restructured existing interpretive rulings previously found at 12
CFR part 7. The OCC proposed another major regulatory revision of the
lending limits for national banks on October 24, 1989 (54 FR 43398). A
final rule in response to this proposal was never adopted, however.
The Proposal
On February 11, 1994 the OCC published its proposal to revise the
lending limit regulation found at 12 CFR part 32 (proposal), 59 FR
6593, as part of the OCC's Regulation Review Program. The proposal
sought to modernize the regulation and incorporate into the rule
significant interpretive positions of the OCC. The proposal sought to
comprehensively revise, reorganize, update, and simplify the
regulation, and to reduce unnecessary regulatory burdens, without
compromising the important safety and soundness objectives of the
lending limits rule.
Comments Received and Changes Made
The final rule implements most of the initiatives contained in the
proposal. However, several additional changes are made in response to
the comments received. Most of these changes clarify the original
intent of the proposal. Other changes alter the proposed regulation in
a manner that provides additional flexibility to banks. The final rule
also includes a number of technical changes to the proposal.
The OCC received 28 comment letters on the proposal. The comments
received generally were very favorable. Comment letters included 16
from banks and bank holding companies, three from law firms, and eight
from trade associations and the representatives of banks, thrifts, home
builders, and clearing houses. The commenters welcomed the OCC's effort
to reorganize part 32 and several stated that the changes made in the
proposal represented a significant improvement over the old rule.
Commenters generally praised the new format and the additional clarity
provided by the revisions. Some predicted that the simplified
regulation would reduce regulatory burden and compliance costs.
Overview of the Final Rule
The OCC reviewed the lending limit rule with the goals of reducing
unnecessary regulatory burdens and providing banks with increased
flexibility in their lending operations, consistent with safe and sound
banking practices.
As part of this new approach, the final rule alters the definition
of ``capital and surplus'' upon which lending limits are based. The new
lending limit calculation draws upon risk-based capital components that
a bank must already calculate for Call Report purposes. By relying on
quarterly Call Report information, most national banks generally will
be required to calculate their lending limit only once every quarter,
rather than every time they propose to make a loan.
The final rule also adds a few new definitions and removes or
consolidates old ones to enhance the regulation's clarity. Several
modifications provide banks with greater flexibility in certain lending
situations, subject to safety and soundness parameters. For example,
the rule includes a new exception to the lending limits to allow a bank
to advance funds to renew and complete the funding of a qualifying loan
commitment under circumstances where the additional advance will
protect the position of the bank. The final rule also allows a bank to
advance funds to pay for taxes, insurance and other necessary expenses
to protect its interest in the collateral securing a loan, and
clarifies when a loan is considered ``nonconforming,'' rather than a
violation, when it exceeds a bank's lending limit, but was within the
bank's lending limit when made.
Section-by-Section Discussion
The commenters focused on provisions of the proposal needing
modification or further amendment. The OCC carefully considered each of
the comment letters and has made a number of changes in response. Those
comments and any changes are identified and explained in the section-
by-section discussion that follows. A table summarizing the sections of
the former part 32 that are amended by the final rule is included at
the end of this preamble.
Authority, Purpose and Scope (Sec. 32.1)
The proposal amended the ``Purpose'' paragraph to expressly
incorporate the objectives of safety and soundness, loan
diversification, and equitable access to banking services. The final
rule adds to the ``Scope'' paragraph new language cautioning bank
management that the lending limit rule is not a ``safe harbor'' for
lending.
The ``Scope'' paragraph emphasizes that the lending limit rules are
only one component of a prudent lending program. National banks must
always underwrite loans in accordance with prudent banking practices,
in addition to adhering to specific quantitative limitations such as
the lending limits. Several commenters remarked that the OCC should
amend the lending limits provisions to recognize the existence of
limited liability companies as bank subsidiaries, comparable to
operating subsidiaries. Treatment of limited liability companies as
operating subsidiaries is an issue raised in the OCC's proposed changes
to Part 5 of its regulations, and the OCC believes the question is
better resolved in that context. (59 FR 61034, November 29, 1994.) In
the interim, however, when a bank seeks permission to invest in a
limited liability company as a subsidiary, and the bank's voting
interest satisfies the operating subsidiary percentage control
requirements, the bank may also seek confirmation that loans by the
bank to the limited liability company subsidiary will be treated in the
same way as loans to an ``operating subsidiary'' for purposes of
lending limits.
Definitions (Sec. 32.2)
The proposal consolidated all the definitions located throughout
the existing rule into a single section. Commenters raised questions
about some of the revisions and additions made to the definitions. Of
particular note are the following revisions. [[Page 8528]]
Capital and Surplus (Sec. 32.2(b))
Under the former rule, the statutory lending limit of 15% of
capital was applied to a definition of capital found in 12 CFR
Sec. 3.100. The Sec. 3.100 definition serves as the capital base for
certain other regulatory limitations, such as limits on purchasing
investment securities, holding property and OREO, and investing in
community development corporations. The Sec. 3.100 capital definition
is separate and different from the leverage and risk-based capital
formulae used to determine banks' capital adequacy.
In order to reduce regulatory burden associated with calculating
lending limits and to begin the process of reducing the multiple
definitions of capital currently in use, the proposal changed the
definition of capital and surplus used for lending limits purposes by
employing a capital calculation that all banks already make. Under the
proposal, a bank's basic lending limit would be an amount equal to 15%
of the sum of its allowed Tier 1 and Tier 2 capital, plus the balance
of its allowance for loan and lease losses (ALLL) not included in Tier
2 capital for the bank's risk-based capital calculation. For
simplicity, the proposal used the terminology ``capital and surplus''
rather than the statutory terms ``unimpaired capital and unimpaired
surplus.''
The commenters generally favored this approach to the capital
definition, however, some expressed concern that the approach needed to
be clarified. The new capital base for calculation of the limit in the
proposal appeared to some commenters to be the sum of all Tier 1
elements and all Tier 2 elements, whether or not they exceeded the
amounts that could be included in a bank's risk-based capital. The
final rule adopts the proposed capital and surplus definition but with
an amendment to clarify that only the amount of Tier 1 and Tier 2
capital that is actually included in a bank's risk-based capital (plus
the excess ALLL) is allowed in the bank's lending limit capital base.
Loans and Extensions of Credit (Sec. 32.2(j))
The commenters generally favored the proposed amendments to the
definition of loans and extensions of credit, now found at
Sec. 32.2(j), which incorporates significant OCC interpretive positions
clarifying the term. Section 32.2(j)(1)(iii) adds the requirement that
in order to exclude a bank's purchase of Type I securities subject to a
repurchase agreement, a bank must have assured control over or
established rights to the securities.
Some commenters requested additional clarification of the meaning
of ``assured control.'' Assured control means that the bank has
recognized and exercisable authority over the asset. For example, a
bank can assure control of property subject to a repurchase agreement
by taking physical possession of the security or by requiring a proper
recordation of ownership of book-entry securities.
Section 32.2(j)(1)(v) excludes all intra-day or daylight overdrafts
from the definition of an extension of credit. Several commenters
questioned whether the terms ``intra-day'' or ``daylight'' were
sufficiently adaptable for an increasingly complex and international
payments system. As the commenters point out, more and more banks
operate across several time zones. The financial payments systems are
now global systems spanning many time zones. With this in mind, several
commenters suggested that the final rule adapt the meaning of a
``daylight'' overdraft to contemporary conventions. The OCC believes
these concerns have merit and the final rule drops the reference to
``daylight'' and simplifies the definition. Intra-day overdrafts
excluded from the final rule are those overdrafts for which payment is
received before the bank closes its books for the calendar day. This
change recognizes the reality of a rapidly expanding payments system
that may eventually run 24 hours a day and looks to each bank's
practice for closing its books for the calendar day.
Loans Legally Unenforceable
Section 32.2(j)(1)(vii) of the proposal was intended to incorporate
OCC interpretive letters that elaborated on former Sec. 32.106, that
certain loans that become legally unenforceable would not be counted in
calculating a bank's lending limit. One commenter observed that in
attempting to incorporate the OCC interpretive letters, the proposal
effectively narrowed the effect of the interpretive ruling by excluding
from lending limit calculations only loans that are discharged in
bankruptcy, or by judicial decision or statute, and not excluding loans
that are legally unenforceable ``for any other reason.''
The final rule returns to the scope of the original OCC
interpretive ruling. Under the final rule, a loan (or a portion
thereof) that becomes legally unenforceable for any reason and has been
charged off on a bank's books, is not considered a loan or extension of
credit. As a matter of prudent banking practice, the OCC expects that
banks will keep sufficient documentation to show why loans are legally
unenforceable. These records may include letters, memoranda, or written
agreements that evidence the bank's legally enforceable forgiveness of
a loan. The financial records of the bank also should reflect that the
loan has been charged off.
Advances for the Benefit of the Borrower
As proposed, Sec. 32.2(j)(2)(i) exempts from the definition of
``loans and extensions of credit'' additional funds advanced to a
borrower by a bank for taxes or insurance if the advance is made for
the protection of the bank. The purpose of this exemption was to allow
banks to preserve the value of the collateral securing a loan. The
proposal requested that commenters address whether advances made for
other purposes should be similarly exempted from the definition of
loans and extensions of credit. Commenters responded that the purpose
of the exemption is served by allowing an advance for any purpose that
protects the collateral.
The OCC carefully considered the comments received on this issue.
The OCC recognizes that there may be situations when an advance on
behalf of a troubled borrower could help the lending bank avoid greater
expenses after foreclosure. For example, an advance for the purpose of
repairing a leaking roof is more cost effective than waiting until
after foreclosure which leads to spending more money to restore the
value of water-damaged OREO. However, using the exemption to advance
funds for building new property would not be consistent with the
purpose of the exemption. The OCC also has concerns that banks
reasonably anticipate a borrower's need to fund various expenses in
determining the appropriate size of the loan that a bank is able to
extend and that the exemption not create incentives for borrowers to
divert or reclassify spending in order to qualify larger portions of
their credit needs for the exemption.
Nevertheless, the OCC believes that a moderate extension of the
exemption to allow advances to pay for more than taxes and insurance is
appropriate, provided that the expenses have not been structured to
avoid a bank's lending limits. The final rule therefore exempts from
the lending limit reasonable advances made on behalf of the borrower to
pay for necessary maintenance and certain other expenditures when an
advance is consistent with safe and sound banking practices and
designed to protect the lending bank's interest in the collateral.
[[Page 8529]] As before, these advances will be treated as an extension
of credit and taken into account in calculating the bank's lending
limit if the bank seeks to make an additional loan to the same
borrower.
Accrued and Discounted Interest
Section 32.2(j)(2)(ii) of the proposal clarified the type of
accrued and discounted interest that would qualify for an exclusion
from the definition of ``loans and extensions of credit''. The proposal
also provided, however, that accrued and discounted interest would be
treated as an extension of credit if a bank sought to make another loan
to the borrower.
Several commenters, particularly large banks with loans to foreign
governments, objected to this provision of the paragraph. One commenter
stated that this provision would be a major problem for banks seeking
to restructure loans to foreign governments with substantial accrued
interest. The proposed provision could severely impair a bank's ability
to participate in any new extensions of credit in connection with that
type of sovereign debt restructuring. Other commenters pointed to the
1982 Garn-St Germain amendments, Pub. L. 97-320 (1982), which changed
the language of 12 U.S.C. 84 from ``total obligations'' of a borrower
to ``loans and extensions of credit''. These commenters argued that the
1982 amendment reflects a shift in the focus of the statute. They
argued that the 1982 amendment confirms that Sec. 84 is not directed to
interest that is contractually due but is intended to limit only the
funds that actually leave the bank in the form of principal. In short,
these commenters believe that the lending limits apply to money loaned,
not money owed.
The OCC believes these comments have merit. In order to provide
greater flexibility to banks seeking to improve their recoveries
through loan work-outs and restructured loans with troubled debtors,
the final rule modifies the OCC's previous approach. Under the final
rule, a bank need not attribute past-due or accrued interest to a
borrower for purposes of the lending limit. However, as already noted,
all loans made by a national bank must be underwritten in accordance
with prudent banking practices, in addition to adhering to specific
quantitative limitations such as the lending limits. National banks
therefore should consider the possibility of unscheduled interest
accruals in determining the amount of the bank's original extension of
credit, and also must bear the prudent banking practices standard in
mind when extending additional credit to a borrower with past-due or
accrued interest.
Renewals
The proposal incorporated an OCC interpretive position that
excludes from the definition of ``loans and extensions of credit''
certain loan renewals or restructurings if the bank first exercised
``best efforts'' to bring the loan into conformity with its lending
limit. Several commenters questioned whether the use of the term ``best
efforts'' sets a standard that is too high to provide any practical
application. The OCC agrees and the final rule uses the term
``reasonable'' efforts, which better reflects the OCC expectation and
the original intent of the proposed amendment.
Items in the Process of Collection
The OCC has generally taken the interpretive position that giving
credit for uncollected items is a loan or an extension of credit.
However, under the proposal, the OCC also created an exception for
instances where payment is required by Regulation CC of the Federal
Reserve Board, 12 CFR part 229. Regulation CC specifies certain time
frames within which funds must be made available. Several commenters
correctly pointed out that although the intent of the proposal was to
provide additional flexibility, the effect of the change did not
achieve that result. In fact, the proposal may have prevented a bank
from giving credit for an uncollected item prior to the day stated in
the mandatory availability schedule in Regulation CC, by requiring the
bank to treat that advance as an extension of credit.
The final rule amends this paragraph by providing that amounts paid
on items in the normal process of collection do not constitute a loan
or extension of credit. However, once an item is returned or dishonored
by the paying bank, it no longer is in the normal process of
collection. Payment by a bank against a dishonored item would be an
extension of credit.
Participation Loans
Section 32.2(j)(2)(vi) of the final rule revises the proposal's
treatment of participation loans. The proposal incorporated
interpretive positions previously found at Sec. 32.107 and included a
new provision requiring a bank that originates a loan to receive
funding from the participants on the same day. If the bank did not
receive participant funding on the same day, the proposal required the
bank to treat unfunded portions as a loan from the originating bank to
the borrower. Many commenters suggested that the OCC eliminate the
same-day funding requirement because it is impractical. The OCC
disagrees with that contention and believes the participant funding
provision is an important protection to the originating bank that will
help ensure prompt funding by participants.
The commenters, however, correctly point out that delays in the
timing and delivery in funding a participation are not infrequent. The
OCC does not intend for inadvertent funding delays to cause lending
limit violations. The final rule therefore extends the funding period
to provide a more realistic timeframe to address temporary or
inadvertent funding errors. The final rule provides that a
participation loan is not attributed to the originating bank if it
receives funding from the participants before the close of business on
the day after it makes funds available to the borrower. The final rule
also sets forth standards for an originating bank that, if followed,
shield the bank from a lending limit violation in the event that a
participant fails to fund.
Special Lending Limits (Sec. 32.3(b))
Section 32.3(b)(3)(ii) of the proposal required an inspection and
valuation of livestock that is ``current, taking into account the
nature and frequency of turnover of the livestock'' in order to qualify
for the special lending limit for loans secured by documents covering
livestock. Former part 32 required that an ``inspection and appraisal
report'' be performed at least every 12 months or more frequently as
deemed prudent. The proposal recognized the differences in turnover
between different kinds of livestock that secure a loan. It removed the
presumption that an inspection and appraisal report performed every 12
months is adequate.
Several commenters questioned this change. The commenters read the
former rule to require an inspection report only once every 12 months.
Although some commenters characterized the proposal as more burdensome
than the old requirement, the OCC believes it is not. In fact, the
former rule required an inspection and appraisal report more frequently
than once a year, if it was prudent to do so. The proposal actually
reduced burden by allowing the use of valuations, rather than
appraisals, when appropriate. Recognizing the need for clarity,
however, the final rule includes the requirement that an inspection or
valuation be made no less frequently than every 12 months.
Section 32.3(b)(5) of the proposal also provided a new exception to
the lending limits to enable a bank to renew a [[Page 8530]] qualifying
commitment to lend in order to complete the financing of a project in
process. Under the proposal, the advance had to be to protect the
position of the bank, and the amount of additional advances could not
exceed the lesser of the unfunded portion of the original commitment or
5 percent of the bank's capital and surplus. Commenters generally
supported this position. Several suggested, however, that for the
exception to accomplish its intended purpose, the OCC should allow the
bank to fund the full amount of the commitment even if it was in excess
of the five percent cap.
The OCC believes that this suggestion has merit, but is also
concerned that full funding of the original commitment must not
compromise a bank's safety and soundness. Accordingly, the final rule
modifies the approach contained in the proposal to allow funding up to
the amount of the original commitment, provided the renewal and
additional funding thereunder is consistent with safe and sound banking
practices, is made to protect the bank's position, and will enable the
borrower to complete the project for which the original commitment was
made.
Section 32.3(b)(6) of the proposal was not included in the final
rule. This paragraph set forth a special lending limit that expired on
January 1, 1995. Since the section serves no purpose after that date it
is not incorporated into the final rule.
Loans Exempt From the Lending Limit (Sec. 32.3(c))
Section 32.3(c)(3) is revised in the final rule. This paragraph
provides that loans collateralized by U.S. government obligations are
exempt from the lending limits to the extent of the current market
value of the collateral. This exemption includes loans that are secured
by bonds, notes, Treasury bills, or similar obligations fully
guaranteed as to principal and interest by the full faith and credit of
the United States Government. This exemption was the subject of several
commenter suggestions that it be expanded to include loans that are
secured by instruments with comparable government backing. The OCC
agrees with these comments that certain other forms of collateral that
carry the full faith and credit of the U.S. government pose no greater
risk of loss. Accordingly, the final rule relies on the OCC's authority
under 12 U.S.C. 84(d)(1) to establish limits or requirements other than
those specified in the statute, for particular classes or categories of
loans, to include an additional class of loans in the exempt category--
loans guaranteed as to repayment of principal by the full faith and
credit of the U.S. Government. This exemption includes qualifying Small
Business Administration, Federal Housing Administration, and Veterans
Administration guaranteed loans, but only to the extent of the
government guarantee.
Some commenters suggested that the final rule also extend this
exemption to loans that are secured by other types of instruments. The
OCC has carefully considered these suggestions, but does not agree
that, as a general matter, the principal and liquidity risks presented
by the suggested types of instruments are sufficiently comparable to
the risks of directly holding the U.S. Government securities, or
government-backed loans. Accordingly, the OCC declines to add an
additional category of collateral that could qualify a loan for an
exemption from lending limits.
The final rule also modifies Sec. 32.3(c)(10) of the proposal. As
proposed, this paragraph was intended to incorporate OCC interpretive
positions on loans to leasing companies. This paragraph allows banks to
attribute loans made to leasing companies to the lessees when certain
conditions are met. The final rule includes minor changes to ensure
that the conditions for this treatment are no more burdensome than if
the bank were to act as a lessor itself subject to 12 CFR part 23.
These changes better convey the current OCC interpretive position.
Frequency of the Lending Limit Calculation (Sec. 32.4)
The former rule required a bank to determine its lending limit for
each loan on the date that it made a loan. The proposal simplified this
requirement by allowing a bank to rely on its quarterly calculation of
capital found in its Call Report. Rather than calculate daily, under
the proposal the bank generally could calculate the lending limit once
for the entire quarter. However, the OCC was concerned that a
significant decline in capital between quarterly calculations could
result in a bank lending at a level above its actual limit for the
duration of the quarter.
To prevent a bank from lending in excess of a shrinking capital
base, the proposal required a bank to recalculate its lending limit
between quarters if there were a change in its capital category for
purposes of prompt corrective action, or if a ``material event''
occurred that caused its capital to increase or decrease by 10 percent
or more. However, it was recognized that what constitutes a ``material
event'' for this trigger may not be readily defined. Anticipating
criticism of the material event component, the proposal suggested an
alternative: a simple increase or decrease of 10 percent in a bank's
capital between quarters would trigger the recalculation obligation.
Comment was mixed on both approaches to the recalculation trigger.
Generally, commenters characterized the ``material event'' element as
too vague to be useful. Many suggested that a simple percentage test
would be more reliable and useful. Others questioned whether a
percentage test was needed given the OCC's general ability to require
more frequent calculations in individual cases. The OCC finds these
arguments persuasive. The OCC has concluded that the material event
element is too vague to give a reliable indication of the need to
recalculate. As a result, the OCC has not included this requirement in
the final rule.
Imposing the requirement that a bank recalculate whenever its
capital declined by 10 percent between quarters is also problematic.
Several commenters observed that the obligation to monitor the changes
in capital between quarters would give a bank little comfort that its
quarterly lending limit is valid for the entire quarter. In effect the
obligation to monitor 10 percent swings in capital could force a bank
to make a daily calculation of capital, not quarterly as proposed. This
result would be contrary to the purpose of the proposed quarterly
calculation.
On the other hand, the OCC also considered whether a quarterly
calculation would be inappropriate for any identifiable subset of
national banks, such as banks that are undercapitalized. The OCC
determined not to include a different lending limit calculation
frequency requirement for undercapitalized banks as a class, however,
because the OCC anticipates that such banks will be subject to enhanced
supervisory oversight and directives that will address the frequency of
the bank's lending limit calculations in those cases where lending
limit excesses are a potential problem. (For example, a bank could be
undercapitalized for reasons unrelated to its lending activities, or
could have poor underwriting practices and losses on loans and raise no
lending limits issues). The OCC closely monitors undercapitalized
banks, however, and will make appropriate adjustments to the frequency
of required lending limit calculations for such banks if experience
indicates that a general standard for undercapitalized banks is needed.
The final rule, therefore, deletes the 10 percent recalculation
requirement [[Page 8531]] but retains the explicit authority for the
OCC to require a national bank to calculate its lending limits more
frequently than every quarter when the OCC believes it is necessary.
The OCC therefore may address unsafe or unsound lending practices or
other supervisory concerns by directing any bank to calculate its
lending limit more frequently than quarterly. This authority is set
forth in Sec. 32.4(b).
Direct Benefit Test (Sec. 32.5(b))
Section 32.5(b) requires a loan to be attributed to a third party
if the third party gains the direct benefit of the loan proceeds. The
proposal narrowed the direct benefits tests to clarify that loans are
not attributable to a third party when the loan proceeds are
transferred to the third party to acquire property, goods, or services
in a bona-fide arms-length transaction.
The proposal requested comment on the question of whether the
direct benefits test was necessary. Several commenters argued that it
was not. Some commenters suggested that the common enterprise test
addresses most, and possibly all, circumstances that involve the less
than a bona fide arms-length transactions that is the focus of the
direct benefits test. The OCC has carefully considered these comments
but has concluded that the direct benefits test uniquely addresses an
area of concern in the lending limits area. The final rule therefore
retains the test but with one change, designed to improve certainty
regarding the application of the test. The ``facts and circumstances''
provision of the direct benefits test is removed. The OCC believes this
part of the test was redundant and potentially confusing.
Common Enterprise Test (Sec. 32.5(c))
The final rule adopts the common enterprise test largely as stated
in the proposal. The common enterprise test requires the aggregation of
loans made to persons who are related through common control and
financial interdependence or share a common source of income for
repayment of the loan, or whenever the OCC determines the ``facts and
circumstances'' requires aggregation. Most commenters characterized the
proposed language as a much improved restatement of the test that was
easier to understand. Some commenters requested further amendments,
alterations, and extension of the rule.
The OCC has not adopted most of the suggestions. Many of the
commenters' suggestions for change would have undermined the
effectiveness of this combination rule. Most of the suggested changes
would not have provided much additional clarity. Others risked
diminishing the effectiveness of the rule. Although the common
enterprise test may be somewhat complex to apply to certain corporate
structures, the OCC has concluded that, on balance, it is an effective
description of the varied circumstances when loans to separate
borrowers should be combined because they present a common source of
credit exposure for a bank.
The final rule makes changes to Sec. 32.5(c)(3), to clarify that
the rule requires combination of only those loans that the borrowers
use for the acquisition of a controlling interest in a business. The
final rule also specifically clarifies that limited liability companies
will be treated in the same manner as corporations, rather than as
partnerships, in applying the common enterprise test.
Nonconforming Loans (Sec. 32.6)
The proposal incorporated OCC policy that a bank will not be deemed
to violate the lending limits when a loan that was legal when made
becomes nonconforming as a result of several specifically defined
events, provided the bank exercises ``best efforts'' to bring the loan
into conformity with the lending limit. A number of commenters objected
that the ``best efforts'' standard was too high. Some commenters
pointed out that using best efforts to reduce a nonconforming loan
could pose certain safety and soundness risks to a bank. For example,
if a bank holds a loan that was legal when made and subsequently the
bank's capital declines, the best efforts standard might require that
the bank sell the loan off at any price. This forced sale only causes
the bank to lose an asset during a period that its capital is in
decline. The OCC did not intend this result of the proposed
nonconforming loan provisions.
In response to commenter concerns, the final rule replaces the term
``best efforts'' with the term ``reasonable efforts''. The OCC believes
this standard more accurately reflects the level of effort appropriate
to bring a loan into conformance with a bank's current lending limits.
The final rule also makes clear that the section does not require a
bank to make efforts to bring the loan into conformity if to do so
would be inconsistent with safe and sound banking practices. In
addition, the final rule adds that loans that exceed a bank's lending
limit as a result of changes in the capital rules or because borrowers
subsequently become a common enterprise will be treated as
nonconforming.
Finally, in response to commenters, the final rule changes the
treatment of loans that qualify for a lending limit exemption because
they are secured by certain collateral, such as U.S. government
obligations. Under the former rule, as well as the proposal, a national
bank was required to bring a loan into conformity through restoration
of the market value of the collateral or by reducing the amount of the
bank's loan by the amount that exceeds the lending limit within five
business days. Several commenters characterized the five day correction
period as arbitrary and unrealistic.
The OCC recognizes that there are circumstances beyond the bank's
control which might cause a loan of this type to violate the lending
limit, because of a decline in collateral value. Instead of the five
day period, the final rule requires that a bank bring these loans into
conformity within 30 calendar days. During that 30 day period, the loan
will be treated as non-conforming. The OCC believes this change will
provide a more realistic period to enable a bank to address restoration
of proper collateral for a loan without forcing a precipitous
divestiture of all or part of the loan that would not be in the best
interests of the bank.
Effective Date
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994, 12 U.S.C. 4802, requires that a regulation
that imposes new requirements take effect on the first day of the
quarter following publication of the final rule. That section provides,
however, that an agency may determine that the rule should take effect
earlier.
The OCC believes that this regulation relieves burden by
eliminating inefficient and unduly costly regulatory requirements and
better focusing the lending limit rules on areas of greatest safety and
soundness concern. These revisions to part 32 should not be further
delayed. Accordingly, the final rule is effective 30 days after
publication.
Derivation Table
Only substantive modifications, additions and changes are
indicated.
[[Page 8532]]
----------------------------------------------------------------------------------------------------------------
Revised provision Existing provision Comments
----------------------------------------------------------------------------------------------------------------
Sec. 32.1......................................... Sec. 32.1, Sec. 32.111.......... Modified.
Sec. 32.2(a)...................................... Sec. 32.101..................... Added and modified.
(b)........................................... Sec. 32.2(c).................... Significant change.
(c)........................................... ................................ Added.
(d)........................................... Sec. 32.6(h)(3)................. ..........................
(e)........................................... Sec. 32.6(h)(4)................. ..........................
(f)........................................... Sec. 32.2(d).................... ..........................
(g)........................................... Sec. 32.5(a)(2)(v).............. Modified.
(h)........................................... Sec. 32.4(b).................... ..........................
(i)........................................... Sec. 32.4(c) and (e)............ ..........................
(j)(1)(i)..................................... Sec. 32.2(a).................... ..........................
(j)(1)(ii).................................... Sec. 32.2(a).................... ..........................
(j)(1)(iii)................................... Sec. 32.103..................... Modified.
(j)(1)(iv).................................... Sec. 32.104..................... Modified.
(j)(1)(v)..................................... Sec. 32.105..................... ..........................
(j)(1)(vi).................................... Sec. 32.102(b).................. ..........................
(j)(1)(vii)................................... Sec. 32.106..................... Modified.
(j)(2)(i).................................... ................................ Added.
(j)(2)(ii).................................... Sec. 32.108..................... Modified.
(j)(2)(iii)................................... ................................ Added.
(j)(2)(iv).................................... ................................ Added.
(j)(2)(v)..................................... ................................ Added.
(j)(2)(vi).................................... Sec. 32.107..................... Significant change.
(k)........................................... Sec. 32.2(b).................... Modified.
(l)........................................... Sec. 32.2(f).................... ..........................
(m)........................................... Sec. 32.4(c).................... ..........................
(n)........................................... Sec. 32.6(c)(3)................. ..........................
(o)........................................... Sec. 32.102(a).................. ..........................
(p)........................................... Sec. 32.2(e).................... ..........................
Sec. 32.3(a)...................................... Sec. 32.3, Sec. 32.4............ Modified.
(b)(1)........................................ Sec. 32.6(c).................... ..........................
(b)(2)........................................ Sec. 32.6(h).................... Modified.
(b)(3)........................................ Sec. 32.6(i)(1)................. Modified.
(b)(4)........................................ Sec. 32.6(i)(2)................. ..........................
(b)(5)........................................ ................................ Significant addition.
(c)(1)........................................ Sec. 32.6(a).................... ..........................
(c)(2)........................................ Sec. 32.6(b).................... ..........................
(c)(3)........................................ Sec. 32.6(d).................... Significant change.
(c)(4)....................................... Sec. 32.6(e).................... ..........................
(c)(5)........................................ Sec. 32.109..................... ..........................
(c)(6)........................................ Sec. 32.6(f).................... Modified.
(c)(7)........................................ Sec. 32.6(g).................... ..........................
(c)(8)........................................ Sec. 32.6(j).................... ..........................
(c)(9)........................................ Sec. 32.110..................... ..........................
(c)(10)....................................... ................................ Added.
Sec. 32.4......................................... ................................ Significant addition.
Sec. 32.5(a)...................................... Sec. 32.5(a)(1)................. ..........................
(b)........................................... ................................ Significant change.
(c)........................................... Sec. 32.5(a)(2)................. Modified.
(d)........................................... Sec. 32.5(b).................... Modified.
(e)........................................... Sec. 32.5(c).................... ..........................
(f)........................................... Sec. 32.5(d).................... ..........................
Sec. 32.6......................................... Sec. 32.7....................... Modified.
----------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Comptroller of the Currency certifies that the final rule will not have
a significant economic impact on a substantial number of small
entities. Accordingly, a regulatory flexibility analysis is not
required. This regulation will reduce the regulatory burden on national
banks, regardless of size, by simplifying and clarifying existing
regulatory requirements.
Executive Order 12866
The OCC has determined that this document is not a significant
regulatory action as defined in Executive Order 12866.
List of Subjects in 12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, part 32 of chapter I of
title 12 of the Code of Federal Regulations is revised to read as
follows:
PART 32--LENDING LIMITS
Sec.
32.1 Authority, purpose and scope.
32.2 Definitions.
32.3 Lending limits.
32.4 Calculation of lending limits.
32.5 Combination rules.
32.6 Nonconforming loans.
Authority: 12 U.S.C. 1 et seq., 84, and 93a.
Sec. 32.1 Authority, purpose and scope.
(a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq.,
12 U.S.C. 84, and 12 U.S.C. 93a.
(b) Purpose. The purpose of this part is to protect the safety and
soundness of [[Page 8533]] national banks by preventing excessive loans
to one person, or to related persons that are financially dependent,
and to promote diversification of loans and equitable access to banking
services.
(c) Scope. (1) This part applies to all loans and extensions of
credit made by national banks and their domestic operating
subsidiaries. This part does not apply to loans made by a national bank
and its domestic operating subsidiaries to the bank's ``affiliates,''
as that term is defined in 12 U.S.C. 371c(b)(1), to the bank's
operating subsidiaries, or to Edge Act or Agreement Corporation
subsidiaries.
(2) The lending limits in this part are separate and independent
from the investment limits prescribed by 12 U.S.C. 24 (Seventh), and a
national bank may make loans or extensions of credit to one borrower up
to the full amount permitted by this part and also hold eligible
securities of the same obligor up to the full amount permitted under 12
U.S.C. 24 (Seventh) and 12 CFR part 1.
(3) Extensions of credit to executive officers, directors and
principal shareholders of national banks, and their related interests
are subject to limits prescribed by 12 U.S.C. 375a and 375b in addition
to the lending limits established by 12 U.S.C. 84 and this part.
(4) In addition to the foregoing, loans and extensions of credit
made by national banks and their domestic operating subsidiaries must
be consistent with safe and sound banking practices.
Sec. 32.2 Definitions.
(a) Borrower means a person who is named as a borrower or debtor in
a loan or extension of credit, or any other person, including a drawer,
endorser, or guarantor, who is deemed to be a borrower under the
``direct benefit'' or the ``common enterprise'' tests set forth in
Sec. 32.5.
(b) Capital and surplus means--
(1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-
based capital under the OCC's Minimum Capital Ratios in Appendix A of
part 3 of this chapter; plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital under part 3 of this chapter.
(c) Close of business means the time at which a bank closes its
accounting records for the business day.
(d) Consumer means the user of any products, commodities, goods, or
services, whether leased or purchased, but does not include any person
who purchases products or commodities for resale or fabrication into
goods for sale.
(e) Consumer paper means paper relating to automobiles, mobile
homes, residences, office equipment, household items, tuition fees,
insurance premium fees, and similar consumer items. Consumer paper also
includes paper covering the lease (where the bank is not the owner or
lessor) or purchase of equipment for use in manufacturing, farming,
construction, or excavation.
(f) Contractual commitment to advance funds. (1) The term includes
a bank's obligation to--
(i) Make payment (directly or indirectly) to a third person
contingent upon default by a customer of the bank in performing an
obligation and to make such payment in keeping with the agreed upon
terms of the customer's contract with the third person, or to make
payments upon some other stated condition;
(ii) Guarantee or act as surety for the benefit of a person;
(iii) Advance funds under a qualifying commitment to lend, as
defined in paragraph (l) of this section; and
(iv) Advance funds under a standby letter of credit as defined in
paragraph (p) of this section, a put, or other similar arrangement.
(2) The term does not include commercial letters of credit and
similar instruments where the issuing bank expects the beneficiary to
draw on the issuer, that do not guarantee payment, and that do not
provide for payment in the event of a default by a third party.
(g) Control is presumed to exist when a person directly or
indirectly, or acting through or together with one or more persons--
(1) Owns, controls, or has the power to vote 25 percent or more of
any class of voting securities of another person;
(2) Controls, in any manner, the election of a majority of the
directors, trustees, or other persons exercising similar functions of
another person; or
(3) Has the power to exercise a controlling influence over the
management or policies of another person.
(h) Current market value means the bid or closing price listed for
an item in a regularly published listing or an electronic reporting
service.
(i) Financial instrument means stocks, notes, bonds, and debentures
traded on a national securities exchange, OTC margin stocks as defined
in Regulation U, 12 CFR part 221, commercial paper, negotiable
certificates of deposit, bankers' acceptances, and shares in money
market and mutual funds of the type that issue shares in which banks
may perfect a security interest. Financial instruments may be
denominated in foreign currencies that are freely convertible to U.S.
dollars. The term ``financial instrument'' does not include mortgages.
(j) Loans and extensions of credit means a bank's direct or
indirect advance of funds to or on behalf of a borrower based on an
obligation of the borrower to repay the funds or repayable from
specific property pledged by or on behalf of the borrower.
(1) Loans or extensions of credit for purposes of 12 U.S.C. 84 and
this part include--
(i) A contractual commitment to advance funds, as defined in
paragraph (f) of this section;
(ii) A maker or endorser's obligation arising from a bank's
discount of commercial paper;
(iii) A bank's purchase of securities subject to an agreement that
the seller will repurchase the securities at the end of a stated
period, but not including a bank's purchase of Type I securities, as
defined in part 1 of this chapter, subject to a repurchase agreement,
where the purchasing bank has assured control over or has established
its rights to the Type I securities as collateral;
(iv) A bank's purchase of third-party paper subject to an agreement
that the seller will repurchase the paper upon default or at the end of
a stated period. The amount of the bank's loan is the total unpaid
balance of the paper owned by the bank less any applicable dealer
reserves retained by the bank and held by the bank as collateral
security. Where the seller's obligation to repurchase is limited, the
bank's loan is measured by the total amount of the paper the seller may
ultimately be obligated to repurchase. A bank's purchase of third party
paper without direct or indirect recourse to the seller is not a loan
or extension of credit to the seller;
(v) An overdraft, whether or not prearranged, but not an intra-day
overdraft for which payment is received before the close of business of
the bank that makes the funds available;
(vi) The sale of Federal funds with a maturity of more than one
business day, but not Federal funds with a maturity of one day or less
or Federal funds sold under a continuing contract; and
(vii) Loans or extensions of credit that have been charged off on
the books of the bank in whole or in part, unless the loan or extension
of credit--
(A) Is unenforceable by reason of discharge in bankruptcy;
(B) Is no longer legally enforceable because of expiration of the
statute of limitations or a judicial decision; or
(C) Is no longer legally enforceable for other reasons, provided
that the bank [[Page 8534]] maintains sufficient records to demonstrate
that the loan is unenforceable.
(2) The following items do not constitute loans or extensions of
credit for purposes of 12 U.S.C. 84 and this part--
(i) Additional funds advanced for the benefit of a borrower by a
bank for payment of taxes, insurance, utilities, security, and
maintenance and operating expenses necessary to preserve the value of
real property securing the loan, consistent with safe and sound banking
practices, but only if the advance is for the protection of the bank's
interest in the collateral, and provided that such amounts must be
treated as an extension of credit if a new loan or extension of credit
is made to the borrower;
(ii) Accrued and discounted interest on an existing loan or
extension of credit, including interest that has been capitalized from
prior notes and interest that has been advanced under terms and
conditions of a loan agreement;
(iii) Financed sales of a bank's own assets, including Other Real
Estate Owned, if the financing does not put the bank in a worse
position than when the bank held title to the assets;
(iv) A renewal or restructuring of a loan as a new ``loan or
extension of credit,'' following the exercise by a bank of reasonable
efforts, consistent with safe and sound banking practices, to bring the
loan into conformance with the lending limit, unless new funds are
advanced by the bank to the borrower (except as permitted by
Sec. 32.3(b)(5)), or a new borrower replaces the original borrower, or
unless the OCC determines that a renewal or restructuring was
undertaken as a means to evade the bank's lending limit;
(v) Amounts paid against uncollected funds in the normal process of
collection; and
(vi)(A) That portion of a loan or extension of credit sold as a
participation by a bank on a nonrecourse basis, provided that the
participation results in a pro rata sharing of credit risk
proportionate to the respective interests of the originating and
participating lenders. Where a participation agreement provides that
repayment must be applied first to the portions sold, a pro rata
sharing will be deemed to exist only if the agreement also provides
that, in the event of a default or comparable event defined in the
agreement, participants must share in all subsequent repayments and
collections in proportion to their percentage participation at the time
of the occurrence of the event.
(B) When an originating bank funds the entire loan, it must receive
funding from the participants before the close of business of its next
business day. If the participating portions are not received within
that period, then the portions funded will be treated as a loan by the
originating bank to the borrower. If the portions so attributed to the
borrower exceed the originating bank's lending limit, the loan may be
treated as nonconforming subject to Sec. 32.6, rather than a violation,
if:
(1) The originating bank had a valid and unconditional
participation agreement with a participating bank or banks that was
sufficient to reduce the loan to within the originating bank's lending
limit;
(2) The participating bank reconfirmed its participation and the
originating bank had no knowledge of any information that would permit
the participant to withhold its participation; and
(3) The participation was to be funded by close of business of the
originating bank's next business day.
(k) Person means an individual; sole proprietorship; partnership;
joint venture; association; trust; estate; business trust; corporation;
limited liability company; not-for-profit corporation; sovereign
government or agency, instrumentality, or political subdivision
thereof; or any similar entity or organization.
(l) Qualifying commitment to lend means a legally binding written
commitment to lend that, when combined with all other outstanding loans
and qualifying commitments to a borrower, was within the bank's lending
limit when entered into, and has not been disqualified.
(1) In determining whether a commitment is within the bank's
lending limit when made, the bank may deduct from the amount of the
commitment the amount of any legally binding loan participation
commitments that are issued concurrent with the bank's commitment and
that would be excluded from the definition of ``loan or extension of
credit'' under paragraph (j)(2)(vi) of this section.
(2) If the bank subsequently chooses to make an additional loan and
that subsequent loan, together with all outstanding loans and
qualifying commitments to a borrower, exceeds the bank's applicable
lending limit at that time, the bank's qualifying commitments to the
borrower that exceed the bank's lending limit at that time are deemed
to be permanently disqualified, beginning with the most recent
qualifying commitment and proceeding in reverse chronological order.
When a commitment is disqualified, the entire commitment is
disqualified and the disqualified commitment is no longer considered a
``loan or extension of credit.'' Advances of funds under a disqualified
or non-qualifying commitment may only be made to the extent that the
advance, together with all other outstanding loans to the borrower, do
not exceed the bank's lending limit at the time of the advance,
calculated pursuant to Sec. 32.4.
(m) Readily marketable collateral means financial instruments and
bullion that are salable under ordinary market conditions with
reasonable promptness at a fair market value determined by quotations
based upon actual transactions on an auction or similarly available
daily bid and ask price market.
(n) Readily marketable staple means an article of commerce,
agriculture, or industry, such as wheat and other grains, cotton, wool,
and basic metals such as tin, copper and lead, in the form of
standardized interchangeable units, that is easy to sell in a market
with sufficiently frequent price quotations.
(1) An article comes within this definition if--
(i) The exact price is easy to determine; and
(ii) The staple itself is easy to sell at any time at a price that
would not be considerably less than the amount at which it is valued as
collateral.
(2) Whether an article qualifies as a readily marketable staple is
determined on the basis of the conditions existing at the time the loan
or extension of credit that is secured by the staples is made.
(o) Sale of Federal funds means any transaction between depository
institutions involving the transfer of immediately available funds
resulting from credits to deposit balances at Federal Reserve Banks, or
from credits to new or existing deposit balances due from a
correspondent depository institution.
(p) Standby letter of credit means any letter of credit, or similar
arrangement, that represents an obligation to the beneficiary on the
part of the issuer:
(1) To repay money borrowed by or advanced to or for the account of
the account party;
(2) To make payment on account of any indebtedness undertaken by
the account party; or
(3) To make payment on account of any default by the account party
in the performance of an obligation.
Sec. 32.3 Lending limits.
(a) Combined general limit. A national bank's total outstanding
loans and extensions of credit to one borrower [[Page 8535]] may not
exceed 15 percent of the bank's capital and surplus, plus an additional
10 percent of the bank's capital and surplus, if the amount that
exceeds the bank's 15 percent general limit is fully secured by readily
marketable collateral, as defined in Sec. 32.2(m). To qualify for the
additional 10 percent limit, the bank must perfect a security interest
in the collateral under applicable law and the collateral must have a
current market value at all times of at least 100 percent of the amount
of the loan or extension of credit that exceeds the bank's 15 percent
general limit.
(b) Loans subject to special lending limits. The following loans or
extensions of credit are subject to the lending limits set forth below.
When loans and extensions of credit qualify for more than one special
lending limit, the special limits are cumulative.
(1) Loans secured by bills of lading or warehouse receipts covering
readily marketable staples. (i) A national bank's loans or extensions
of credit to one borrower secured by bills of lading, warehouse
receipts, or similar documents transferring or securing title to
readily marketable staples, as defined in Sec. 32.2(n), may not exceed
35 percent of the bank's capital and surplus in addition to the amount
allowed under the bank's combined general limit. The market value of
the staples securing the loan must at all times equal at least 115
percent of the amount of the outstanding loan that exceeds the bank's
combined general limit.
(ii) Staples that qualify for this special limit must be
nonperishable, may be refrigerated or frozen, and must be fully covered
by insurance if such insurance is customary. Whether a staple is non-
perishable must be determined on a case-by-case basis because of
differences in handling and storing commodities.
(iii) This special limit applies to a loan or extension of credit
arising from a single transaction or secured by the same staples,
provided that the duration of the loan or extension of credit is:
(A) Not more than ten months if secured by nonperishable staples;
or
(B) Not more than six months if secured by refrigerated or frozen
staples.
(iv) The holder of the warehouse receipts, order bills of lading,
documents qualifying as documents of title under the Uniform Commercial
Code, or other similar documents, must have control and be able to
obtain immediate possession of the staple so that the bank is able to
sell the underlying staples and promptly transfer title and possession
to a purchaser if default should occur on a loan secured by such
documents. The existence of a brief notice period, or similar
procedural requirements under applicable law, for the disposal of the
collateral will not affect the eligibility of the instruments for this
special limit.
(A) Field warehouse receipts are an acceptable form of collateral
when issued by a duly bonded and licensed grain elevator or warehouse
having exclusive possession and control of the staples even though the
grain elevator or warehouse is maintained on the premises of the owner
of the staples.
(B) Warehouse receipts issued by the borrower-owner that is a grain
elevator or warehouse company, duly-bonded and licensed and regularly
inspected by state or Federal authorities, may be considered eligible
collateral under this provision only when the receipts are registered
with an independent registrar whose consent is required before the
staples may be withdrawn from the warehouse.
(2) Discount of installment consumer paper. (i) A national bank's
loans and extensions of credit to one borrower that arise from the
discount of negotiable or nonnegotiable installment consumer paper, as
defined at Sec. 32.2(e), that carries a full recourse endorsement or
unconditional guarantee by the person selling the paper, may not exceed
10 percent of the bank's capital and surplus in addition to the amount
allowed under the bank's combined general limit. An unconditional
guarantee may be in the form of a repurchase agreement or separate
guarantee agreement. A condition reasonably within the power of the
bank to perform, such as the repossession of collateral, will not make
conditional an otherwise unconditional guarantee.
(ii) Where the seller of the paper offers only partial recourse to
the bank, the lending limits of this section apply to the obligation of
the seller to the bank, which is measured by the total amount of paper
the seller may be obligated to repurchase or has guaranteed.
(iii) Where the bank is relying primarily upon the maker of the
paper for payment of the loans or extensions of credit and not upon any
full or partial recourse endorsement or guarantee by the seller of the
paper, the lending limits of this section apply only to the maker. The
bank must substantiate its reliance on the maker with--
(A) Records supporting the bank's independent credit analysis of
the maker's ability to repay the loan or extension of credit,
maintained by the bank or by a third party that is contractually
obligated to make those records available for examination purposes; and
(B) A written certification by an officer of the bank authorized by
the bank's board of directors or any designee of that officer, that the
bank is relying primarily upon the maker to repay the loan or extension
of credit.
(iv) Where paper is purchased in substantial quantities, the
records, evaluation, and certification must be in a form appropriate
for the class and quantity of paper involved. The bank may use sampling
techniques, or other appropriate methods, to independently verify the
reliability of the credit information supplied by the seller.
(3) Loans secured by documents covering livestock. (i) A national
bank's loans or extensions of credit to one borrower secured by
shipping documents or instruments that transfer or secure title to or
give a first lien on livestock may not exceed 10 percent of the bank's
capital and surplus in addition to the amount allowed under the bank's
combined general limit. The market value of the livestock securing the
loan must at all times equal at least 115 percent of the amount of the
outstanding loan that exceeds the bank's combined general limit. For
purposes of this subsection, the term ``livestock'' includes dairy and
beef cattle, hogs, sheep, goats, horses, mules, poultry and fish,
whether or not held for resale.
(ii) The bank must maintain in its files an inspection and
valuation for the livestock pledged that is reasonably current, taking
into account the nature and frequency of turnover of the livestock to
which the documents relate, but in any case not more than 12 months
old.
(iii) Under the laws of certain states, persons furnishing
pasturage under a grazing contract may have a lien on the livestock for
the amount due for pasturage. If a lien that is based on pasturage
furnished by the lienor prior to the bank's loan or extension of credit
is assigned to the bank by a recordable instrument and protected
against being defeated by some other lien or claim, by payment to a
person other than the bank, or otherwise, it will qualify under this
exception provided the amount of the perfected lien is at least equal
to the amount of the loan and the value of the livestock is at no time
less than 115 percent of the portion of the loan or extension of credit
that exceeds the bank's combined general limit. When the amount due
under the grazing contract is dependent upon future performance, the
resulting lien does not meet the requirements of the exception.
(4) Loans secured by dairy cattle. A national bank's loans and
extensions of credit to one borrower that arise from the discount by
dealers in dairy cattle of [[Page 8536]] paper given in payment for the
cattle may not exceed 10 percent of the bank's capital and surplus in
addition to the amount allowed under the bank's combined general limit.
To qualify, the paper--
(i) Must carry the full recourse endorsement or unconditional
guarantee of the seller; and
(ii) Must be secured by the cattle being sold, pursuant to liens
that allow the bank to maintain a perfected security interest in the
cattle under applicable law.
(5) Additional advances to complete project financing pursuant to
renewal of a qualifying commitment to lend. A national bank may renew a
qualifying commitment to lend, as defined by Sec. 32.2(l), and complete
funding under that commitment if all of the following criteria are
met--
(i) The completion of funding is consistent with safe and sound
banking practices and is made to protect the position of the bank;
(ii) The completion of funding will enable the borrower to complete
the project for which the qualifying commitment to lend was made; and
(iii) The amount of the additional funding does not exceed the
unfunded portion of the bank's qualifying commitment to lend.
(c) Loans not subject to the lending limits. The following loans or
extensions of credit are not subject to the lending limits of 12 U.S.C.
84 or this part.
(1) Loans arising from the discount of commercial or business
paper. (i) Loans or extensions of credit arising from the discount of
negotiable commercial or business paper that evidences an obligation to
the person negotiating the paper. The paper--
(A) Must be given in payment of the purchase price of commodities
purchased for resale, fabrication of a product, or any other business
purpose that may reasonably be expected to provide funds for payment of
the paper; and
(B) Must bear the full recourse endorsement of the owner of the
paper, except that paper discounted in connection with export
transactions, that is transferred without recourse, or with limited
recourse, must be supported by an assignment of appropriate insurance
covering the political, credit, and transfer risks applicable to the
paper, such as insurance provided by the Export-Import Bank.
(ii) A failure to pay principal or interest on commercial or
business paper when due does not result in a loan or extension of
credit to the maker or endorser of the paper; however, the amount of
such paper thereafter must be counted in determining whether additional
loans or extensions of credit to the same borrower may be made within
the limits of 12 U.S.C. 84 and this part.
(2) Bankers' acceptances. A bank's acceptance of drafts eligible
for rediscount under 12 U.S.C. 372 and 373, or a bank's purchase of
acceptances created by other banks that are eligible for rediscount
under those sections; but not including--
(i) A bank's acceptance of drafts ineligible for rediscount (which
constitutes a loan by the bank to the customer for whom the acceptance
was made, in the amount of the draft);
(ii) A bank's purchase of ineligible acceptances created by other
banks (which constitutes a loan from the purchasing bank to the
accepting bank, in the amount of the purchase price); and
(iii) A bank's purchase of its own acceptances (which constitutes a
loan to the bank's customer for whom the acceptance was made, in the
amount of the purchase price).
(3)(i) Loans secured by U.S. obligations. Loans or extensions of
credit, or portions thereof, to the extent fully secured by the current
market value of:
(A) Bonds, notes, certificates of indebtedness, or Treasury bills
of the United States or by similar obligations fully guaranteed as to
principal and interest by the United States;
(B) Loans to the extent guaranteed as to repayment of principal by
the full faith and credit of the U.S. government, as set forth in
paragraph (c)(4)(ii) of this section.
(ii) To qualify under this paragraph, the bank must perfect a
security interest in the collateral under applicable law.
(4) Loans to or guaranteed by a Federal agency. (i) Loans or
extensions of credit to any department, agency, bureau, board,
commission, or establishment of the United States or any corporation
wholly owned directly or indirectly by the United States.
(ii) Loans or extensions of credit, including portions thereof, to
the extent secured by unconditional takeout commitments or guarantees
of any of the foregoing governmental entities. The commitment or
guarantee--
(A) Must be payable in cash or its equivalent within 60 days after
demand for payment is made;
(B) Is considered unconditional if the protection afforded the bank
is not substantially diminished or impaired if loss should result from
factors beyond the bank's control. Protection against loss is not
materially diminished or impaired by procedural requirements, such as
an agreement to take over only in the event of default, including
default over a specific period of time, a requirement that notification
of default be given within a specific period after its occurrence, or a
requirement of good faith on the part of the bank.
(5) Loans to or guaranteed by general obligations of a State or
political subdivision. Loans or extensions of credit to a State or
political subdivision that constitutes a general obligation of the
State or political subdivision, as defined in Part 1 of this chapter,
and for which the lending bank has obtained the opinion of counsel that
the loan or extension of credit is a valid and enforceable general
obligation of the borrower, and loans or extensions of credit,
including portions thereof, to the extent guaranteed or secured by a
general obligation of a State or political subdivision and for which
the lending bank has obtained the opinion of counsel that the guarantee
or collateral is a valid and enforceable general obligation of that
public body.
(6) Loans secured by segregated deposit accounts. Loans or
extensions of credit, including portions thereof, to the extent secured
by a segregated deposit account in the lending bank, provided a
security interest in the deposit has been perfected under applicable
law.
(i) Where the deposit is eligible for withdrawal before the secured
loan matures, the bank must establish internal procedures to prevent
release of the security without the lending bank's prior consent.
(ii) A deposit that is denominated and payable in a currency other
than that of the loan or extension of credit that it secures may be
eligible for this exception if the currency is freely convertible to
U.S. dollars.
(A) This exception applies to only that portion of the loan or
extension of credit that is covered by the U.S. dollar value of the
deposit.
(B) The lending bank must establish procedures to revalue foreign
currency deposits to ensure that the loan or extension of credit
remains fully secured at all times.
(7) Loans to financial institutions with the approval of the
Comptroller. Loans or extensions of credit to any financial institution
or to any receiver, conservator, superintendent of banks, or other
agent in charge of the business and property of a financial institution
when an emergency situation exists and a national bank is asked to
provide assistance to another financial institution, and the loan is
approved by the Comptroller. For purposes of this
[[Page 8537]] paragraph, financial institution means a commercial bank,
savings bank, trust company, savings association, or credit union.
(8) Loans to the Student Loan Marketing Association. Loans or
extensions of credit to the Student Loan Marketing Association.
(9) Loans to industrial development authorities. A loan or
extension of credit to an industrial development authority or similar
public entity created to construct and lease a plant facility,
including a health care facility, to an industrial occupant will be
deemed a loan to the lessee, provided that--
(i) The bank evaluates the creditworthiness of the industrial
occupant before the loan is extended to the authority;
(ii) The authority's liability on the loan is limited solely to
whatever interest it has in the particular facility;
(iii) The authority's interest is assigned to the bank as security
for the loan or the industrial occupant issues a promissory note to the
bank that provides a higher order of security than the assignment of a
lease; and
(iv) The industrial occupant's lease rentals are assigned and paid
directly to the bank.
(10) Loans to leasing companies. A loan or extension of credit to a
leasing company for the purpose of purchasing equipment for lease will
be deemed a loan to the lessee, provided that--
(i) The bank evaluates the creditworthiness of the lessee before
the loan is extended to the leasing corporation;
(ii) The loan is without recourse to the leasing corporation;
(iii) The bank is given a security interest in the equipment and in
the event of default, may proceed directly against the equipment and
the lessee for any deficiency resulting from the sale of the equipment;
(iv) The leasing corporation assigns all of its rights under the
lease to the bank;
(v) The lessee's lease payments are assigned and paid to the bank;
and
(vi) The lease terms are subject to the same limitations that would
apply to a national bank acting as a lessor.
Sec. 32.4 Calculation of lending limits.
(a) Calculation date. For purposes of determining compliance with
12 U.S.C. 84 and this part, a bank's lending limit shall be calculated
as of the most recent of the following dates--
(1) When the bank's Consolidated Report of Condition and Income is
required to be filed; or
(2) When there is a change in the bank's capital category for
purposes of 12 U.S.C. 1831o and part 6 of this chapter.
(b) Authority of OCC to require more frequent calculations. If the
OCC determines for safety and soundness reasons that a bank should
calculate its lending limit more frequently than required by paragraph
(a) of this section, the OCC may provide written notice to the bank
directing the bank to calculate its lending limit at a more frequent
interval, and the bank shall thereafter calculate its lending limit at
that interval until further notice.
Sec. 32.5 Combination rules.
(a) General rule. Loans or extensions of credit to one borrower
will be attributed to another person and each person will be deemed a
borrower--
(1) When proceeds of a loan or extension of credit are to be used
for the direct benefit of the other person, to the extent of the
proceeds so used; or
(2) When a common enterprise is deemed to exist between the
persons.
(b) Direct benefit. The proceeds of a loan or extension of credit
to a borrower will be deemed to be used for the direct benefit of
another person and will be attributed to the other person when the
proceeds, or assets purchased with the proceeds, are transferred to
another person, other than in a bona fide arm's length transaction
where the proceeds are used to acquire property, goods, or services.
(c) Common enterprise. A common enterprise will be deemed to exist
and loans to separate borrowers will be aggregated:
(1) When the expected source of repayment for each loan or
extension of credit is the same for each borrower and neither borrower
has another source of income from which the loan (together with the
borrower's other obligations) may be fully repaid. An employer will not
be treated as a source of repayment under this paragraph because of
wages and salaries paid to an employee, unless the standards of
paragraph (c)(2) of this section are met;
(2) When loans or extensions of credit are made--
(i) To borrowers who are related directly or indirectly through
common control, including where one borrower is directly or indirectly
controlled by another borrower; and
(ii) Substantial financial interdependence exists between or among
the borrowers. Substantial financial interdependence is deemed to exist
when 50 percent or more of one borrower's gross receipts or gross
expenditures (on an annual basis) are derived from transactions with
the other borrower. Gross receipts and expenditures include gross
revenues/expenses, intercompany loans, dividends, capital
contributions, and similar receipts or payments;
(3) When separate persons borrow from a bank to acquire a business
enterprise of which those borrowers will own more than 50 percent of
the voting securities or voting interests, in which case a common
enterprise is deemed to exist between the borrowers for purposes of
combining the acquisition loans; or
(4) When the OCC determines, based upon an evaluation of the facts
and circumstances of particular transactions, that a common enterprise
exists.
(d) Special rule for loans to a corporate group. (1) Loans or
extensions of credit by a bank to a corporate group may not exceed 50
percent of the bank's capital and surplus. This limitation applies only
to loans subject to the combined general limit. A corporate group
includes a person and all of its subsidiaries. For purposes of this
paragraph, a corporation or a limited liability company is a subsidiary
of a person if the person owns or beneficially owns directly or
indirectly more than 50 percent of the voting securities or voting
interests of the corporation or company.
(2) Except as provided in paragraph (d)(1) of this section, loans
or extensions of credit to a person and its subsidiary, or to different
subsidiaries of a person, are not combined unless either the direct
benefit or the common enterprise test is met.
(e) Special rules for loans to partnerships, joint ventures, and
associations.--(1) Partnership loans. Loans or extensions of credit to
a partnership, joint venture, or association are deemed to be loans or
extensions of credit to each member of the partnership, joint venture,
or association. This rule does not apply to limited partners in limited
partnerships or to members of joint ventures or associations if the
partners or members, by the terms of the partnership or membership
agreement, are not held generally liable for the debts or actions of
the partnership, joint venture, or association, and those provisions
are valid under applicable law.
(2) Loans to partners. (i) Loans or extensions of credit to members
of a partnership, joint venture, or association are not attributed to
the partnership, joint venture, or association unless either the direct
benefit or the common enterprise tests are met. Both the direct benefit
and common enterprise tests are met between a member of a partnership,
joint venture or association and such partnership, joint venture or
association, [[Page 8538]] when loans or extensions of credit are made
to the member to purchase an interest in the partnership, joint venture
or association.
(ii) Loans or extensions of credit to members of a partnership,
joint venture, or association are not attributed to other members of
the partnership, joint venture, or association unless either the direct
benefit or common enterprise test is met.
(f) Loans to foreign governments, their agencies, and
instrumentalities.--(1) Aggregation. Loans and extensions of credit to
foreign governments, their agencies, and instrumentalities will be
aggregated with one another only if the loans or extensions of credit
fail to meet either the means test or the purpose test at the time the
loan or extension of credit is made.
(i) The means test is satisfied if the borrower has resources or
revenue of its own sufficient to service its debt obligations. If the
government's support (excluding guarantees by a central government of
the borrower's debt) exceeds the borrower's annual revenues from other
sources, it will be presumed that the means test has not been
satisfied.
(ii) The purpose test is satisfied if the purpose of the loan or
extension of credit is consistent with the purposes of the borrower's
general business.
(2) Documentation. In order to show that the means and purpose
tests have been satisfied, a bank must, at a minimum, retain in its
files the following items:
(i) A statement (accompanied by supporting documentation)
describing the legal status and the degree of financial and operational
autonomy of the borrowing entity;
(ii) Financial statements for the borrowing entity for a minimum of
three years prior to the date the loan or extension of credit was made
or for each year that the borrowing entity has been in existence, if
less than three;
(iii) Financial statements for each year the loan or extension of
credit is outstanding;
(iv) The bank's assessment of the borrower's means of servicing the
loan or extension of credit, including specific reasons in support of
that assessment. The assessment shall include an analysis of the
borrower's financial history, its present and projected economic and
financial performance, and the significance of any financial support
provided to the borrower by third parties, including the borrower's
central government; and
(v) A loan agreement or other written statement from the borrower
which clearly describes the purpose of the loan or extension of credit.
The written representation will ordinarily constitute sufficient
evidence that the purpose test has been satisfied. However, when, at
the time the funds are disbursed, the bank knows or has reason to know
of other information suggesting that the borrower will use the proceeds
in a manner inconsistent with the written representation, it may not,
without further inquiry, accept the representation.
(3) Restructured loans.--(i) Non-combination rule. Notwithstanding
paragraphs (a) through (e) of this section, when previously outstanding
loans and other extensions of credit to a foreign government, its
agencies, and instrumentalities (i.e., public-sector obligors) that
qualified for a separate lending limit under paragraph (f)(1) of this
section are consolidated under a central obligor in a qualifying
restructuring, such loans will not be aggregated and attributed to the
central obligor. This includes any substitution in named obligors,
solely because of the restructuring. Such loans (other than loans
originally attributed to the central obligor in their own right) will
not be considered obligations of the central obligor and will continue
to be attributed to the original public-sector obligor for purposes of
the lending limit.
(ii) Qualifying restructuring. Loans and other extensions of credit
to a foreign government, its agencies, and instrumentalities will
qualify for the non-combination process under paragraph (f)(3)(i) of
this section only if they are restructured in a sovereign debt
restructuring approved by the OCC, upon request by a bank for
application of the non combination rule. The factors that the OCC will
use in making this determination include, but are not limited to, the
following:
(A) Whether the restructuring involves a substantial portion of the
total commercial bank loans outstanding to the foreign government, its
agencies, and instrumentalities;
(B) Whether the restructuring involves a substantial number of the
foreign country's external commercial bank creditors;
(C) Whether the restructuring and consolidation under a central
obligor is being done primarily to facilitate external debt management;
and
(D) Whether the restructuring includes features of debt or debt-
service reduction.
(iii) 50 percent aggregate limit. With respect to any case in which
the non-combination process under paragraph (f)(3)(i) of this section
applies, a national bank's loans and other extensions of credit to a
foreign government, its agencies and instrumentalities, (including
restructured debt) shall not exceed, in the aggregate, 50 percent of
the bank's capital and surplus.
Sec. 32.6 Nonconforming loans.
(a) A loan, within a bank's legal lending limit when made, will not
be deemed a violation but will be treated as nonconforming if the loan
is no longer in conformity with the bank's lending limit because--
(1) The bank's capital has declined, borrowers have subsequently
merged or formed a common enterprise, lenders have merged, the lending
limit or capital rules have changed; or
(2) Collateral securing the loan to satisfy the requirements of a
lending limit exception has declined in value.
(b) A bank must use reasonable efforts to bring a loan that is
nonconforming as a result of paragraph (a)(1) of this section into
conformity with the bank's lending limit unless to do so would be
inconsistent with safe and sound banking practices.
(c) A bank must bring a loan that is nonconforming as a result of
circumstances described in paragraph (a)(2) of this section into
conformity with the bank's lending limit within 30 calendar days,
except when judicial proceedings, regulatory actions or other
extraordinary circumstances beyond the bank's control prevent the bank
from taking action.
Dated: February 6, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-3363 Filed 2-14-95; 8:45 am]
BILLING CODE 4810-33-P
