Lending Limits
Federal RegisterFeb 11, 1994
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 32
[Docket No. 94-02]
RIN 1557-AA72
Lending Limits
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing to comprehensively revise its rules governing national bank
lending limits. This proposal is the first in a series of proposals
intended to simplify OCC regulations and reduce compliance costs. The
proposed revisions clarify the scope and application of the lending
limits; reorganize the regulation to group related subjects together;
update the rules to address frequently asked questions and incorporate
significant OCC interpretations of the lending limits; simplify
calculation of the lending limits by relying primarily on quarterly
Call Report information, rather than requiring that lending limits be
calculated on a daily basis; revise the definition of capital and
surplus upon which lending limits are based to rely on capital
components that a bank must already calculate for Call Report purposes;
add and amend definitions and consolidate definitions at the beginning
of the regulation; restructure and clarify the loan combination rules;
and add a new exception to the lending limits to allow a bank to
advance funds to renew and complete funding a loan commitment under
circumstances where the additional advance will protect the position of
the bank. The purpose of the proposed revisions is to clarify the
limits set by the regulation and, consistent with statutory
requirements, focus the lending limits on situations where excessive
loans to a borrower present safety and soundness concerns.
DATES: Comments must be received by April 12, 1994.
ADDRESSES: Comments should be directed to: Communications Division, 250
E Street, SW., Washington, DC 20219, Attention: Docket No. 94-02.
Comments will be available for public inspection and photocopying
at the same location.
FOR FURTHER INFORMATION CONTACT: Deborah Katz, Senior Attorney,
Enforcement and Compliance Division, (202) 874-4800; Stephen Freeland,
Bank Operations and Assets Division, (202) 874-4460; William C. Kerr,
National Bank Examiner, Traditional Activities, (202) 874-5170; Nancy
E. Chase, Assistant Director, Legislative, Regulatory and International
Activities, (202) 874-5090; William W. Templeton, Senior Attorney,
Legislative, Regulatory and International Activities, (202) 874-5090.
SUPPLEMENTARY INFORMATION:
Background
OCC Regulation Review Program
The OCC is proposing revisions to the national bank lending limits
as part of its program to review all the OCC's rules and eliminate
provisions that do not contribute significantly to maintaining safety
and soundness and accomplishing the OCC's other statutory
responsibilities. The OCC believes that the regulatory process should
strive for an environment in which risk is prudently managed by banks
and appropriately monitored by their regulator, without imposing
excessive regulatory costs and without undermining the ability of banks
efficiently to provide products and services to their customers. A
central objective of the regulation review effort is to target
regulation to those risks that present unacceptable exposure to the
Federal deposit insurance system. Rules that are not necessary to
protect against unacceptable risks, that do not support equitable
access to banking services for all consumers, or that are not needed to
accomplish other statutory responsibilities of the OCC will be
eliminated.
Where risks are meaningful and regulation is appropriate, rules
will be examined to determine if they achieve their purpose at the
least possible cost. In this regard, the OCC recognizes that one source
of regulatory cost is the failure of regulations to provide clear
guidance because they are simply difficult to follow and understand.
Therefore, an important component of the OCC's effort will be to revise
regulations, where appropriate, to improve clarity and better
communicate the standards that the rules are intended to embody.
Lending Limits
The national bank lending limits are one of the oldest and most
important components of bank supervision. The first version of the
lending limits was enacted over 130 years ago as part of the Currency
Act of 1863,1 and the lending limits have been revised several
times since then.
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\1\Act of February 25, 1863, 12 Stat. 665 et seq.
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The Garn-St Germain Depository Institutions Act, Public Law 97-320
(1982), represents the most recent major statutory revision of the
lending limits for national banks. 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.
The OCC implemented the amended 12 U.S.C. 84 with a final rule
published on April 12, 1983 (48 FR 15844). This 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 was never adopted, however.
The revisions proposed today address developments that have
occurred since the lending limits were last revised and also seek to
implement the goals of the OCC's regulation review program, described
above.
Proposal
The proposal revises the text of the regulation to improve clarity
and to address frequently asked questions. For ease of reference, the
regulation is reorganized to group related subjects together, and to
incorporate interpretive rulings and significant OCC interpretive
positions. The proposed regulation begins with the authority, purpose,
and scope (Sec. 32.1), followed by the definitions (Sec. 32.2), the
general and special lending limits, and exceptions to the lending
limits (Sec. 32.3), the date for calculating lending limits
(Sec. 32.4), the combination rules (Sec. 32.5), and the treatment of
nonconforming loans (Sec. 32.6).
The following discussion identifies and explains significant
proposed changes to the regulation. The OCC is requesting general
comment on all aspects of the proposed regulation, as well as specific
comment on major changes in the rules. A table summarizing the areas
where changes are proposed is set forth at the end of this preamble.
Authority, Purpose and Scope (Sec. 32.1)
The proposal amends the ``Purpose'' paragraph to add explicit
reference to the objectives of safety and soundness, as well as the
goals of loan diversification and equitable access to banking services.
The ``Scope'' paragraph (1) clarifies language; (2) incorporates the
interpretation that currently appears at 12 CFR 32.111, which states
that the lending limits found in 12 CFR part 32 are separate and
distinct from the limits on investment securities, found in 12 CFR part
1; and (3) clarifies that extensions of credit to insiders of national
banks are subject to additional limitations found at 12 U.S.C. 375a and
375b, as interpreted by 12 CFR parts 31 and 215.
Definitions (Sec. 32.2)
The proposal brings the definitions that are currently located in
various places in the regulation into a single definitions section at
the beginning of the regulation. It adds new definitions and revises
many existing definitions to clarify their meaning and incorporate
interpretative rulings and other significant OCC interpretive
positions. Of particular note are the following proposed revisions:
Capital and Surplus
The current definition of ``unimpaired capital and unimpaired
surplus,'' which is the basis for calculating a bank's lending limits,
refers to a special definition of ``capital and surplus,'' ultimately
found at 12 CFR 3.100. This special definition differs from the
components of Tier 1 and Tier 2 capital that are used for capital
adequacy purposes. Capital adequacy also is generally determined on a
quarterly basis, using information contained in a bank's Report of
Condition and Income (Call Report). In contrast, the OCC's current
lending limit rule requires lending limits to be calculated as of the
date a loan is made.
The OCC believes that the use of a special definition of capital as
the basis for calculating lending limits, and the requirement to
calculate limits as of the dates loans are made, may be unnecessarily
burdensome and complicated. The OCC recognizes that national banks must
currently comply with a number of regulations each of which define
``capital and surplus'' according to a separate formula. As part of a
general effort to reduce the number of capital formulas applicable to
national banks, this proposal ties the formula and the date for
determining capital and surplus that a bank must use for lending limit
purposes to a capital figure that can be derived from its Call Report
on a quarterly basis.
The proposed definition of ``capital and surplus,'' found at
Sec. 32.2(b), is composed of the bank's Tier 1 and Tier 2 capital, plus
the balance of the bank's allowance for loan and lease losses (ALLL)
not included in the total of the bank's Tier 1 and Tier 2 capital. The
OCC is proposing to include the full amount of a bank's ALLL in the
base for calculating a bank's lending limits because the full amount is
currently included in that base. The OCC believes it is inadvisable to
constrict the lending limit base at a time when concerns about credit
availability are widespread, and believes this proposed change will not
impact credit availability. Commenters are specifically requested to
address this issue. Commenters also are specifically requested to
address (1) the significance of the ALLL component in their lending
limit calculations; (2) whether any other component of the current
lending limit base should be included in the revised definition of
``capital and surplus''; and (3) whether, on balance, an approach using
Tier 1 and Tier 2 capital alone, would be preferable because of its
simplicity.
The revised definition of ``capital and surplus,'' together with
the new dates for calculating capital, as described in more detail
below, should be substantially easier for a bank to implement than the
current definition, since all the components of the lending limits
would be derived from calculations a bank must make for its Call
Report.
Loans and Extensions of Credit
The proposal amends the definition of ``loans and extensions of
credit,'' found at paragraph (i), to incorporate interpretative rulings
and other significant OCC interpretive positions that clarify the term.
Paragraph (i)(1)(iii) adds the requirement that, in order for a bank's
purchase of Type I securities subject to a repurchase agreement to be
excluded from the definition of ``loans and extensions of credit,'' the
bank must have assured control over or established its rights to the
securities.
Paragraph (i)(1)(vi) incorporates the OCC's current position that
giving credit for uncollected items is a loan and extension of credit.
However, the paragraph also creates an exception for instances where
payment is required by Regulation CC of the Federal Reserve Board, 12
CFR part 229. (Regulation CC specifies certain timeframes within which
funds must be made available.)
Paragraph (i)(2) lists items that are not ``loans and extensions of
credit'' and contains several new provisions. Paragraph (i)(2)(i)
excludes 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 for the protection of the bank. The
additional advance would be treated as an extension of credit and taken
into account in calculating the bank's lending limit, however, if the
bank sought to make another loan to the borrower. Commenters are
requested to address whether payments for purposes other than for taxes
and insurance should be excluded from the definition of ``loans and
extensions of credit'' and, if so, what standards should apply to those
advances.
Paragraph (i)(2)(ii) clarifies the types of accrued and discounted
interest that qualify for an exclusion from the definition of ``loans
and extensions of credit,'' and incorporates existing OCC policy by
treating the accrued and discounted interest as an extension of credit
if the bank seeks to make another loan to the borrower.
Paragraph (i)(2)(iii) incorporates a longstanding OCC position
excluding from the definition of ``loans and extensions of credit''
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 it held the asset.
Paragraph (i)(2)(iv) adopts an OCC interpretive position and
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.
Paragraph (i)(2)(v) incorporates the treatment of loan
participations currently set forth in Sec. 32.105 into the basic
definition of ``loans and extensions of credit.'' Commenters are
requested to address whether further clarifications are needed in that
paragraph regarding the time period within which participations must be
funded.
Finally, commenters are also asked to identify whether there are
other categories of transactions that should be included or
specifically excluded from the definition of ``loans and extensions of
credit.''
Lending Limits (Sec. 32.3)
This proposed section brings together all the general and special
lending limit rules and all the exceptions to the lending limits.
Paragraph (a) incorporates and integrates the substance of current
Sec. 32.3 (general limit) and Sec. 32.4 (additional general limit).
Paragraph (b) collects into one paragraph all the types of loans that
are subject to special lending limits and clarifies that loans secured
by various types of collateral may qualify for more than one exception,
i.e., that the exceptions may be cumulative. Paragraph (c) collects in
one subsection all the types of loans that are not subject to the
lending limits. Throughout this section, provisions have been revised
to delete verbatim repetition of the statutory language.
Paragraph (a) introduces the term ``combined general limit,'' which
consists of the 15 percent general limit plus the 10 percent additional
general limit for loans secured by readily marketable collateral. The
revised paragraph eliminates specific language regarding monthly
foreign exchange valuations. Financial instruments denominated in
foreign currencies should be revalued in accordance with the procedures
developed by the bank consistent with the treatment of other readily
marketable collateral.
Paragraph (b)(2) clarifies that in order to qualify for the special
lending limit for loans arising from the discount of installment
consumer paper, a bank must substantiate its reliance on the maker for
payment with specific documentation supporting the bank's independent
credit analysis and a certification from an authorized official of the
bank that the bank is relying on the maker for repayment.
Paragraph (b)(3)(ii) requires 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. The current rule requires an ``inspection and appraisal
report'' performed at least every 12 months or more frequently as
deemed prudent. This proposed change seeks to address the differences
among livestock businesses and to remove the presumption that an
inspection and appraisal report performed every 12 months is adequate.
Commenters are specifically requested to address whether the revised
language provides sufficient guidance regarding the timing of
appraisals.
Paragraph (b)(5) provides a new exception to the lending limits to
enable a bank to renew a qualifying commitment to lend in order to
complete the financing of a project in process. The purpose of the
advance must be to protect the position of the bank, and the amount of
the additional advance may not exceed the lesser of the unfunded
portion of the original commitment or 5 percent of the bank's capital
and surplus. This exception addresses situations in which developers
and builders are unable to obtain funding from their original lender or
substitute lenders to finish partially completed projects. By allowing
a lender to complete funding, this exception reduces the likelihood
that property will become OREO for the lending bank.
The OCC requests commenters to address, consistent with safety and
soundness, the merits of this proposed exception and address any other
situations that may warrant consideration.
Paragraph (c)(10) incorporates a longstanding OCC interpretive
position regarding lease-note financing also known as the ``U.S.
Leasing'' exception. The exception treats loans to leasing corporations
for the purpose of purchasing equipment for lease as loans to the
underlying lessees in certain circumstances.
Calculation of Lending Limits (Sec. 32.4)
The proposal changes the way in which banks must calculate their
lending limits. Instead of requiring that a bank calculate its capital
each time it makes a loan, a bank generally will be able to use a
capital figure that can be derived from its quarterly Call Report to
determine its lending limit. This capital figure would be used to
determine whether a bank's loans were legal when made and to determine
whether a bank's existing loans have remained in conformity with the
lending limit. The OCC anticipates that most banks will be able to rely
exclusively on their Call Reports to determine their lending limit and,
therefore, their the lending limit will not change between Call Report
dates.
A bank would, however, be required to calculate its limit between
these quarterly dates if there were a change in the bank's capital
category for purposes of prompt corrective action, or if a ``material
event'' occurred and that event caused the bank's capital to decrease
or increase by 10 percent or more. The proposal envisions that a
``material event'' for this purpose need not be a single event
occurring on a single day, but could include a series of related events
that, in the aggregate, are material to the bank. The OCC believes it
would be inappropriate for banks experiencing capital declines between
quarterly Call Report dates to look only to a change in their prompt
corrective action capital category as a basis for requiring
recalculation of their lending limits. The OCC also expects banks to
conscientiously evaluate whether capital declines between quarterly
Call Report dates require recalculation of a bank's lending limit under
the ``material event'' trigger.
Commenters are specifically requested to address this new
methodology and, in particular, whether a ``material event'' is a
sufficiently definite concept to use as part of the recalculation
standard, or whether a single percentage test, such as a 10 percent
increase or decrease in capital, would be preferable. Commenters also
are requested to address how this proposed approach would be affected
by implementation of Statement of Financial Accounting Standards No.
115, ``Accounting For Certain Investments in Debt and Equity
Securities,'' which creates a new component of stockholders' equity
based on unrealized holding gains or losses on securities available for
sale.
The proposal also retains for the OCC the ability to determine for
safety and soundness reasons that a bank should calculate its lending
limit more frequently than otherwise provided, for example, where a
bank regularly lends close to its lending limit. In such cases, the OCC
may give written notice to a bank directing the bank to calculate its
lending limit at a more frequent interval. The notice will briefly
explain why the OCC has determined to require the more frequent
calculation.
Combination Rules (Sec. 32.5)
The proposal restructures and clarifies aspects of the loan
combination rules. The revised ``direct benefit'' test, found in
paragraph (b), narrows the situations where a loan to one person is
attributed to a third person because the third person receives the loan
proceeds. As revised, the test does not attribute a loan to a third
party when proceeds are transferred to the third party to acquire
property, goods, or services from that party in a bona fide arms-length
transaction. However, borrowed funds that are re-loaned to a third
party would be attributed to the third party under this test.
Commenters are specifically requested to address whether additional
clarifications of, or limitations on, the test are appropriate,
including whether the test should be eliminated, given the scope of the
``common enterprise'' test, discussed below.
The proposal also revises and reorganizes the ``common enterprise''
test, found in paragraph (c), to clarify its impact. Paragraph (c)(1)
incorporates the OCC's current position regarding circumstances where
loans to several borrowers will be combined under the ``common
enterprise'' test because they depend upon a common source of
repayment. Paragraph (c)(1) also incorporates the OCC's current
position regarding the treatment of employer/employee situations for
purposes of the ``common enterprise'' test by providing that an
employer will not be treated as a source of repayment because of wages
or salaries paid to an employee unless the employee controls the
employer.
Commenters are specifically requested to address these proposed
changes and whether further simplification of the combination rules is
appropriate. In particular, commenters are requested to address whether
they would prefer a simpler test, which may contain ambiguities, or
``bright line'' attribution rules that may be complex to apply in some
situations, but which provide more certainty.
Nonconforming Loans (Sec. 32.6)
This new section incorporates OCC policy that a bank will not be in
violation of 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. The events included in the
regulation are: a decline in the bank's capital, a merger of borrowers,
a merger of lenders, or a change in the lending limit rules.
Commenters are specifically asked to address (1) whether the
phrase, ``best efforts,'' needs additional clarification, and if so,
how it might be defined or should be documented for the purposes of
this section and Sec. 32.2(i)(2)(iv) on renewals of loans and
extensions of credit, and (2) whether other events, if any, should be
added to the list of circumstances that may cause a loan to become
nonconforming.
The regulation also notes that where an existing loan becomes
nonconforming because of a decline in the value of collateral securing
the loan, a bank will be given five business days, as is currently the
case, to bring the loan into conformance with the bank's lending limit.
Commenters are specifically asked to address whether this dual
approach is reasonable. Commenters are also asked to discuss the effect
of the new quarterly calculation of capital on conformity of existing
loans with the lending limit.
The OCC also welcomes comments on any aspect of the proposed
regulation, and in particular, those issues specifically noted in this
preamble, and those that could have an impact on credit availability.
Derivation Table.--Only Substantive Modifications, Additions and Changes
are Indicated
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Revised provision Original provision Comments
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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).................. Sec. 32.6(h)(3)........ ......................
(d).................. Sec. 32.6(h)(4)........ ......................
(e).................. Sec. 32.2(d)........... ......................
(f).................. Sec. 32.5 (a) (2) (v).. Modified.
(g).................. Sec. 32.4(b)........... ......................
(h).................. Sec. 32.4(c) and (e)... ......................
(i)(1)(i)............ Sec. 32.2(a)........... ......................
(i)(1)(ii)........... Sec. 32.2(a)...........
(i)(1)(iii).......... Sec. 32.103............ Modified.
(i)(1)(iv)........... Sec. 32.104............ Modified.
(i)(1)(v)............ Sec. 32.105............ ......................
(i)(1)(vi)........... ....................... Added.
(i)(1)(vii).......... Sec. 32.102(b)......... ......................
(i)(1)(viii)......... Sec. 32.106............ Modified.
(i)(2)(i)............ ....................... Added.
(i)(2)(ii)........... Sec. 32.108............ Modified.
(i)(2)(iii).......... ....................... Added.
(i)(2)(iv)........... ....................... Added.
(i)(2)(v)............ Sec. 32.107............ Modified.
(j).................. Sec. 32.2(b)........... ......................
(k).................. Sec. 32.2(f)........... ......................
(l).................. Sec. 32.4(c)........... ......................
(m).................. Sec. 32.6(c)(3)........ ......................
(n).................. Sec. 32.102(a)......... ......................
(o).................. Sec. 32.2(e)........... ......................
Sec. 32.3(a)........... Sec. 32.3 and 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.
(b)(6)............... Sec. 32.8.............. ......................
(c)(1)............... Sec. 32.6(a)........... ......................
(c)(2)............... Sec. 32.6(b)........... ......................
(c)(3)............... Sec. 32.6(d)........... ......................
(c)(4)............... Sec. 32.6(e)........... ......................
(c)(5)............... Sec. 32.109............ ......................
(c)(6)............... Sec. 32.6(f)........... ......................
(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)........... ......................
(e).................. Sec. 32.5(c)........... ......................
(f).................. Sec. 32.5(d)........... ......................
Sec. 32.6.............. Sec. 32.7.............. Modified.
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Regulatory Flexibility Act
It is hereby certified that this regulation 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
It has been determined that this document is not a significant
regulatory action. The impact of this proposed rule is expected to be
slight and will benefit banks by simplifying and clarifying existing
regulatory requirements.
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 proposed to be 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 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), or 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(7), 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
investment securities of the same obligor up to the full amount
permitted under 12 U.S.C. 24(7) 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.
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 as defined in the OCC's
Minimum Capital Ratios in 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 1 and Tier 2 capital, for purposes of the
calculation of risk-based capital under part 3 of this chapter.
(c) 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.
(d) 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.
(e) 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 (k) of this section; and
(iv) Advance funds under a standby letter of credit as defined in
Sec. 32.2(o), 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.
(f) 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.
(g) Current market value means the bid or closing price listed for
an item in a regularly published listing or an electronic reporting
service.
(h) 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.
(i) Loans and extensions of credit means a bank's direct or
indirect advance of funds to a borrower based on an obligation of that
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 (e) 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 Sec. 1.3(c) 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
or daylight overdraft;
(vi) Amounts paid against uncollected funds, except as required by
12 CFR part 229;
(vii) 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
(viii) 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) Has become unenforceable by reason of discharge in bankruptcy;
or
(B) Is no longer legally enforceable because of expiration of the
statute of limitations or a judicial decision.
(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 to a borrower by a bank for taxes or
for insurance if the advance is for the protection of the bank, 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, 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;
(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 best
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 is substituted for 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; and
(v) 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. Where an originating bank funds the
entire loan, it must receive funding from the participants on the same
day or the portions funded will be treated as loans by the originating
bank to the borrower.
(j) Person means an individual; sole proprietorship; partnership;
joint venture; association; trust; estate; business trust; corporation;
not-for-profit corporation; sovereign government or agency,
instrumentality, or political subdivision thereof; or any similar
entity or organization.
(k) 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 Sec. 32.2(i)(2)(v).
(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.
(l) 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.
(m) 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.
(n) 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.
(o) 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 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(l). 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(m), 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 10 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(d), 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 paragraph, 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.
(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 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(k), and complete
funding under that commitment if all of the following criteria are
met--
(i) The advance is made to protect the position of the bank;
(ii) The advance will enable the borrower to complete the project
for which the qualifying commitment to lend was made; and
(iii) The amount of the additional advance does not exceed the
lesser of the unfunded portion of the bank's qualifying commitment to
lend, or 5 percent of the bank's capital and surplus.
(6) Agricultural or oil and gas loans--(i) Definitions. For
purposes of this section--
(A) Agricultural loans include loans or extensions of credit
secured by farmland, loans to finance agricultural production and other
loans to farmers reported in the bank's Report of Condition and Income
(Call Report). Examples of these types of loans are loans for growing
and storing of crops, breeding and marketing of livestock, financing
fisheries, purchasing of farm machinery and equipment, maintaining and
operating farms, and purchasing discounted notes of farmers.
(B) Oil and gas loans include loans or extensions of credit to oil
companies, petroleum refiners, and companies primarily engaged in the
oil- and gas-related business, such as operating oil and gas field
properties, contract drilling, performing exploration services on a
contract basis, performing oil and gas field services, manufacturing or
leasing of oil field machinery and equipment, transporting petroleum by
pipeline, transmitting or distributing natural gas, and investing in
oil and gas royalties or leases.
(C) Special category loan charge-offs means agricultural or oil and
gas loans charged-off during the period from January 1, 1986 through
December 31, 1989, that have been reported in a special memorandum item
in the bank's Call Report in accordance with the OCC's capital
forbearance policy.
(ii) Substitute lending limit. A national bank that had special
category loan charge-offs resulting in a reduction in its capital and
surplus since December 31, 1985, may substitute a lending limit
calculated under this section for the bank's 15 percent general limit,
up to a maximum amount of 20 percent of the bank's capital and surplus,
until January 1, 1995.
(iii) Calculation of lending limit. The substitute lending limit in
paragraph (b)(6)(ii) of this section is the lesser of the following
amounts:
(A) 15 percent of the bank's capital and surplus on December 31,
1985; or
(B) 15 percent of the total of--
(1) The difference between the sum of special category loan charge-
offs and the sum of recoveries on those charge-offs; plus
(2) Capital and surplus; or
(C) 20 percent of capital and surplus.
(iv) Expiration. Paragraph (b)(6) of this section expires on
January 1, 1995.
(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, or the
Foreign Credit Insurance Association.
(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) 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 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, where a security
interest in the collateral has been perfected under applicable state
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 Sec. 1.3(g) 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 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.
(iii) 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.
(iv) 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 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 corporations. A loan or extension of credit
to a leasing corporation 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 directly to
the bank; and
(vi) The lease payments assigned to the bank are sufficient to
satisfy the loan to the leasing corporation with no allowance for
salvage value or rents that could accrue through renewal or extension
of the lease.
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 with the OCC;
(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; or
(3) When a material event (including a series of related events
that are material in the aggregate) occurs that reduces or increases
the bank's capital and surplus calculated under paragraphs (a)(1) or
(a)(2) of this section by 10 percent or more.
(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.
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--
(1) 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; or
(2) When the OCC determines, based upon an evaluation of the facts
and circumstances, that a party has directly benefited from a loan or
extension of credit from the bank through the use of a nominee
borrower.
(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 as defined in Sec. 32.2(f), including where one borrower
is directly or indirectly controlled by another borrower; and
(ii) Substantial financial interdependence exists among 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, in which case a common enterprise is deemed to
exist between the borrowers; 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 is a subsidiary of any person that owns or
beneficially owns directly or indirectly more than 50 percent of the
voting stock of the corporation.
(2) Loans or extensions of credit to a person and its subsidiary,
or to 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) 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 to be
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 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, when loans or extensions of credit are made to the member
to purchase an interest in the partnership, joint venture or
association.
(3) 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, notwithstanding 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, instrumentalities, all other public-
sector borrowers (including restructured debt) shall not exceed, in the
aggregate, 50 percent of the bank's unimpaired capital and unimpaired
surplus.
Sec. 32.6 Nonconforming loans.
(a) A loan, within a bank's legal lending limit when made, will
become nonconforming if it is no longer in conformity with the bank's
lending limit because--
(1) the bank's capital has declined, borrowers have merged, lenders
have merged, the lending limit 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 exercise best efforts, consistent with safe and
sound banking practices, to bring a loan that is nonconforming as a
result of paragraph (a)(1) of this section into conformity with the
lending limit.
(c) A bank must bring a loan that is nonconforming as a result of
paragraph (a)(2) of this section into conformity with the lending limit
within five business days, except when judicial proceedings, regulatory
actions or other extraordinary circumstances beyond the bank's control
prevent the bank from taking action.
Dated: October 10, 1993.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-3184 Filed 2-10-94; 8:45 am]
BILLING CODE 4810-33-P
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