LOANS TO ONE BORROWER
Carla Stone Witzel
Financial Services Practice Group
A.
National Banks.
Effective July 21, 2012, the Office of the Comptroller of the Currency (“OCC”) issued an
interim final rule to revise its regulation governing national bank lending limits to
consolidate the national bank and savings association lending limit rules. The interim final
rule also implements section 610 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which amends the definition of “loans and extensions of credit” to include
credit exposure arising from derivative transactions, repurchase agreements, reverse
repurchase agreements, securities lending transactions and securities borrowing
transactions. 77 Fed. Reg. 37265 (June 21, 2012). The lending limit does not apply to the
credit exposure arising from a derivative transaction or securities financing transaction until
January 1, 2013. Id.
1.
Purpose and Scope.
a.
Purpose.
The purpose of the federal law, located at 12 U.S.C. § 84 (also known as
Revised Statutes § 5200), and its implementing regulation at 12 C.F.R. Part
32, is to protect the safety and soundness of national banks and savings
associations by preventing excessive loans to a single borrower (or to that
borrower together with persons related to the borrower through common
control or financial interdependence) and to promote diversification of loans
and equitable access to banking services. 12 C.F.R. § 32.1(b).
b.
Scope.
The lending limits apply to all loans and extensions of credit made by
national banks, federal and state savings associations, and their domestic
operating subsidiaries. They do not apply to loans made to “affiliates” as
defined in 12 U.S.C. §§ 371c(b)(1) and (e) and Regulation W, to operating
subsidiaries, to Edge Act or Agreement Corporation subsidiaries, or to any
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other subsidiary consolidated with the bank or savings association under Generally Accepted
Accounting Principles (GAAP). 12 C.F.R. § 32.1(c)(1).
c.
Other Laws that Still Apply.
Even when a loan complies with the lending limits summarized here, several
other laws or requirements must be consulted: the investment limits in
12 U.S.C. § 24 (Seventh) or 12 U.S.C. § 1464(c), and 12 C.F.R. parts 1 and
160.30; the restrictions on loans to insiders in 12 U.S.C. §§ 375a and 375b;
and the overriding rule that all loans may be made only if consistent with
safe and sound banking practices. 12 C.F.R. §§ 32.1(c)(2)-(3).
2.
Definitions.
a.
Appropriate federal banking agency means the OCC in the case of a
national bank or federal savings association and the FDIC in the case of a
state savings association. 12 C.F.R. § 32.2(a).
b.
Borrower means a “person” who is named as a borrower or debtor in a
“loan or extension of credit”; a person to whom a national bank or savings
association has credit exposure arising from a derivative transaction or a
securities financing transaction entered by the bank or savings association;
and any other person, including drawers, endorsers and guarantors, who
are deemed to be a “borrower” under the “direct benefit” or “common
enterprise” tests (see A.9 below). 12 C.F.R. § 32.2(b).
c.
Capital and Surplus means the sum of:
(1)
Tier 1 and Tier 2 capital included in its risk-based capital as
reported in the Call Report; plus
(2)
The balance of the allowance for loan and lease losses not included
in Tier 2 capital under its risk-based capital calculation as reported
in the Call Report. 12 C.F.R. § 32.2(c).
d.
Credit derivative has the same meaning as this term has in 12 C.F.R. Part
3, Appendix C, Section 2. 12 C.F.R. § 32.2(i).
e.
Derivative transaction includes any contract, agreement, swap, warrant,
note, or option that is based, in whole or in part, on the value of, any
interest in, or any quantitative measure or the occurrence of any event
relating to, one or more commodities, securities, currencies, interest or
other rates, indices, or other assets. 12 C.F.R. § 32.2(k).
f.
Effective margining arrangement means a master legal agreement
governing derivative transactions that requires the counterparty to post, on
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g.
a daily basis, variation margin to fully collateralize that amount of the
bank’s net credit exposure to the counterparty that exceeds $1 million
created by the derivative transactions covered by the agreement. C.F.R. §
32.2(l).
h.
Eligible credit derivative means a single-name credit derivative or a
standard, non-tranched index credit derivative, subject to certain
conditions. 12 C.F.R. § 32.2(m).
i.
Eligible national bank or eligible savings association means a national
bank or savings association that is well capitalized as defined in the
prompt corrective action rules applicable to the institution and has a
composite CAMEL rating of 1 or 2, with an asset quality and management
rating of at least 2. 12 C.F.R. § 32.2(n).
j.
Loans and Extensions of Credit (collectively, “loans”) are direct or indirect
advances of funds to a borrower made on the basis of any obligation of
that person to repay the funds, including loans repayable from specific
property pledged by or on behalf of the person, and any credit exposure, as
determined pursuant to 12 C.F.R. § 32.9, arising from a derivative
transaction or a securities financing transaction. 12 U.S.C. § 84(b)(1); 12
C.F.R. § 32.2(q).
(1)
Loans include:
(a)
A “contractual commitment to advance funds,” as defined in
12 C.F.R. § 32.2(g);
(b)
A maker’s or endorser’s obligation that arises from the
discount of commercial paper;
(c)
A national bank’s or savings association’s purchase of thirdparty 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 or savings association’s
loan is the total unpaid balance of the paper owned by the
bank or savings association less any dealer reserves retained
by the bank or savings association and held as collateral
security. Where the seller’s obligation to repurchase is
limited, the loan is measured by the total amount of the
paper the seller ultimately may be obligated to repurchase.
A national bank’s or savings association’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.
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(2)
(d)
Overdrafts, but not including intra-day overdrafts for which
payment is received before close of business;
(e)
Sales of Fed funds with a maturity of more than one
business day, other than those sold under a continuing
contract;
(f)
Loans charged off the books of the bank or savings
association in whole or part; however, charge-offs due to the
following circumstances do not fall under this rule: loans
unenforceable due to a discharge in bankruptcy, statute of
limitations or a judicial decision and loans no longer
enforceable for other reasons (like legally enforceable
forgiveness) provided the bank or savings association has
adequate records and charges-off the loan;
(g)
[to be removed 1/1/13, 77 Fed. Reg. 37277] A national
bank’s or savings association’s purchase of securities
subject to repurchase at the end of a stated period, but not
including a national bank’s or savings association’s
purchase of Type I securities, subject to a repurchase
agreement, where the purchasing bank or savings
association has assured control over or has established its
rights to the Type I securities as collateral. 12 C.F.R.
§ 32.2(q)(1).
Loans do not include:
(a)
Additional funds advanced for the benefit of the borrower
for taxes, insurance, utilities, security and maintenance and
operating expenses necessary to preserve the value of real
property when consistent with safe and sound banking
practices and when made only for the protection of the
bank’s or savings association’s interest in the collateral;
provided, however, that such amounts must be treated as a
loan if a new loan is made to the borrower;
(b)
Accrued and discounted interest on an existing loan,
including capitalized interest from prior notes and interest
advanced by agreement;
(c)
Financed sales of the bank’s or savings association’s own
assets, including Other Real Estate Owned, if it does not
worsen the bank’s or savings association’s position;
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(d)
Renewal or restructuring of a loan as a new “loan”
following reasonable efforts to bring the loan into
compliance with the lending limits, unless new funds are
advanced other than in the situation of a qualified
commitment to lend (see A.4.c below), a new borrower
replaces the prior borrower or the appropriate federal
banking agency determines that the renewal was undertaken
to evade the lending limits;
(e)
Amounts paid against uncollected funds in the normal
process of collection; and
(f)
Portions of a participation loan sold on a nonrecourse basis,
provided that the participation results in a pro-rata sharing
of credit risk proportionate to the participants’ respective
interests as long as certain other conditions are met:
(i)
When payments must be applied first to portions
sold, pro-rata sharing exists only if the agreement
provides that in the event of default, participants
must share in all subsequent payments proportionate
to their respective interests; and
(ii)
When the originating bank or savings association
funds the entire loan, it must receive funding from
participants before the close of the next business
day, provided, however, that if this condition is not
met, the amount funded will be treated as a
nonconforming loan rather than a violation if certain
other conditions are met. 12 C.F.R. § 32.2(q)(2).
k.
Person means an individual, sole proprietorship, partnership, joint venture,
association, trust, estate, business trust, corporation, not-for-profit
corporation, limited liability company, sovereign government, agency,
instrumentality or political subdivision thereof, or any similar entity or
organization. 12 U.S.C. § 84(b)(2); 12 C.F.R. § 32.2(r).
l.
Residential housing units mean:
(1)
Homes (including a dwelling unit in a multi-family residential
property such as a condominium or a cooperative).
(2)
Combinations of homes and business property (i.e., a home used in
part for business).
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m.
3.
(3)
Other real estate used for primarily residential purposes other than
a home (but which may include homes).Combinations of such real
estate and business property involving only minor business use
(i.e., where no more than 20% of the total appraised value of the
real estate is attributable to the business use).
(4)
Farm residences and combinations of farm residences and
commercial farm real estate.
(5)
Property to be improved by the construction of such structure.
(6)
Leasehold interests in the above real estate. 12 C.F.R. § 32.2(x).
Securities financing transaction means a repurchase agreement, reverse
repurchase agreement, securities lending transaction, or securities
borrowing transaction. 12 C.F.R. § 32.2(aa).
General Limits.
a.
Total loans outstanding to any person at any one time cannot exceed:
(1)
15% of the Bank’s or Savings Association’s Capital and Surplus.
When the loans are not fully secured by collateral having a market
value at least equal to their face amount; and
(2)
An Additional 10% of the Bank’s or Savings Association’s Capital
and Surplus.
When the amounts over 15% are fully secured at all times by a
perfected security interest in readily marketable collateral as defined
in 12 C.F.R. § 32.2(v) (e.g., financial instruments and bullion that
are saleable with reasonable promptness at a fair market value
determined by quotations). 12 C.F.R. § 32.3(a).
b.
For purposes of determining compliance, calculations shall be made when
the bank’s or savings association’s Consolidated Report of Condition and
Income is required to be filed and if there is a change in capital category.
The appropriate federal banking agency also has the right to require
recalculation by written notice for reasons of safety and soundness.
12 C.F.R. § 32.4.
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4.
Special Limits.
a.
Additional 10% of the Bank’s or Savings Association’s Capital and
Surplus.
In addition to the amount allowed under the General Limits (A.3.a. above),
the bank or savings association may make loans to one borrower not
exceeding 10% of capital and surplus on loans:
b.
(1)
Secured by livestock or dairy cattle in an amount equal to at least
115% of the amount of the loan that exceeds the combined general
limit (appraisals should be completed at least once each 12
months), and subject to special rules in states where persons
furnishing pasturage have liens on the livestock, 12 C.F.R.
§ 32.3(b)(3):
(2)
That arise from the discount of paper by dealers in dairy cattle
given in payment for the cattle carrying full recourse endorsements
or unconditional guaranties of the seller, and only if the paper is
secured by the cattle, pursuant to liens that allow the bank or
savings association to maintain a perfected security interest in the
cattle, 12 C.F.R. § 32.3(b)(4); or
(3)
That arise from the discount of installment consumer paper, as
defined in 12 C.F.R. § 32.2(f), carrying full recourse endorsements
or unconditional guaranties by the transferor, with additional rules:
limiting application of this higher lending limit to the maker where
the bank is relying primarily on the maker of the paper for
payment; and imposing recordkeeping requirements where paper is
purchased in substantial quantities, 12 U.S.C. § 84(c)(8); 12 C.F.R.
§ 32.3(b)(2).
Additional 35% of the Bank’s or Savings Association’s Capital and
Surplus.
In addition to the amount allowed under the General Limits (A.3.a. above), a
bank or savings association may make loans to one borrower not exceeding
35% of capital and surplus where the loans are secured 115% at all times by
bills of lading, warehouse receipts or similar documents transferring or
securing title to “readily marketable staples” as defined in 12 C.F.R. §
32.2(w). The staples should be fully covered by insurance if customary to
do so. 12 U.S.C. § 84(c)(3); 12 C.F.R. § 32.3(b)(1). Other conditions as to
form
and
holding
of
receipts,
etc.,
apply.
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c.
(1)
Staples are limited to what are typically thought of as nonperishable agricultural commodities and metals. 12 C.F.R. §§ 32.2
(w), 32.3(b)(1)(ii).
(2)
The special limit applies to a loan arising from a single transaction
or secured by the same staples, provided further that the loan is for
a period between 6 and 10 months. 12 C.F.R. § 32.3(b)(1)(iii).
Advances Pursuant to Renewal of a Qualifying Commitment to Lend.
The bank or savings association may renew a qualifying commitment to
lend, as defined in 12 C.F.R. § 32.2(t), and complete funding under the
commitment if:
(1)
Funding is consistent with safe and sound banking practices and is
made to protect the bank’s or savings association’s position;
(2)
Funding enables the borrower to complete the project for which the
qualifying commitment to lend was made; and
(3)
The amount of funding does not exceed the unfunded portion of
the bank’s or savings association’s qualifying commitment to lend.
12 C.F.R. § 32.3(b)(5).
d.
Savings Associations - Commercial paper and corporate debt securities. In
addition to the amount allowed under the savings association’s General
Limits (A.3.a. above), a savings association may invest up to 10% of
unimpaired capital and unimpaired surplus in the obligations of one issuer
evidenced by commercial paper or corporate debt securities that are, as of
the date of purchase, investment grade. 12 C.F.R. § 32.3(d)(3).
e.
Special Rules for Residential real estate loans, small business loans, and
small farm loans (“Supplemental Lending Limits Program”).
(1)
In addition to the amount that a national bank or savings
association may lend to one borrower under the General Limits
(A.3.a. above), an eligible national bank or eligible savings
association may make:
(aa)
residential real estate loans or extensions of credit to
one borrower in the lesser of 10% of its capital and surplus
or the percent of its capital and surplus, in excess of 15%,
that a state bank is permitted to lend under the state lending
limit that is available for residential real estate loans or
unsecured loans in the state where the main office of the
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national bank or home office of the savings association is
located. Any such loan must be secured by a perfected first
lien security interest in 1-4 family real estate in an amount
that does not exceed 80% of the appraised value of the
collateral at the time the loan or extension of credit is made.
(bb)
small business loans to one borrower in the lesser of
10% of its capital and surplus or the percent of its capital
and surplus, in excess of 15%, that a state bank is permitted
to lend under the state lending limit that is available for
small business loans or unsecured loans in the state where
the main office of the national bank or home office of the
savings association is located.
(cc)
small farm loans to one borrower in the lesser of
10% of its capital and surplus or the percent of its capital
and surplus, in excess of 15%, that a state bank is permitted
to lend under the state lending limit that is available for
small farm loans or unsecured loans in the state where the
main office of the national bank or home office of the
savings association is located.
(2)
The total outstanding amount of a national bank’s or savings
association’s loans and extensions of credit to one borrower made
under §§ 32.3(a) and (b) (General Limits and Special Limits),
together with loans and extension of credit to the borrower made
pursuant to paragraph (1) shall not exceed 25% of capital and
surplus.
(3)
The total outstanding amount of a national bank’s or savings
association’s loans to all of its borrowers made pursuant to the
supplemental lending limits provided in paragraph (1) may not
exceed 100% of the bank’s or savings association’s capital and
surplus.
12 C.F.R. § 32.7.
5.
No Limits.
The following are not subject to the lending limits:
a.
Loans arising from the discount of commercial or business paper
evidencing a recourse obligation to the person negotiating it, given in
payment for the purchase price of commodities in domestic or export
transactions, 12 U.S.C. § 84(c)(1), 12 C.F.R. § 32.3(c)(1);
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b.
The acceptance of drafts eligible for rediscount under 12 U.S.C. §§ 372
and 373 or 12 U.S.C. § 1464(c)(1)(M) or the purchase of the type of
banks’ or savings associations’ acceptances that are eligible for rediscount
under those sections, but not including acceptance of drafts ineligible for
rediscount, a purchase of ineligible acceptances created by other banks or
savings associations, and a bank’s or savings association’s purchase of its
own acceptances, 12 U.S.C. § 84(c)(2), 12 C.F.R. § 32.3(c)(2);
c.
Loans fully secured by a perfected security interest in bonds, notes,
certificates of indebtedness, T-bills, or other obligations fully guaranteed
as to principal and interest by the United States and loans fully guaranteed
as to the repayment of principal by the full faith and credit of the U.S.
government, 12 U.S.C. § 84(c)(4), 12 C.F.R. § 32.3(c)(3);
d.
Loans to, or loans secured by unconditional takeout commitments or
guarantees of, any department, agency, etc. of the United States, or of any
corporation wholly owned by the United States, so long as in the case of a
commitment or guarantee, it is payable in cash upon 60 days demand, 12
U.S.C. § 84(c)(5), 12 C.F.R. § 32.3(c)(4);
e.
Loans to a state or political subdivision or to the extent guaranteed by a
state or political subdivision, provided in either case that an opinion of
counsel is received that the undertaking is valid and enforceable, 12 C.F.R.
§ 32.3(c)(5);
f.
Loans secured by a perfected security interest in a segregated deposit
account in the lender, 12 U.S.C. § 84(c)(6), 12 C.F.R. § 32.3(c)(6);
g.
Loans to any financial institution or any receiver, conservator,
superintendent of banks or savings associations or other agent in charge of
the business or property of such financial institution when approved by the
appropriate Federal banking agency, 12 U.S.C. § 84(c)(7), 12 C.F.R. §
32.3(c)(7);
h.
Loans to the Student Loan Marketing Association, 12 U.S.C. § 84(c)(10),
12 C.F.R. § 32.3(c)(8);
i.
A loan to an industrial development authority or similar public entity
(“IDA”) created to construct and lease a plant facility (including a health
care facility) to an industrial occupant will be deemed to be a loan to the
lessee, and not the IDA, if:
(1)
The bank or savings association evaluates the creditworthiness of
the lessee before the loan is made;
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j.
(2)
The IDA’s liability is limited solely to whatever interest it has in
the facility;
(3)
The IDA’s interest is assigned to the bank or savings association as
security or the lessee issues a promissory note to the bank or
savings association that provides greater security than assignment
of the lease; and
(4)
The lease and rental payments are assigned and paid directly to the
bank or savings association. 12 C.F.R. § 32.3(c)(9);
A loan to a leasing company for purchasing equipment for lease will be
deemed to be a loan to the lessee, and not the leasing company, if:
(1)
The bank or savings association evaluates the creditworthiness of
the lessee before the loan is made;
(2)
The loan is without recourse to the leasing company;
(3)
The bank or savings association is given a security interest in the
equipment and, in the case of default, may proceed directly against
the equipment and the lessee for deficiencies;
(4)
The leasing company assigns all of its rights in the lease to the
bank or savings association;
(5)
The lease payments are assigned and paid to the bank or savings
association; and
(6)
The lease terms are subject to the same limits that apply to a
national bank or savings association acting as a lessor. 12 C.F.R.
§ 32.3(c)(10).
k.
Credit exposures arising from securities financing transactions in which
the securities being financed are certain governmental securities: Type I
securities, as defined in 12 C.F.R. § 1.2(j), in the case of national banks; or
securities listed in sections 5(c)(1)(C), (D), (E), and (F) of HOLA and
general obligations of a state or subdivision as listed in section 5(c)(1)(H)
of HOLA, 12 U.S.C. §§ 1464(c)(1)(C), (D), (E), (F), and (H), in the case
of savings associations. 12 C.F.R. § 32.3(c)(11).
l.
Intraday credit exposures arising from a derivative transaction or securities
financing transaction. 12 C.F.R. § 32.3(c)(12).
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6.
Alternative Savings Association Limits.
(1)
In lieu of the General Limits (A.3.a. above), savings associations may make
loans to one borrower for any purpose, not exceeding $500,000, HOLA §
5(u)(2)(A)(i), 12 C.F.R. § 560.93(d)(1) (BUT SEE OTHER
RESTRICTIONS, e.g., HOLA § 5(c)(2)(B)(i)); or
(2)
Loans to develop domestic residential housing, not exceeding the lesser of
$30,000,000 or 30% of unimpaired capital and surplus (including all loans
made under the General Limits (A.3.a. above)), if:
(a)
The savings association is and will be in compliance with fully
phased-in capital standards;
(b)
The appropriate Federal banking agency permits;
(c)
Such loans to all borrowers do not exceed 150% of unimpaired
capital and surplus; and
(d)
The loans comply with applicable loan-to-value requirements.
(e)
The term “to develop” includes each of the various phases
necessary to produce housing units as an end product, such as
acquisition, development and construction; development and
construction; construction; rehabilitation; and conversion; and the
term “domestic” includes units within the fifty states, the District
of Columbia, Puerto Rico, the Virgin Islands, Guam, and the
Pacific Islands.
(f)
This exception operates as the uppermost limit on all lending to
one borrower. 77 Fed. Reg. 37282 (June 21, 2012).
12 C.F.R. § 32.3(d).
7.
Calculating the Credit Exposure for Derivative Transactions. 12 C.F.R. § 32.9.
a.
The “credit exposure” for a derivative transaction is commonly viewed as
the sum of the current credit exposure on the control or portfolio plus
some measure of potential future exposure (PFE).
b.
Credit exposure of derivative transactions other than credit derivatives.
Unless required to use a specific method to determine credit exposure, by
the appropriate Federal banking agency pursuant to § 32.9(b)(3), a national
bank or savings association may choose one of three methods to compute
credit exposure. 12 C.F.R. § 32.9(b)(1). A national bank or savings
association must use the same method for all calculations.
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(1)
The “Internal Model Method” estimates counterparty credit
exposures via an internal model approved by the OCC that
estimates a credit exposure amount, including the mark-to-market
value (MTM) of the derivative contract. The model must have
been approved for purposes of section 53 of the Advanced
Approaches Appendices of the appropriate Federal banking
agencies’ capital rules or be another appropriate model approved
by the appropriate Federal banking agency.
The bank or savings association is permitted to net credit
exposures of derivative transactions arising under the same
qualifying master netting agreement, thereby reducing the
institution’s exposure to the borrower to the net exposure under the
master netting agreement.
(2)
(3)
Under the “Conversion Factor Matrix Method,” credit exposure
equals and remains fixed at the PFE of the derivative transaction as
determined at execution of the transaction by reference to a lookup table similar to Table B included in the Risk-Based Capital
Guidelines Appendix of 12 C.F.R. Part 3.
(a)
The table adequately reflects the absence of the current
MTM component of the credit exposure of these
transactions.
(b)
This approach is less burdensome than the Internal Model
Method because institutions do not have to establish
statistical simulations of future PFE calculations.
The “Remaining Maturity Method” incorporates both the current
MTM and the transaction’s remaining maturity (measured in years)
as well as a fixed add-on for each year of the transaction’s
remaining life.
(a)
The additional burden involved with determining the MTM
under this method may be balanced by the fact that,
depending on the MTM, as the maturity decreases, the credit
exposure also decreases, permitting additional extensions of
credit under the lending limit.
(b)
The Remaining Maturity Method incorporates the fact that a
negative MTM offsets the positive contribution to exposure
from the remaining life portion of the calculation, though
the overall calculation has a floor of zero.
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8.
c.
Credit derivatives. A special rule applies to credit derivatives. A national
bank or savings association that uses the “Conversion Factor Matrix
Method” or “Remaining Maturity Method,” or that uses the “Internal
Model Method” without entering an effective margining arrangement with
its counterparty, calculates the counterparty credit exposure arising from
credit derivatives by adding the net notional value of all protection
purchased from the counterparty on each reference entity. 12 C.F.R. §
32.9(b)(2).
d.
The OCC, in the case of national banks and federal savings associations,
and the FDIC, in the case of state savings associations, may require use of
a specific method to calculate credit exposure if it finds that such method
is necessary to promote the safety and soundness of the bank or savings
association. 12 C.F.R. § 32.9(b)(3).
Calculating the Credit Exposure for Securities Financing Transactions.
a.
Banks and savings associations have two options for determining the
credit exposure of securities financing transactions. 12 C.F.R. § 32.9(c).
b.
The “Internal Model Method” provides that an institution may calculate
the credit exposure of a securities financing transaction by using an
internal model approved by the appropriate Federal banking agency for
purposes of § 32(d) of the Internal-Ratings-Based Appendices of the OCC
or FDIC’s capital rules, as appropriate, or any other appropriate model
approved by the appropriate Federal banking agency.
c.
The “Non-Model Method” is based on the type of securities financing
transaction at issue. This is considered to be a simpler approach.
(1)
Repurchase agreements and securities lending transactions.
For a repurchase agreement or a securities loan where the collateral
is cash, exposure is equal to and remains fixed at the net current
exposure, i.e., the market value at execution of the transaction of
securities transferred to the other party, less cash received from the
other party.
For securities lending transactions where the collateral is other
securities (i.e., not cash), the exposure is equal to and remains
fixed as the product of the higher of the two haircuts associated
with the securities, as determined by a look-up table included in the
regulation (Table 3), and the higher of the two par values of the
securities. The haircuts in Table 3 are consistent with the standard
supervisory market price volatility haircuts in 12 C.F.R. Part 3,
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Appendix C. 12 C.F.R. § 32.9(c)(1)(ii)(B)(2). Reverse repurchase
agreements (asset repos) and securities borrowing transactions.
Where the collateral is cash, the credit exposure will equal and
remain fixed as the product of the haircut associated with the
collateral received, as determined in Table 3, and the amount of
cash transferred to the other party. The credit exposure arising
from a securities borrowed transaction where the collateral is other
securities (i.e., not cash) shall equal and remain fixed as the
product of the higher of the two haircuts associated with the
securities, as determined in Table 3, and the higher of the two par
values of the securities. 12 C.F.R. §§ 32.9(c)(1)(ii)(C) and
(c)(1)(ii)(D).
d.
9.
The appropriate Federal banking agency may require a national bank or
savings association to use a specific method to calculate the credit
exposure of securities financing transactions if the agency finds that this
method is necessary to promote the safety and soundness of the bank or
savings association. 12 C.F.R. § 32.9(c)(2).
Combining Loans to Separate Borrowers.
Loans or extensions of credit to one borrower will be attributed to other persons and
all will be deemed to be borrowers when the proceeds are used for the “direct
benefit” of the other person(s) or when a “common enterprise” is deemed to exist
between the persons. 12 C.F.R. § 32.5(a). Loans to corporations, limited liability
companies, partnerships, joint ventures, associations and foreign governments and
their agencies will be attributed to their related entities under certain circumstances.
See 12 C.F.R. §§ 32.5(d)-(f).
a.
Direct Benefit.
A loan to a borrower will be deemed to be for the direct benefit of another
when the proceeds (or assets purchased with the proceeds) are transferred to
the other person, other than in a bona fide arm’s length transaction where
proceeds are used to acquire property, goods, or services. 12 C.F.R.
§ 32.5(b).
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b.
Loans to a Common Enterprise.
Loans to two or more persons will be attributed to each for the face amount
of the loan when a “common enterprise” exists. 12 C.F.R. § 32.5(c). The
following circumstances each are deemed to constitute a “common
enterprise:”
c.
(1)
Where the expected source of repayment for each loan is the same
and neither borrower has another source from which the loan,
together with all other obligations of the borrower, may be fully
repaid (subject to special rules for employer/employee situations);
(2)
Where the borrowers are related through common “control,” a
common enterprise will exist if the persons also have substantial
financial interdependence between them (when at least 50% or
more of one person’s gross receipts or expenditures are derived
from transactions with the other borrower);
(a)
“Control” exists when one or more persons has the power to
vote at least 25% of any class of the voting securities of
another; or
(b)
“Control” exists when one or more persons has the power to
elect a majority of the directors or to direct the policies and
management of another, 12 C.F.R. § 32.2(h);
(3)
Where separate persons borrow to acquire a business of which the
persons will own more than 50% of the voting securities, the
acquisition loans are combined and attributed to all; or
(4)
Where the appropriate Federal banking agency determines, based
on the facts and circumstances, that a common enterprise exists.
12 C.F.R. §§ 32.5(c)(1)-(4).
Loans to Corporations and Limited Liability Companies.
(1)
Loans made pursuant to the general limitations in 12 U.S.C. §§
84(a)(1)-(2) to a “corporate group” (consisting of a person and all
of its subsidiaries) cannot exceed 50% of capital and surplus. 12
C.F.R. § 32.5(d)(1). Since this limitation applies only to loans
made pursuant to 12 U.S.C. §§ 84(a)(1)-(2), the limitation does not
apply to a loan made, for example, under the general 35%
limitation in 12 U.S.C. § 84(c)(3) (loans secured 115% by bills of
lading).
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d.
e.
(2)
Loans to a person and its subsidiary or different subsidiaries will be
attributed to each for the face amount of the loan when the direct
benefit or common enterprise test is met. 12 C.F.R. § 32.5(d)(2).
(3)
Subsidiaries of a person include:
(a)
A corporation (or limited liability company) of which the
person owns or beneficially owns, directly or indirectly,
more than 50% of the voting stock; and
(b)
A corporation (or limited liability company) owned
indirectly so that if A owns more than 50% of Corporation
X which itself owns more than 50% of Corporation Y, A’s
subsidiaries include both corporations. 12 C.F.R. §
32.5(d)(1).
Loans to Partnerships, Joint Ventures, Associations, and their Partners or
Members.
(1)
Loans to a partnership, joint venture, or association (“partnership”)
are considered to be loans to each partner or member (“member”),
but are not considered to be loans to a limited member who is not
liable for debts or actions of the partnership by the terms of the
partnership agreement as long as those provisions are valid under
applicable law. 12 C.F.R. § 32.5(e)(1).
(2)
Loans to individual members (general or limited) of a partnership
are attributed to the partnership only where the direct benefit or
common enterprise test is met. Both tests are met where the loan is
made to a person for the purpose of purchasing an interest in the
partnership. Loans made to a member of a partnership will not be
attributed to another member individually unless the direct benefit
or common enterprise test is met. 12 C.F.R. § 32.5(e)(2).
Loans to Foreign Governments, their Agencies and Instrumentalities.
Loans to foreign governments, their agencies and instrumentalities will be
combined under 12 U.S.C. § 84 only if they fail to meet either of the
following
tests
at
the
time
the
loan
is
made:
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(1)
“Means” Test.
The borrower has its own resources sufficient over time to service its
obligation, but if the government’s support (excluding guarantees by
a central government) exceeds the borrower’s annual revenues from
other sources then it is presumed that the means test has not been
satisfied; or
(2)
“Purpose” Test.
The purpose of the loan is consistent with the purposes of the
borrower’s general business. 12 C.F.R. § 32.5(f)(1).
The bank or savings association must maintain certain items in its files to
show compliance with the “means” or “purpose” test. 12 C.F.R. § 32.5(f)(2).
f.
10.
Special rules apply to restructured loans. 12 C.F.R. § 32.5(f)(3).
Nonconforming Loans.
a.
Defined.
A loan, within lending limits when made, will not be deemed a violation but
instead will be treated as nonconforming when:
b.
(1)
The bank’s or savings association’s capital has declined, borrowers
have merged or formed a common enterprise, lenders have merged,
or capital rules have changed (referred to here as “changed
conditions”);
(2)
Collateral used to satisfy a higher lending limit allowance has
declined in value (referred to here as “decline in collateral”); or
(3)
In the case of a credit exposure arising from a transaction identified
in § 32.9(a) and measured by the Internal Model Method specified
in § 32.9(b)(1)(i) or § 32.9(c)(1)(i), the credit exposure increases
after execution of the transaction. 12 C.F.R. § 32.6(a).
Actions To Be Taken.
(1)
When the nonconformity is due to changed conditions, the bank or
savings association must use reasonable efforts to bring the loan
into conformity, unless to do so would be inconsistent with safe
and sound banking practices. 12 C.F.R. § 32.6(b).
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(2)
B.
When the nonconformity is due to a decline in collateral, the bank
or savings association must bring the loan into conformity within
30 calendar days, unless judicial proceedings, regulatory actions or
other extraordinary circumstances prevent the bank or savings
association from taking action. 12 C.F.R. § 32.6(c)
State-Chartered Banks.
1.
Definitions and General Rule.
a.
Commercial Bank.
A “commercial bank” is an institution that is incorporated under Maryland
law as a State bank or trust company. Md. Code Ann., Fin. Inst. § 1-101(f)
[hereinafter FI].
b.
Unimpaired Surplus.
The “unimpaired surplus” of a commercial bank includes surplus, retained
earnings, and 100% of the possible loan loss reserves. FI § 3-601(k).
c.
General Rule.
A commercial bank may follow Maryland law (described below) or the loan
to one borrower limitations applicable to national banks (described above).
Letter from Joseph R. Crouse, State of Maryland Banking Department (Jan.
26, 1983) (discussing lending limits applicable to state banks).
2.
General Limitation on Loans.
The total liability of any one person to a commercial bank for loans, including
standby letters of credit, at any one time may not exceed:
a.
10% of the bank’s unimpaired capital and surplus; or
b.
30% of the bank’s unimpaired capital and surplus if:
(1)
The excess over ten percent is approved by a two-thirds vote of the
directors; and
(2)
The loans are secured by currency or obligations of the United
States or Maryland or any political subdivision. FI § 3-601(c)(2).
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3.
Exceptions as to Loans.
In addition to the general limitations on loans noted above, the total liabilities of any
one person to a bank may not exceed:
4.
a.
25% of the bank’s unimpaired capital and surplus for discounts of
commercial paper issued in a commercial transaction and negotiated by
the person who owns it, or for discounts of chattel paper, negotiated by the
person who owns it; and
b.
25% of the bank’s unimpaired capital and surplus for obligations, drawn in
good faith against existing values, which are secured by goods in the
process of shipment or secured by goods which, when accepted, will be
accompanied by documents of title. FI §§ 3-601(d)-(e).
Maximum of All Liabilities.
The total of all liabilities of any one person to a bank, including all liabilities
outlined above, may not exceed 30% of the bank’s unimpaired capital and surplus.
FI § 3-601(b).
5.
Computation of Total Liabilities.
a.
As to Individuals.
Subject to subsection (3), below, the total liabilities of an individual to a
bank include:
b.
(1)
All liabilities of any partnership or unincorporated association of
which the individual is a member; and
(2)
All loans made for the benefit of the individual or for the benefit of
any partnership or unincorporated association of which the
individual is a member. FI § 3-601(g).
(3)
When the individual holds only a limited interest in a limited
partnership, the individual’s total liabilities for limited partnership
liabilities may not exceed the value of the individual’s interest in
the limited partnership. Id.
As to Partnerships and Associations.
The total liabilities of a partnership or association to a bank include:
(1)
All liabilities of its individual members; and
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(2)
c.
All loans made for the benefit of the partnership or association to
the extent that the proceeds are transferred to it or for the benefit of
any member of the partnership or association. FI §§ 3-601(h) and
(j).
As to Corporations.
The total liabilities of a corporation include all loans that are made for the
benefit of the corporation to the extent that the proceeds are transferred to it.
FI § 3-601(i).
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