[Federal Register Volume 61, Number 204 (Monday, October 21, 1996)]
[Rules and Regulations]
[Pages 54533-54538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26849]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 61, No. 204 / Monday, October 21, 1996 /
Rules and Regulations
[[Page 54533]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 31
[Docket No. 96-23]
RIN 1557-AB40
Extensions of Credit to Insiders and Transactions With Affiliates
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
revising its rules governing extensions of credit to national bank
insiders. This rulemaking is another component of the OCC's Regulation
Review Program to update and streamline OCC regulations and to reduce
unnecessary regulatory costs and other burdens. The final rule
modernizes and clarifies the insider lending rules and reduces
unnecessary regulatory burdens where feasible, consistent with
statutory requirements.
EFFECTIVE DATE: November 20, 1996.
FOR FURTHER INFORMATION CONTACT: Aline Henderson, Senior Attorney, Bank
Activities and Structure (202) 874-5300; Emily McNaughton, National
Bank Examiner, Credit & Management Policy (202) 874-5170; or Mark
Tenhundfeld, Assistant Director, Legislative and Regulatory Activities
(202) 874-5090, Office of the Comptroller of the Currency,
Communications Division, 250 E Street, SW, Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
Summary of Regulation Review Program
The OCC is revising 12 CFR part 31 as another component of its
Regulation Review Program (Program). The goal of the Program is to
review all of the OCC's rules and to eliminate provisions that do not
contribute significantly to maintaining the safety and soundness of
national banks or to accomplishing the OCC's other statutory
responsibilities. Another goal of the Program is to clarify regulations
so that they more effectively convey the standards the OCC seeks to
apply.
The OCC intends for this final rule to reduce regulatory costs and
other burdens on national banks by clarifying certain requirements and
eliminating a separate statement of provisions that are similar to
provisions found in the Federal Reserve Board's (the Board) Regulation
O (12 CFR part 215) (Reg. O). The final rule also responds to
commenters' requests for guidance on certain of the key differences
between the requirements of part 31 (as amended by this final rule) and
12 CFR part 32 (Lending Limits).
The Proposal
Current part 31 contains two subparts. Subpart A implements 12
U.S.C. 375a(4) and 375b(3) by setting a limit on the amount that a
national bank may lend to any one of its executive officers other than
for housing- and education-related loans and by establishing a
threshold above which approval of the bank's board of directors is
required for any loan to an insider. Subpart B implements 12 U.S.C.
1817(k) and 1972(2)(G)(ii) by requiring a national bank to disclose,
upon request, the names of its executive officers and principal
shareholders who borrow more than specified amounts from the bank
itself or from the bank's correspondent banks and to maintain records
related to requests for this information. Subpart B also implements 12
U.S.C. 1972(2)(G)(i), which requires a national bank's executive
officers and principal shareholders to report on loans they or their
related interests receive from the bank's correspondent banks.
The OCC solicited comment in the proposal (60 FR 63461 (December
11, 1995)) on whether the agency should adopt exceptions to the limit
on loans that a national bank may make to its executive officers for
loans that are secured by United States obligations, guaranteed by a
Federal agency, or secured by a segregated deposit account, in order to
be consistent with recent changes made by other agencies.1 The OCC
also solicited comment on proposed changes intended to clarify and
simplify the former rule by removing provisions that no longer are
necessary. Finally, the OCC invited comments on whether guidance would
be helpful on the differences between the insider lending limits and
the loans-to-one-borrower limits.
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\1\ See 59 FR 66666 (December 28, 1994) (amending the Federal
Deposit Insurance Corporation's rule) and 59 FR 8831 (February 24,
1994) (amending the Board's rule). The Office of Thrift
Supervision's regulation automatically applies the Board's rule to
thrifts. See 12 CFR 563.43.
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The Final Rule and Comments Received
The OCC received eleven comments in response to the proposal, most
of which supported the proposed changes. In many cases, a commenter
expressed support for the proposed changes and then requested that the
OCC reduce burden further. These comments fall for the most part into
two broad categories: First, that the OCC either eliminate part 31
altogether or remove those provisions that substantively are identical
to provisions in Reg. O; and second, that the OCC relax or clarify
various restrictions that currently apply to loans to insiders. These
comments are addressed in greater detail in the text that follows.
Adoption of proposed exceptions. Commenters addressing this issue
uniformly supported adopting the three proposed exceptions to the
limits that apply to loans to an executive officer. The OCC continues
to believe that these exceptions are appropriate for two reasons.
First, the OCC recognizes that a lending bank's position clearly is
protected where a loan is secured by obligations of the United States,
guaranteed by a Federal agency, or secured by a segregated deposit
account. The strength of the security in these situations reduces the
need for the additional protections against insider abuse that the
lower limits on loans to executive officers provide. Second, conforming
the OCC's regulation to those of the other Federal banking agencies is
consistent with section 303 of the Riegle Community Development and
Regulatory Improvement Act of 1994 (CDRI Act) (12 U.S.C. 4803) (which
requires each agency to work with the other Federal banking agencies to
make uniform all regulations and guidelines implementing common
statutory or
[[Page 54534]]
supervisory policies). Accordingly, the OCC adopts the exceptions as
proposed.
Elimination of part 31. One commenter suggested that the OCC
eliminate part 31 in its entirety. This commenter stated that part 31
is unnecessary because national banks, as member banks, must comply
with Reg. O. Another commenter suggested that the OCC eliminate
requirements in part 31 that duplicate requirements in Reg. O. In this
commenter's view, national banks are put at a disadvantage by having to
comply with the more restrictive set of rules if part 31 and Reg. O
differ. Finally, a third commenter stated that, if the OCC retains a
separate rule, the rule should be identical to comparable provisions in
Reg. O because even stylistic differences raise the question of whether
a substantive difference is intended.
In light of these comments and the agency's further internal
considerations, the OCC has decided simply to state in its rule that a
national bank and its insiders shall comply with provisions contained
in 12 CFR part 215. The final rule therefore eliminates from part 31
those sections that are redundant in light of comparable provisions in
Reg. O. The reference in the final rule to 12 CFR part 215 includes the
exceptions to the limits on the amount of loans a bank may make to its
insiders. The OCC agrees with the commenters that part 31 is
substantively identical to comparable restrictions in Reg. O (with the
addition of the exceptions that are being adopted as part of this final
rule) and that compliance would be simplified by eliminating a
restatement of the provisions in question.
The OCC is not eliminating part 31 altogether because several
provisions in the statutes that part 31 implements mandate that certain
restrictions be set by the ``appropriate Federal banking agency.'' For
instance, section 22(g) of the Federal Reserve Act (12 U.S.C. 375a(4))
states that a member bank may make extensions of credit not otherwise
specifically authorized under that section in an amount ``prescribed by
regulation of the member bank's appropriate Federal banking agency.''
Similarly, section 22(h) of the Federal Reserve Act (12 U.S.C. 375b(3))
states that a member bank must obtain the approval of the bank's board
of directors before extending credit to an insider in an amount that
would exceed a threshold established by regulation by the bank's
``appropriate Federal banking agency (as defined in section 3 of the
Federal Deposit Insurance Act)* * *.'' See also 12 U.S.C. 1817(k)
(regarding reports on, and disclosure of, loans by a bank to its
executive officers and principal shareholders) and 12 U.S.C.
1972(2)(G)(ii) (regarding reports on, and disclosure of, loans by a
correspondent bank to the reporting bank's executive officers and
principal shareholders).
The OCC believes that adopting a regulation that incorporates
restrictions from another regulation satisfies its obligation to
implement these statutes. Moreover, this eliminates any confusion that
may exist concerning, for instance, whether the OCC intends for the
rules to be identical to those adopted by the Board or whether national
banks must comply with a different and/or more restrictive provision.
Relaxation or clarification of restrictions. Several commenters,
while supporting the proposed changes, asked that the OCC relax certain
provisions governing insider lending. Others suggested amendments to
clarify existing ambiguities.
Two commenters seeking a relaxation of various standards objected
to provisions that are mandated by statute. One of these commenters
suggested that the OCC eliminate the requirement that an executive
officer submit a detailed current financial statement as a condition of
receiving credit from the officer's bank. However, this requirement
comes from section 22(g)(1)(C) of the Federal Reserve Act (12 U.S.C.
375a(1)(C)) and thus cannot be eliminated by a regulation. Another
commenter suggested that the OCC eliminate the prior approval
requirements and the requirement that a loan to an executive officer be
payable on demand whenever the officer becomes indebted to other banks
in an amount greater than the officer could borrow from his or her own
bank. These, too, are mandated by statutes. See 12 U.S.C. 375b(3) and
375a(1)(D), respectively. Accordingly, the OCC has not made the changes
suggested by these commenters.
In other cases, commenters requested that the OCC unilaterally
adopt changes to certain insider lending restrictions that have been
established by regulation. For instance, three commenters requested
that the OCC raise the maximum amount that a national bank may lend to
one of its executive officers. Another commenter suggested that the OCC
exempt loans secured by readily marketable securities or cash value
life insurance policies from the limits on loans to an executive
officer. Two other commenters requested that the OCC clarify certain
provisions that these commenters find ambiguous. The first of these
commenters noted that bank holding companies are excluded from
definition of ``principal shareholder'' in 12 CFR 215.2(m) but are
included in the definition of the same term in 12 CFR 215.11(a)(1). The
commenter stated that this difference requires the preparation of many
unnecessary reports of loans made by correspondent banks to
subsidiaries of a member bank's parent holding company. Another
commenter requested that the OCC clarify which provisions of the
insider lending restrictions apply to subsidiaries of a bank.
The OCC believes these types of changes should be considered on an
interagency basis, which also would be consistent with section 303 of
the CDRI Act. For these reasons, the OCC has declined to make the
changes suggested, but will discuss these suggestions with the other
Federal banking agencies.
The following discussion summarizes the amendments to part 31 and
the remaining comments.
Title of Regulation
The final rule changes the title of part 31 from ``Extensions of
credit to national bank insiders'' to ``Extensions of credit to
insiders and transactions with affiliates.'' This change reflects the
relocation to part 31 of two interpretations regarding transactions
with affiliates that formerly were set out in part 7.
Authority (Sec. 31.1)
The final rule states that part 31 is issued by the Comptroller of
the Currency pursuant to 12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and
1972(2)(G), as amended. With the exception of 12 U.S.C. 93a (which
provides general rulemaking authority to the OCC), each of these
sections directs or authorizes the appropriate Federal banking agency
to issue rules governing various aspects of loans to insiders.
Insider Lending Restrictions and Reporting Requirements (Sec. 31.2)
The final rule implements the statutes identified in Sec. 31.1 by
requiring national banks to comply with the provisions of Reg. O. These
statutes are implemented as follows: 12 U.S.C. 375a(4) is implemented
in Sec. 215.5 (b) and (c) of Reg. O; 12 U.S.C. 375b(3) is implemented
in Sec. 215.4(b); 12 U.S.C. 1817(k) is implemented in Sec. 215.11; and
12 U.S.C. 1972(2)(G) is implemented in subpart B of part 215. Because
national banks are members of the Federal Reserve System, the remaining
provisions in Reg. O implementing other provisions of the insider
lending statutes also apply to national banks. Thus, rather than create
the impression that national banks are to comply with
[[Page 54535]]
only some of Reg. O's provisions (namely, those provisions that
implement the statutes identified in Sec. 31.1), the final rule simply
states that national banks and their insiders shall comply with all of
Reg. O.
By stating the OCC's rule in this way, the final rule incorporates
the definitions used in Reg. O. In order to promote uniformity between
part 31 and Reg. O, the final rule does not distinguish between insured
and uninsured national banks in the definition of ``bank'' as that term
was used in former Sec. 31.5(a)(1). Finally, the rule clarifies that
the OCC administers and enforces Reg. O as it applies to national
banks.
The OCC intends for the provisions of Reg. O that have been
incorporated, as now or hereafter in effect, to govern insider lending
by national banks. The OCC will review subsequent revisions to Reg. O
and will publish further amendments to part 31 if necessary.
Interpretations (Appendix A)
Earlier this year, the OCC relocated several interpretations
pertaining to section 23A of the Federal Reserve Act (12 U.S.C. 371c)
that formerly appeared in part 7. See 61 FR 4849 (February 9, 1996)
(relocating 12 CFR 7.7360--loans secured by stock or obligations of an
affiliate, 7.7365--Federal funds transactions between affiliates, and
7.7370--deposits between affiliated banks). The OCC relocated these
interpretations to part 31 because the section 23A interpretations and
part 31 stem from similar concerns about persons or entities taking
undue advantage of positions of influence and thereby adversely
affecting the safety and soundness of a national bank.
The final rule amends the interpretation concerning loans secured
by stock or obligations of an affiliate (Section 1) to emphasize that a
loan is a covered transaction for purposes of section 23A if the loan
proceeds in the circumstances identified in the interpretation are used
for the benefit of, or transferred to, an affiliate.
The final rule removes the interpretation concerning Federal funds
transactions between affiliates (proposed Sec. 31.101). This
interpretation is substantively identical to a Board interpretation
(see 12 CFR 250.160) that applies to all member banks. Accordingly,
there is no need for the OCC to restate this provision.
The remaining interpretation (Section 2) has been restated without
amendment.
Guidance Regarding Differences Between Lending Limits and Insider
Lending Standards (Appendix B)
In the proposal, the OCC sought comment on whether it would be
useful for the agency to issue guidance clarifying the differences
between the insider lending limits (part 31) and the loans-to-one-
borrower limits (part 32).
The four commenters addressing this issue uniformly favored having
the OCC provide guidance. Of those who identified areas where
additional guidance would be helpful, one requested guidance on the
differences between the rules for combining loans to related interests
with the insider and the rules for combining loans due to a common
enterprise. Another asked for guidance on the differences between the
tangible economic benefit rule in part 31 and the direct benefit rule
in part 32. Two commenters expressed concern about the possibility of
the guidance adding burden to national banks. One of these commenters
stated that the OCC should proceed with caution so that guidance does
not deviate from Reg. O.
In light of these comments, the OCC has decided to issue guidance
that focuses on areas of significant difference. Appendix B sets forth
guidance on the differences in part 31 (as amended by this final rule)
and part 32 between (a) the definitions of ``extension of credit,'' (b)
exceptions to the definitions of ``extension of credit,'' and (c) the
attribution rules. This guidance does not impose any new requirements
on national banks. Rather, it simply provides an accessible reference
for several important areas where parts 31 and 32 differ and highlights
areas that will require additional care by banks when engaging in
transactions that are subject to both sets of standards.
Effective Date
Section 302(b) of the Riegle Community Development and Regulatory
Improvement Act of 1994 requires that a Federal banking agency
regulation that imposes ``additional reporting, disclosures, or other
new requirements on insured depository institutions [to] * * * take
effect on the first day of a calendar quarter which begins on or after
the date on which the regulations are published in final form.* * *'' A
regulation may become effective earlier than the first day of the next
calendar quarter if the agency determines that good cause exists to
make the effective date earlier and publishes this determination with
the regulation.
The OCC has determined that the part 31 final rule does not impose
any additional requirements on national banks. Rather, it simplifies
the former rule by removing provisions that are unnecessary in light of
comparable provisions in Reg. O, provides national banks with
additional flexibility in extending credit to executive officers, and
highlights certain differences between the insider lending restrictions
and the lending limits regulation. Accordingly, the requirement for a
delayed effective date does not apply.
Regulatory Flexibility Act
It is hereby certified that this 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
final rule will reduce somewhat the regulatory burden on national
banks, regardless of size, by eliminating and clarifying current
regulatory requirements. However, its impact will be minimal.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates
Act) requires that an agency prepare a budgetary impact statement
before promulgating a rule that includes a Federal mandate that may
result in the annual expenditure of $100 million or more in any one
year by State, local, and tribal governments, in the aggregate, or by
the private sector. If a budgetary impact statement is required,
section 205 of the Unfunded Mandates Act requires an agency to identify
and consider a reasonable number of alternatives before promulgating a
rule.
The OCC has determined that the final rule will not result in
expenditures by State, local, and tribal governments, or by the private
sector, of more than $100 million in any one year. Accordingly, the OCC
has not prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
List of Subjects in 12 CFR Part 31
Credit, National banks, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, part 31 of chapter I of
title 12 of the Code of Federal Regulations is revised to read as
follows:
[[Page 54536]]
PART 31--EXTENSIONS OF CREDIT TO INSIDERS AND TRANSACTIONS WITH
AFFILIATES
Sec.
31.1 Authority.
31.2 Insider lending restrictions and reporting requirements.
Appendix A to Part 31--Interpretations
Appendix B to Part 31--Guidance Regarding Differences Between Lending
Limits and Insider Lending Standards
Authority: 12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and
1972(2)(G).
Sec. 31.1 Authority.
This part is issued by the Comptroller of the Currency pursuant to
12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and 1972(2)(G), as amended.
Sec. 31.2 Insider lending restrictions and reporting requirements.
(a) General rule. A national bank and its insiders shall comply
with the provisions contained in 12 CFR part 215.
(b) Enforcement. The Comptroller of the Currency administers and
enforces insider lending standards and reporting requirements as they
apply to national banks and their insiders.
Appendix A to Part 31--Interpretations
Section 1. Loans Secured by Stock or Obligations of an Affiliate
A bank that makes a loan to an unaffiliated third party may take
a security interest in securities of an affiliate as collateral for
the loan without the loan being deemed a ``covered transaction''
under section 23A of the Federal Reserve Act (12 U.S.C. 371c) if:
a. The borrower provides additional collateral that, taken
alone, meets or exceeds the collateral requirements specified in
section 23A(c) (12 U.S.C. 371c(c)); and
b. The loan proceeds:
1. Are not used to purchase the bank affiliate's securities that
serve as collateral; and
2. Are not otherwise used for the benefit of, or transferred to,
any affiliate.
Section 2. Deposits Between Affiliated Banks
a. General rule. The OCC considers a deposit made by a bank in
an affiliated bank to be a loan or extension of credit to the
affiliate under 12 U.S.C. 371c. These deposits must be secured in
accordance with 12 U.S.C. 371c(c). However, a national bank may not
pledge assets to secure private deposits unless otherwise permitted
by law (see, e.g., 12 U.S.C. 90 (permitting collateralization of
deposits of public funds); 12 U.S.C. 92a (trust funds); and 25
U.S.C. 156 and 162a (Native American funds)). Thus, unless one of
the exceptions to 12 U.S.C. 371c noted in paragraph b. of this
interpretation applies or unless another exception applies that
enables a bank to meet the collateral requirements of 12 U.S.C.
371c(c), a national bank may not:
1. Make a deposit in an affiliated national bank;
2. Make a deposit in an affiliated State-chartered bank unless
the affiliated State- chartered bank can legally offer collateral
for the deposit in conformance with applicable State law and 12
U.S.C. 371c; or
3. Receive deposits from an affiliated bank.
b. Exceptions. The restrictions of 12 U.S.C. 371c (other than 12
U.S.C. 371c(a)(4), which requires affiliate transactions to be
consistent with safe and sound banking practices) do not apply to
deposits:
1. Made in the ordinary course of correspondent business; or
2. Made in an affiliate that qualifies as a ``sister bank''
under 12 U.S.C. 371c(d)(1).
Appendix B to Part 31--Comparison of Selected Provisions of Part 31 and
Part 32 (as of October 1, 1996)
Note: Even though part 31 now simply requires that national
banks comply with the insider lending provisions contained in
Regulation O (Reg. O) (12 CFR part 215), the chart in this appendix
refers to part 31 because Reg. O is a Federal Reserve Board
regulation and part 31 is the means by which several provisions of
Reg. O are made applicable to national banks and their insiders.
Definition of ``Loan or Extension of Credit''
Renewals............................... In most cases, the two definitions of ``loan or extension of credit''
will be applied in the same manner. A difference exists, however, in
the treatment of renewals. Under Part 31, a renewal of a loan to an
``insider'' (which, unless noted otherwise, includes a bank's
executive officers, directors, principal shareholders, and ``related
interests'' of such persons) is considered to be an extension of
credit. Under Part 32, renewals generally are not considered to be an
extension of credit if the bank exercises reasonable efforts,
consistent with safe and sound banking practices, to bring the loan
into conformance with the lending limit. Renewals would be considered
an extension of credit under Part 32, however, if new funds are
advanced to the borrower, a new borrower replaces the original
borrower, or the OCC determines that the renewal was undertaken to
evade the lending limits.
Commitments to extend credit........... A binding commitment to make a loan is treated as an extension of
credit under Part 31. Under Part 32, a commitment to make a loan will
not be treated as an extension of credit if the amount of the
commitment exceeds the lending limit. Rather, the commitment will be
deemed a ``nonqualifying commitment'' under Part 32 and advances may
be made thereunder only if the advance, together with all other
outstanding loans to the borrower, will not exceed the bank's lending
limit.
Overdrafts............................. An advance by means of an overdraft (except for an intraday overdraft)
generally is considered to be an extension of credit under both Parts
31 and 32. However, indebtedness in amounts up to $5,000 is excluded
from the definition of ``extension of credit'' under Part 31 if the
indebtedness arises pursuant to a written, preauthorized, interest-
bearing plan or written, preauthorized transfer of funds from another
account. Under Part 31, if an overdraft is not made pursuant to this
type of plan or transfer, a bank is prohibited from paying an
overdraft of an insider (which, in this case, includes only an
executive officer or director of the insider's bank) unless the
overdraft is inadvertent, in amounts not exceeding $1,000, outstanding
for not more than 5 business days, and subject to the bank's standard
overdraft fee. Part 32 does not contain these exceptions for
overdrafts, and simply treats overdrafts (except for intraday
overdrafts) as extensions of credit subject to lending limits.
Guarantees............................. Generally speaking, guarantees are included in the Part 31 definition
of ``extension of credit'' but are not included in the definition of
``extension of credit'' in Part 32 unless other criteria are
satisfied. Part 31 applies to any transaction as a result of which an
insider becomes obligated to pay money to a bank, whether the
obligation arises (i) directly or indirectly, (ii) because of an
endorsement on an obligation or otherwise, or (iii) by any means
whatsoever. Accordingly, a loan guaranteed by an insider will be
deemed to have been made to that insider. In contrast, Part 32 does
not consider a loan on which someone signs as guarantor as having been
made to the guarantor unless that person is deemed to be a borrower
under the ``direct benefit'' or ``common enterprise'' tests (see
discussion of these tests in the discussion of the ``General Rule''
under ``Combination/Attribution Rules,'' below).
[[Page 54537]]
Exclusions to Definition
Funds advanced for taxes, etc., Both rules exclude funds advanced for items such as taxes, insurance,
necessary to preserve collateral or or other expenses related to existing indebtedness. However, Part 32
that are incidental to indebtedness. includes these advances for the purpose of determining whether
subsequent loans meet the lending limit, whereas Part 31 excludes
these advances for all purposes. In addition, Part 32 requires that
the funds, which are advanced ``for the benefit of'' a borrower, be
advanced by the bank directly to the third party to whom the borrower
is indebted. Part 31 contains no such requirement.
Loan participations.................... Both rules exclude loan participations if the participation is without
recourse. However, Part 32 elaborates on this exclusion by requiring
that the participation result in a pro rata sharing of credit risk
proportionate to the respective interests of the originating and
participating lenders. Part 32 also requires the originating bank, if
funding the entire loan, to receive funding from the participants
before the close of the next business day. Otherwise, the portion
funded will be treated as a loan by the originating bank to the
underlying borrower, and may be treated as a ``nonconforming'' loan
rather than a violation if (i) the originating bank had an agreement
with the participating bank that reduced the loan to an amount within
the originating bank's lending limit, (ii) the participating bank
reconfirmed its participation and the originating bank had no
knowledge of information that would permit the participating bank to
withhold its participation, and (iii) the participation was to be
funded by close of business of the originating bank's next business
day.
Acquisition of debt through merger or Under Part 31, a note or other evidence of indebtedness acquired
foreclosure. through a merger is excluded from the definition of ``extension of
credit.'' Under Part 32, the indebtedness is deemed to be a loan or
extension of credit. However, if a loan that conformed with Part 32
when originally made exceeds the lending limits following a merger
after the loan is aggregated with other extensions of credit to the
same borrower, the loan will not be deemed to be a lending limits
violation. Rather, the loan will be treated as ``nonconforming,'' and
the bank will have to exercise reasonable efforts to bring the loan
into compliance unless to do so would be inconsistent with safe and
sound banking practices.
Credit card indebtedness............... An insider may incur up to $15,000 in debt on a credit card or similar
open-end credit plan offered by the insider's bank without the debt
counting as an extension of credit under Part 31. The terms of the
credit card or other credit plan must be no more favorable than those
offered by the bank to the general public. Part 32 does not exclude
credit card debt from the lending limits.
Combination/ Attribution Rules
General rule........................... Under Part 31, a loan will be attributed to an insider if the loan
proceeds are ``transferred to,'' or used for the ``tangible economic
benefit of,'' the insider or if the loan is made to a ``related
interest'' of the insider. Under Part 32, a loan will be attributed to
another person when either (i) the proceeds of the loan are to be used
for the direct benefit of the other person or (ii) a common enterprise
exists between the borrower and the other person. The ``transfer''
test and ``tangible economic benefit'' test of Part 31 are
substantially the same as the ``direct benefit'' test of Part 32.
Under each of these tests, a loan will be attributed to another person
where the proceeds are transferred to the other person, unless the
proceeds are used in a bona fide arm's length transaction to acquire
property, goods, or services. However, the ``related interest'' test
of Part 31 and the ``common enterprise'' test under Part 32 will lead
to different results in many instances. Under Part 31, a ``related
interest'' is a company or a political or campaign committee that is
``controlled'' by an insider. Part 31 defines ``control'' as meaning,
generally speaking, that someone owns or controls at least 25 percent
of a class of voting securities of a company, controls the election of
a majority of the company's directors, or can ``exercise a controlling
influence'' over the company. Part 32 uses the same definition of
``control'' in the ``common enterprise'' test, but a mere finding of
``control'' is not, by itself, a sufficient basis to find that a
common enterprise exists. Part 32 will attribute a loan under the
``common enterprise'' test if the borrowers are under common control
(including where one of the persons in question controls the other)
and there is ``substantial financial interdependence'' between the
borrowers (i.e., where at least 50 percent of the gross receipts or
expenditures of one borrower comes from transactions with the other).
If there is not both common control and substantial financial
interdependence, the OCC will not attribute a loan under the ``common
enterprise'' test unless (i) the expected source of repayment for a
loan is the same for each borrower and neither borrower has another
source of income from which the loan may be repaid, (ii) two people
borrow to acquire a business of which they will own a majority of the
voting securities, or (iii) OCC determines that a common enterprise
exists based on facts and circumstances of a particular transaction.
Loans to corporate groups.............. Both Parts 31 and 32 will consider a loan that was made to a
corporation to have been made to a third person if the tests
identified in the previous discussion of the ``General Rule'' are
satisfied. If these tests are not met, Parts 31 and 32 still may
require attribution, but the circumstances when this will occur and
the consequences of attribution under these circumstances differ under
the two rules. Under Part 31, a loan to a corporation will be deemed
to have been made to an insider if the corporation is a ``related
interest'' of the insider (i.e., the insider owns at least 25% percent
of a class of voting shares of the company, controls the election of a
majority of the company's directors, or has the power to exercise a
controlling influence over the company). Under Part 32, a loan to an
individual or company will not be considered to have been made to a
corporate group until a ``person'' (which includes individuals and
companies) owns more than 50% of the voting shares of a company. If a
loan is found to have been made to a related interest of an insider
under Part 31, the loan must comply with all of the insider lending
restrictions of Part 31. If a loan is found to have been made to a
corporate group under Part 32, the loan, when aggregated with all
other loans to that corporate group, generally may not exceed 50% of
the bank's capital and surplus.
[[Page 54538]]
Loans to partnerships, joint ventures, Part 31 applies different rules to implement different restrictions
and associations. applicable to partnerships. For purposes of the limits on loans to
executive officers, a loan made to a partnership in which an executive
officer of the lending bank holds a majority interest is deemed to
have been made to the executive officer. For all other purposes under
Part 31, a loan to a partnership will be attributed to an executive
officer or other insider only if the partnership is a ``related
interest'' of the insider or if the loan is transferred to, or used
for the tangible economic benefit of, the insider. Part 32 does not
make any similar distinction based on the restriction in question.
Under Part 32, a loan made to a partnership, joint venture, or
association will be attributed to all members of such an entity--
regardless of the percentage of ownership--unless a person's liability
is limited by a valid agreement. Conversely, loans to members of a
partnership, joint venture, or association will not be attributed to
the entity under Part 32 unless either the ``common enterprise'' or
``direct benefit'' test is met.
Dated: October 2, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-26849 Filed 10-18-96; 8:45 am]
BILLING CODE 4810-33-P
