Lending Limits

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 95-03]

RIN 1557-AA72

Lending Limits

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is

comprehensively revising its rules governing national bank lending

limits as part of its Regulation Review Program. The final rule amends,

clarifies, and reorganizes the OCC's lending limit rules.

The final rule eliminates inefficient and unduly burdensome

regulatory requirements and refocuses the lending limit rules on the

areas of greatest safety and soundness concern. The new rule enhances

the ability of national banks to lend while protecting against

situations where excessive loans to a borrower or related borrowers

present safety and soundness concerns.

EFFECTIVE DATE: March 17, 1995.

FOR FURTHER INFORMATION CONTACT: William C. Kerr, National Bank

Examiner, or Frank R. Carbone, National Bank Examiner, Credit and

Management Policy, (202) 874-5170; P. Moni SenGupta, Attorney

Legislative and Regulatory Activities Division, (202) 874-5090; Aline

J. Henderson, Senior Attorney, or Laura G. Goldman, Attorney, Bank

Activities and Structure Division, (202) 874-5300; Office of the

Comptroller of the Currency, 250 E St. SW, Washington, D.C. 20219.

[[Page 8527]]

SUPPLEMENTARY INFORMATION:

Background

Although the limitations on a national bank lending to one borrower

can be traced to the Currency Act of 1863,1 the Garn-St Germain

Depository Institutions Act (Act), Pub. L. 97-320 (1982), represents

the most recent major revision of the statutory lending limits. Section

401(a) of that Act amended 12 U.S.C. 84 to raise the amount that a

national bank may lend to a single borrower from 10 to 15 percent of

the bank's unimpaired capital and unimpaired surplus. It also added new

exceptions, defined key terms, and provided express authority for the

OCC to issue regulations to implement the statute, including

regulations to define or further define terms and to establish limits

or requirements other than those contained in the statute for

particular classes or categories of loans.

\1\Act of Feb. 25, 1863, 12 Stat. 665 et seq., R.S. Sec. 5200.

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The OCC implemented the amended 12 U.S.C. 84 with a final rule

published on April 12, 1983 (48 FR 15844). The final rule created a new

part 32 in title 12 of the Code of Federal Regulations which replaced

and restructured existing interpretive rulings previously found at 12

CFR part 7. The OCC proposed another major regulatory revision of the

lending limits for national banks on October 24, 1989 (54 FR 43398). A

final rule in response to this proposal was never adopted, however.

The Proposal

On February 11, 1994 the OCC published its proposal to revise the

lending limit regulation found at 12 CFR part 32 (proposal), 59 FR

6593, as part of the OCC's Regulation Review Program. The proposal

sought to modernize the regulation and incorporate into the rule

significant interpretive positions of the OCC. The proposal sought to

comprehensively revise, reorganize, update, and simplify the

regulation, and to reduce unnecessary regulatory burdens, without

compromising the important safety and soundness objectives of the

lending limits rule.

Comments Received and Changes Made

The final rule implements most of the initiatives contained in the

proposal. However, several additional changes are made in response to

the comments received. Most of these changes clarify the original

intent of the proposal. Other changes alter the proposed regulation in

a manner that provides additional flexibility to banks. The final rule

also includes a number of technical changes to the proposal.

The OCC received 28 comment letters on the proposal. The comments

received generally were very favorable. Comment letters included 16

from banks and bank holding companies, three from law firms, and eight

from trade associations and the representatives of banks, thrifts, home

builders, and clearing houses. The commenters welcomed the OCC's effort

to reorganize part 32 and several stated that the changes made in the

proposal represented a significant improvement over the old rule.

Commenters generally praised the new format and the additional clarity

provided by the revisions. Some predicted that the simplified

regulation would reduce regulatory burden and compliance costs.

Overview of the Final Rule

The OCC reviewed the lending limit rule with the goals of reducing

unnecessary regulatory burdens and providing banks with increased

flexibility in their lending operations, consistent with safe and sound

banking practices.

As part of this new approach, the final rule alters the definition

of ``capital and surplus'' upon which lending limits are based. The new

lending limit calculation draws upon risk-based capital components that

a bank must already calculate for Call Report purposes. By relying on

quarterly Call Report information, most national banks generally will

be required to calculate their lending limit only once every quarter,

rather than every time they propose to make a loan.

The final rule also adds a few new definitions and removes or

consolidates old ones to enhance the regulation's clarity. Several

modifications provide banks with greater flexibility in certain lending

situations, subject to safety and soundness parameters. For example,

the rule includes a new exception to the lending limits to allow a bank

to advance funds to renew and complete the funding of a qualifying loan

commitment under circumstances where the additional advance will

protect the position of the bank. The final rule also allows a bank to

advance funds to pay for taxes, insurance and other necessary expenses

to protect its interest in the collateral securing a loan, and

clarifies when a loan is considered ``nonconforming,'' rather than a

violation, when it exceeds a bank's lending limit, but was within the

bank's lending limit when made.

Section-by-Section Discussion

The commenters focused on provisions of the proposal needing

modification or further amendment. The OCC carefully considered each of

the comment letters and has made a number of changes in response. Those

comments and any changes are identified and explained in the section-

by-section discussion that follows. A table summarizing the sections of

the former part 32 that are amended by the final rule is included at

the end of this preamble.

Authority, Purpose and Scope (Sec. 32.1)

The proposal amended the ``Purpose'' paragraph to expressly

incorporate the objectives of safety and soundness, loan

diversification, and equitable access to banking services. The final

rule adds to the ``Scope'' paragraph new language cautioning bank

management that the lending limit rule is not a ``safe harbor'' for

lending.

The ``Scope'' paragraph emphasizes that the lending limit rules are

only one component of a prudent lending program. National banks must

always underwrite loans in accordance with prudent banking practices,

in addition to adhering to specific quantitative limitations such as

the lending limits. Several commenters remarked that the OCC should

amend the lending limits provisions to recognize the existence of

limited liability companies as bank subsidiaries, comparable to

operating subsidiaries. Treatment of limited liability companies as

operating subsidiaries is an issue raised in the OCC's proposed changes

to Part 5 of its regulations, and the OCC believes the question is

better resolved in that context. (59 FR 61034, November 29, 1994.) In

the interim, however, when a bank seeks permission to invest in a

limited liability company as a subsidiary, and the bank's voting

interest satisfies the operating subsidiary percentage control

requirements, the bank may also seek confirmation that loans by the

bank to the limited liability company subsidiary will be treated in the

same way as loans to an ``operating subsidiary'' for purposes of

lending limits.

Definitions (Sec. 32.2)

The proposal consolidated all the definitions located throughout

the existing rule into a single section. Commenters raised questions

about some of the revisions and additions made to the definitions. Of

particular note are the following revisions. [[Page 8528]]

Capital and Surplus (Sec. 32.2(b))

Under the former rule, the statutory lending limit of 15% of

capital was applied to a definition of capital found in 12 CFR

Sec. 3.100. The Sec. 3.100 definition serves as the capital base for

certain other regulatory limitations, such as limits on purchasing

investment securities, holding property and OREO, and investing in

community development corporations. The Sec. 3.100 capital definition

is separate and different from the leverage and risk-based capital

formulae used to determine banks' capital adequacy.

In order to reduce regulatory burden associated with calculating

lending limits and to begin the process of reducing the multiple

definitions of capital currently in use, the proposal changed the

definition of capital and surplus used for lending limits purposes by

employing a capital calculation that all banks already make. Under the

proposal, a bank's basic lending limit would be an amount equal to 15%

of the sum of its allowed Tier 1 and Tier 2 capital, plus the balance

of its allowance for loan and lease losses (ALLL) not included in Tier

2 capital for the bank's risk-based capital calculation. For

simplicity, the proposal used the terminology ``capital and surplus''

rather than the statutory terms ``unimpaired capital and unimpaired

surplus.''

The commenters generally favored this approach to the capital

definition, however, some expressed concern that the approach needed to

be clarified. The new capital base for calculation of the limit in the

proposal appeared to some commenters to be the sum of all Tier 1

elements and all Tier 2 elements, whether or not they exceeded the

amounts that could be included in a bank's risk-based capital. The

final rule adopts the proposed capital and surplus definition but with

an amendment to clarify that only the amount of Tier 1 and Tier 2

capital that is actually included in a bank's risk-based capital (plus

the excess ALLL) is allowed in the bank's lending limit capital base.

Loans and Extensions of Credit (Sec. 32.2(j))

The commenters generally favored the proposed amendments to the

definition of loans and extensions of credit, now found at

Sec. 32.2(j), which incorporates significant OCC interpretive positions

clarifying the term. Section 32.2(j)(1)(iii) adds the requirement that

in order to exclude a bank's purchase of Type I securities subject to a

repurchase agreement, a bank must have assured control over or

established rights to the securities.

Some commenters requested additional clarification of the meaning

of ``assured control.'' Assured control means that the bank has

recognized and exercisable authority over the asset. For example, a

bank can assure control of property subject to a repurchase agreement

by taking physical possession of the security or by requiring a proper

recordation of ownership of book-entry securities.

Section 32.2(j)(1)(v) excludes all intra-day or daylight overdrafts

from the definition of an extension of credit. Several commenters

questioned whether the terms ``intra-day'' or ``daylight'' were

sufficiently adaptable for an increasingly complex and international

payments system. As the commenters point out, more and more banks

operate across several time zones. The financial payments systems are

now global systems spanning many time zones. With this in mind, several

commenters suggested that the final rule adapt the meaning of a

``daylight'' overdraft to contemporary conventions. The OCC believes

these concerns have merit and the final rule drops the reference to

``daylight'' and simplifies the definition. Intra-day overdrafts

excluded from the final rule are those overdrafts for which payment is

received before the bank closes its books for the calendar day. This

change recognizes the reality of a rapidly expanding payments system

that may eventually run 24 hours a day and looks to each bank's

practice for closing its books for the calendar day.

Loans Legally Unenforceable

Section 32.2(j)(1)(vii) of the proposal was intended to incorporate

OCC interpretive letters that elaborated on former Sec. 32.106, that

certain loans that become legally unenforceable would not be counted in

calculating a bank's lending limit. One commenter observed that in

attempting to incorporate the OCC interpretive letters, the proposal

effectively narrowed the effect of the interpretive ruling by excluding

from lending limit calculations only loans that are discharged in

bankruptcy, or by judicial decision or statute, and not excluding loans

that are legally unenforceable ``for any other reason.''

The final rule returns to the scope of the original OCC

interpretive ruling. Under the final rule, a loan (or a portion

thereof) that becomes legally unenforceable for any reason and has been

charged off on a bank's books, is not considered a loan or extension of

credit. As a matter of prudent banking practice, the OCC expects that

banks will keep sufficient documentation to show why loans are legally

unenforceable. These records may include letters, memoranda, or written

agreements that evidence the bank's legally enforceable forgiveness of

a loan. The financial records of the bank also should reflect that the

loan has been charged off.

Advances for the Benefit of the Borrower

As proposed, Sec. 32.2(j)(2)(i) exempts from the definition of

``loans and extensions of credit'' additional funds advanced to a

borrower by a bank for taxes or insurance if the advance is made for

the protection of the bank. The purpose of this exemption was to allow

banks to preserve the value of the collateral securing a loan. The

proposal requested that commenters address whether advances made for

other purposes should be similarly exempted from the definition of

loans and extensions of credit. Commenters responded that the purpose

of the exemption is served by allowing an advance for any purpose that

protects the collateral.

The OCC carefully considered the comments received on this issue.

The OCC recognizes that there may be situations when an advance on

behalf of a troubled borrower could help the lending bank avoid greater

expenses after foreclosure. For example, an advance for the purpose of

repairing a leaking roof is more cost effective than waiting until

after foreclosure which leads to spending more money to restore the

value of water-damaged OREO. However, using the exemption to advance

funds for building new property would not be consistent with the

purpose of the exemption. The OCC also has concerns that banks

reasonably anticipate a borrower's need to fund various expenses in

determining the appropriate size of the loan that a bank is able to

extend and that the exemption not create incentives for borrowers to

divert or reclassify spending in order to qualify larger portions of

their credit needs for the exemption.

Nevertheless, the OCC believes that a moderate extension of the

exemption to allow advances to pay for more than taxes and insurance is

appropriate, provided that the expenses have not been structured to

avoid a bank's lending limits. The final rule therefore exempts from

the lending limit reasonable advances made on behalf of the borrower to

pay for necessary maintenance and certain other expenditures when an

advance is consistent with safe and sound banking practices and

designed to protect the lending bank's interest in the collateral.

[[Page 8529]] As before, these advances will be treated as an extension

of credit and taken into account in calculating the bank's lending

limit if the bank seeks to make an additional loan to the same

borrower.

Accrued and Discounted Interest

Section 32.2(j)(2)(ii) of the proposal clarified the type of

accrued and discounted interest that would qualify for an exclusion

from the definition of ``loans and extensions of credit''. The proposal

also provided, however, that accrued and discounted interest would be

treated as an extension of credit if a bank sought to make another loan

to the borrower.

Several commenters, particularly large banks with loans to foreign

governments, objected to this provision of the paragraph. One commenter

stated that this provision would be a major problem for banks seeking

to restructure loans to foreign governments with substantial accrued

interest. The proposed provision could severely impair a bank's ability

to participate in any new extensions of credit in connection with that

type of sovereign debt restructuring. Other commenters pointed to the

1982 Garn-St Germain amendments, Pub. L. 97-320 (1982), which changed

the language of 12 U.S.C. 84 from ``total obligations'' of a borrower

to ``loans and extensions of credit''. These commenters argued that the

1982 amendment reflects a shift in the focus of the statute. They

argued that the 1982 amendment confirms that Sec. 84 is not directed to

interest that is contractually due but is intended to limit only the

funds that actually leave the bank in the form of principal. In short,

these commenters believe that the lending limits apply to money loaned,

not money owed.

The OCC believes these comments have merit. In order to provide

greater flexibility to banks seeking to improve their recoveries

through loan work-outs and restructured loans with troubled debtors,

the final rule modifies the OCC's previous approach. Under the final

rule, a bank need not attribute past-due or accrued interest to a

borrower for purposes of the lending limit. However, as already noted,

all loans made by a national bank must be underwritten in accordance

with prudent banking practices, in addition to adhering to specific

quantitative limitations such as the lending limits. National banks

therefore should consider the possibility of unscheduled interest

accruals in determining the amount of the bank's original extension of

credit, and also must bear the prudent banking practices standard in

mind when extending additional credit to a borrower with past-due or

accrued interest.

Renewals

The proposal incorporated an OCC interpretive position that

excludes from the definition of ``loans and extensions of credit''

certain loan renewals or restructurings if the bank first exercised

``best efforts'' to bring the loan into conformity with its lending

limit. Several commenters questioned whether the use of the term ``best

efforts'' sets a standard that is too high to provide any practical

application. The OCC agrees and the final rule uses the term

``reasonable'' efforts, which better reflects the OCC expectation and

the original intent of the proposed amendment.

Items in the Process of Collection

The OCC has generally taken the interpretive position that giving

credit for uncollected items is a loan or an extension of credit.

However, under the proposal, the OCC also created an exception for

instances where payment is required by Regulation CC of the Federal

Reserve Board, 12 CFR part 229. Regulation CC specifies certain time

frames within which funds must be made available. Several commenters

correctly pointed out that although the intent of the proposal was to

provide additional flexibility, the effect of the change did not

achieve that result. In fact, the proposal may have prevented a bank

from giving credit for an uncollected item prior to the day stated in

the mandatory availability schedule in Regulation CC, by requiring the

bank to treat that advance as an extension of credit.

The final rule amends this paragraph by providing that amounts paid

on items in the normal process of collection do not constitute a loan

or extension of credit. However, once an item is returned or dishonored

by the paying bank, it no longer is in the normal process of

collection. Payment by a bank against a dishonored item would be an

extension of credit.

Participation Loans

Section 32.2(j)(2)(vi) of the final rule revises the proposal's

treatment of participation loans. The proposal incorporated

interpretive positions previously found at Sec. 32.107 and included a

new provision requiring a bank that originates a loan to receive

funding from the participants on the same day. If the bank did not

receive participant funding on the same day, the proposal required the

bank to treat unfunded portions as a loan from the originating bank to

the borrower. Many commenters suggested that the OCC eliminate the

same-day funding requirement because it is impractical. The OCC

disagrees with that contention and believes the participant funding

provision is an important protection to the originating bank that will

help ensure prompt funding by participants.

The commenters, however, correctly point out that delays in the

timing and delivery in funding a participation are not infrequent. The

OCC does not intend for inadvertent funding delays to cause lending

limit violations. The final rule therefore extends the funding period

to provide a more realistic timeframe to address temporary or

inadvertent funding errors. The final rule provides that a

participation loan is not attributed to the originating bank if it

receives funding from the participants before the close of business on

the day after it makes funds available to the borrower. The final rule

also sets forth standards for an originating bank that, if followed,

shield the bank from a lending limit violation in the event that a

participant fails to fund.

Special Lending Limits (Sec. 32.3(b))

Section 32.3(b)(3)(ii) of the proposal required an inspection and

valuation of livestock that is ``current, taking into account the

nature and frequency of turnover of the livestock'' in order to qualify

for the special lending limit for loans secured by documents covering

livestock. Former part 32 required that an ``inspection and appraisal

report'' be performed at least every 12 months or more frequently as

deemed prudent. The proposal recognized the differences in turnover

between different kinds of livestock that secure a loan. It removed the

presumption that an inspection and appraisal report performed every 12

months is adequate.

Several commenters questioned this change. The commenters read the

former rule to require an inspection report only once every 12 months.

Although some commenters characterized the proposal as more burdensome

than the old requirement, the OCC believes it is not. In fact, the

former rule required an inspection and appraisal report more frequently

than once a year, if it was prudent to do so. The proposal actually

reduced burden by allowing the use of valuations, rather than

appraisals, when appropriate. Recognizing the need for clarity,

however, the final rule includes the requirement that an inspection or

valuation be made no less frequently than every 12 months.

Section 32.3(b)(5) of the proposal also provided a new exception to

the lending limits to enable a bank to renew a [[Page 8530]] qualifying

commitment to lend in order to complete the financing of a project in

process. Under the proposal, the advance had to be to protect the

position of the bank, and the amount of additional advances could not

exceed the lesser of the unfunded portion of the original commitment or

5 percent of the bank's capital and surplus. Commenters generally

supported this position. Several suggested, however, that for the

exception to accomplish its intended purpose, the OCC should allow the

bank to fund the full amount of the commitment even if it was in excess

of the five percent cap.

The OCC believes that this suggestion has merit, but is also

concerned that full funding of the original commitment must not

compromise a bank's safety and soundness. Accordingly, the final rule

modifies the approach contained in the proposal to allow funding up to

the amount of the original commitment, provided the renewal and

additional funding thereunder is consistent with safe and sound banking

practices, is made to protect the bank's position, and will enable the

borrower to complete the project for which the original commitment was

made.

Section 32.3(b)(6) of the proposal was not included in the final

rule. This paragraph set forth a special lending limit that expired on

January 1, 1995. Since the section serves no purpose after that date it

is not incorporated into the final rule.

Loans Exempt From the Lending Limit (Sec. 32.3(c))

Section 32.3(c)(3) is revised in the final rule. This paragraph

provides that loans collateralized by U.S. government obligations are

exempt from the lending limits to the extent of the current market

value of the collateral. This exemption includes loans that are secured

by bonds, notes, Treasury bills, or similar obligations fully

guaranteed as to principal and interest by the full faith and credit of

the United States Government. This exemption was the subject of several

commenter suggestions that it be expanded to include loans that are

secured by instruments with comparable government backing. The OCC

agrees with these comments that certain other forms of collateral that

carry the full faith and credit of the U.S. government pose no greater

risk of loss. Accordingly, the final rule relies on the OCC's authority

under 12 U.S.C. 84(d)(1) to establish limits or requirements other than

those specified in the statute, for particular classes or categories of

loans, to include an additional class of loans in the exempt category--

loans guaranteed as to repayment of principal by the full faith and

credit of the U.S. Government. This exemption includes qualifying Small

Business Administration, Federal Housing Administration, and Veterans

Administration guaranteed loans, but only to the extent of the

government guarantee.

Some commenters suggested that the final rule also extend this

exemption to loans that are secured by other types of instruments. The

OCC has carefully considered these suggestions, but does not agree

that, as a general matter, the principal and liquidity risks presented

by the suggested types of instruments are sufficiently comparable to

the risks of directly holding the U.S. Government securities, or

government-backed loans. Accordingly, the OCC declines to add an

additional category of collateral that could qualify a loan for an

exemption from lending limits.

The final rule also modifies Sec. 32.3(c)(10) of the proposal. As

proposed, this paragraph was intended to incorporate OCC interpretive

positions on loans to leasing companies. This paragraph allows banks to

attribute loans made to leasing companies to the lessees when certain

conditions are met. The final rule includes minor changes to ensure

that the conditions for this treatment are no more burdensome than if

the bank were to act as a lessor itself subject to 12 CFR part 23.

These changes better convey the current OCC interpretive position.

Frequency of the Lending Limit Calculation (Sec. 32.4)

The former rule required a bank to determine its lending limit for

each loan on the date that it made a loan. The proposal simplified this

requirement by allowing a bank to rely on its quarterly calculation of

capital found in its Call Report. Rather than calculate daily, under

the proposal the bank generally could calculate the lending limit once

for the entire quarter. However, the OCC was concerned that a

significant decline in capital between quarterly calculations could

result in a bank lending at a level above its actual limit for the

duration of the quarter.

To prevent a bank from lending in excess of a shrinking capital

base, the proposal required a bank to recalculate its lending limit

between quarters if there were a change in its capital category for

purposes of prompt corrective action, or if a ``material event''

occurred that caused its capital to increase or decrease by 10 percent

or more. However, it was recognized that what constitutes a ``material

event'' for this trigger may not be readily defined. Anticipating

criticism of the material event component, the proposal suggested an

alternative: a simple increase or decrease of 10 percent in a bank's

capital between quarters would trigger the recalculation obligation.

Comment was mixed on both approaches to the recalculation trigger.

Generally, commenters characterized the ``material event'' element as

too vague to be useful. Many suggested that a simple percentage test

would be more reliable and useful. Others questioned whether a

percentage test was needed given the OCC's general ability to require

more frequent calculations in individual cases. The OCC finds these

arguments persuasive. The OCC has concluded that the material event

element is too vague to give a reliable indication of the need to

recalculate. As a result, the OCC has not included this requirement in

the final rule.

Imposing the requirement that a bank recalculate whenever its

capital declined by 10 percent between quarters is also problematic.

Several commenters observed that the obligation to monitor the changes

in capital between quarters would give a bank little comfort that its

quarterly lending limit is valid for the entire quarter. In effect the

obligation to monitor 10 percent swings in capital could force a bank

to make a daily calculation of capital, not quarterly as proposed. This

result would be contrary to the purpose of the proposed quarterly

calculation.

On the other hand, the OCC also considered whether a quarterly

calculation would be inappropriate for any identifiable subset of

national banks, such as banks that are undercapitalized. The OCC

determined not to include a different lending limit calculation

frequency requirement for undercapitalized banks as a class, however,

because the OCC anticipates that such banks will be subject to enhanced

supervisory oversight and directives that will address the frequency of

the bank's lending limit calculations in those cases where lending

limit excesses are a potential problem. (For example, a bank could be

undercapitalized for reasons unrelated to its lending activities, or

could have poor underwriting practices and losses on loans and raise no

lending limits issues). The OCC closely monitors undercapitalized

banks, however, and will make appropriate adjustments to the frequency

of required lending limit calculations for such banks if experience

indicates that a general standard for undercapitalized banks is needed.

The final rule, therefore, deletes the 10 percent recalculation

requirement [[Page 8531]] but retains the explicit authority for the

OCC to require a national bank to calculate its lending limits more

frequently than every quarter when the OCC believes it is necessary.

The OCC therefore may address unsafe or unsound lending practices or

other supervisory concerns by directing any bank to calculate its

lending limit more frequently than quarterly. This authority is set

forth in Sec. 32.4(b).

Direct Benefit Test (Sec. 32.5(b))

Section 32.5(b) requires a loan to be attributed to a third party

if the third party gains the direct benefit of the loan proceeds. The

proposal narrowed the direct benefits tests to clarify that loans are

not attributable to a third party when the loan proceeds are

transferred to the third party to acquire property, goods, or services

in a bona-fide arms-length transaction.

The proposal requested comment on the question of whether the

direct benefits test was necessary. Several commenters argued that it

was not. Some commenters suggested that the common enterprise test

addresses most, and possibly all, circumstances that involve the less

than a bona fide arms-length transactions that is the focus of the

direct benefits test. The OCC has carefully considered these comments

but has concluded that the direct benefits test uniquely addresses an

area of concern in the lending limits area. The final rule therefore

retains the test but with one change, designed to improve certainty

regarding the application of the test. The ``facts and circumstances''

provision of the direct benefits test is removed. The OCC believes this

part of the test was redundant and potentially confusing.

Common Enterprise Test (Sec. 32.5(c))

The final rule adopts the common enterprise test largely as stated

in the proposal. The common enterprise test requires the aggregation of

loans made to persons who are related through common control and

financial interdependence or share a common source of income for

repayment of the loan, or whenever the OCC determines the ``facts and

circumstances'' requires aggregation. Most commenters characterized the

proposed language as a much improved restatement of the test that was

easier to understand. Some commenters requested further amendments,

alterations, and extension of the rule.

The OCC has not adopted most of the suggestions. Many of the

commenters' suggestions for change would have undermined the

effectiveness of this combination rule. Most of the suggested changes

would not have provided much additional clarity. Others risked

diminishing the effectiveness of the rule. Although the common

enterprise test may be somewhat complex to apply to certain corporate

structures, the OCC has concluded that, on balance, it is an effective

description of the varied circumstances when loans to separate

borrowers should be combined because they present a common source of

credit exposure for a bank.

The final rule makes changes to Sec. 32.5(c)(3), to clarify that

the rule requires combination of only those loans that the borrowers

use for the acquisition of a controlling interest in a business. The

final rule also specifically clarifies that limited liability companies

will be treated in the same manner as corporations, rather than as

partnerships, in applying the common enterprise test.

Nonconforming Loans (Sec. 32.6)

The proposal incorporated OCC policy that a bank will not be deemed

to violate the lending limits when a loan that was legal when made

becomes nonconforming as a result of several specifically defined

events, provided the bank exercises ``best efforts'' to bring the loan

into conformity with the lending limit. A number of commenters objected

that the ``best efforts'' standard was too high. Some commenters

pointed out that using best efforts to reduce a nonconforming loan

could pose certain safety and soundness risks to a bank. For example,

if a bank holds a loan that was legal when made and subsequently the

bank's capital declines, the best efforts standard might require that

the bank sell the loan off at any price. This forced sale only causes

the bank to lose an asset during a period that its capital is in

decline. The OCC did not intend this result of the proposed

nonconforming loan provisions.

In response to commenter concerns, the final rule replaces the term

``best efforts'' with the term ``reasonable efforts''. The OCC believes

this standard more accurately reflects the level of effort appropriate

to bring a loan into conformance with a bank's current lending limits.

The final rule also makes clear that the section does not require a

bank to make efforts to bring the loan into conformity if to do so

would be inconsistent with safe and sound banking practices. In

addition, the final rule adds that loans that exceed a bank's lending

limit as a result of changes in the capital rules or because borrowers

subsequently become a common enterprise will be treated as

nonconforming.

Finally, in response to commenters, the final rule changes the

treatment of loans that qualify for a lending limit exemption because

they are secured by certain collateral, such as U.S. government

obligations. Under the former rule, as well as the proposal, a national

bank was required to bring a loan into conformity through restoration

of the market value of the collateral or by reducing the amount of the

bank's loan by the amount that exceeds the lending limit within five

business days. Several commenters characterized the five day correction

period as arbitrary and unrealistic.

The OCC recognizes that there are circumstances beyond the bank's

control which might cause a loan of this type to violate the lending

limit, because of a decline in collateral value. Instead of the five

day period, the final rule requires that a bank bring these loans into

conformity within 30 calendar days. During that 30 day period, the loan

will be treated as non-conforming. The OCC believes this change will

provide a more realistic period to enable a bank to address restoration

of proper collateral for a loan without forcing a precipitous

divestiture of all or part of the loan that would not be in the best

interests of the bank.

Effective Date

Section 302 of the Riegle Community Development and Regulatory

Improvement Act of 1994, 12 U.S.C. 4802, requires that a regulation

that imposes new requirements take effect on the first day of the

quarter following publication of the final rule. That section provides,

however, that an agency may determine that the rule should take effect

earlier.

The OCC believes that this regulation relieves burden by

eliminating inefficient and unduly costly regulatory requirements and

better focusing the lending limit rules on areas of greatest safety and

soundness concern. These revisions to part 32 should not be further

delayed. Accordingly, the final rule is effective 30 days after

publication.

Derivation Table

Only substantive modifications, additions and changes are

indicated.

[[Page 8532]]

----------------------------------------------------------------------------------------------------------------

Revised provision Existing provision Comments

----------------------------------------------------------------------------------------------------------------

Sec. 32.1......................................... Sec. 32.1, Sec. 32.111.......... Modified.

Sec. 32.2(a)...................................... Sec. 32.101..................... Added and modified.

(b)........................................... Sec. 32.2(c).................... Significant change.

(c)........................................... ................................ Added.

(d)........................................... Sec. 32.6(h)(3)................. ..........................

(e)........................................... Sec. 32.6(h)(4)................. ..........................

(f)........................................... Sec. 32.2(d).................... ..........................

(g)........................................... Sec. 32.5(a)(2)(v).............. Modified.

(h)........................................... Sec. 32.4(b).................... ..........................

(i)........................................... Sec. 32.4(c) and (e)............ ..........................

(j)(1)(i)..................................... Sec. 32.2(a).................... ..........................

(j)(1)(ii).................................... Sec. 32.2(a).................... ..........................

(j)(1)(iii)................................... Sec. 32.103..................... Modified.

(j)(1)(iv).................................... Sec. 32.104..................... Modified.

(j)(1)(v)..................................... Sec. 32.105..................... ..........................

(j)(1)(vi).................................... Sec. 32.102(b).................. ..........................

(j)(1)(vii)................................... Sec. 32.106..................... Modified.

(j)(2)(i).................................... ................................ Added.

(j)(2)(ii).................................... Sec. 32.108..................... Modified.

(j)(2)(iii)................................... ................................ Added.

(j)(2)(iv).................................... ................................ Added.

(j)(2)(v)..................................... ................................ Added.

(j)(2)(vi).................................... Sec. 32.107..................... Significant change.

(k)........................................... Sec. 32.2(b).................... Modified.

(l)........................................... Sec. 32.2(f).................... ..........................

(m)........................................... Sec. 32.4(c).................... ..........................

(n)........................................... Sec. 32.6(c)(3)................. ..........................

(o)........................................... Sec. 32.102(a).................. ..........................

(p)........................................... Sec. 32.2(e).................... ..........................

Sec. 32.3(a)...................................... Sec. 32.3, Sec. 32.4............ Modified.

(b)(1)........................................ Sec. 32.6(c).................... ..........................

(b)(2)........................................ Sec. 32.6(h).................... Modified.

(b)(3)........................................ Sec. 32.6(i)(1)................. Modified.

(b)(4)........................................ Sec. 32.6(i)(2)................. ..........................

(b)(5)........................................ ................................ Significant addition.

(c)(1)........................................ Sec. 32.6(a).................... ..........................

(c)(2)........................................ Sec. 32.6(b).................... ..........................

(c)(3)........................................ Sec. 32.6(d).................... Significant change.

(c)(4)....................................... Sec. 32.6(e).................... ..........................

(c)(5)........................................ Sec. 32.109..................... ..........................

(c)(6)........................................ Sec. 32.6(f).................... Modified.

(c)(7)........................................ Sec. 32.6(g).................... ..........................

(c)(8)........................................ Sec. 32.6(j).................... ..........................

(c)(9)........................................ Sec. 32.110..................... ..........................

(c)(10)....................................... ................................ Added.

Sec. 32.4......................................... ................................ Significant addition.

Sec. 32.5(a)...................................... Sec. 32.5(a)(1)................. ..........................

(b)........................................... ................................ Significant change.

(c)........................................... Sec. 32.5(a)(2)................. Modified.

(d)........................................... Sec. 32.5(b).................... Modified.

(e)........................................... Sec. 32.5(c).................... ..........................

(f)........................................... Sec. 32.5(d).................... ..........................

Sec. 32.6......................................... Sec. 32.7....................... Modified.

----------------------------------------------------------------------------------------------------------------

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

Comptroller of the Currency certifies that the final rule will not have

a significant economic impact on a substantial number of small

entities. Accordingly, a regulatory flexibility analysis is not

required. This regulation will reduce the regulatory burden on national

banks, regardless of size, by simplifying and clarifying existing

regulatory requirements.

Executive Order 12866

The OCC has determined that this document is not a significant

regulatory action as defined in Executive Order 12866.

List of Subjects in 12 CFR Part 32

National banks, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, part 32 of chapter I of

title 12 of the Code of Federal Regulations is revised to read as

follows:

PART 32--LENDING LIMITS

Sec.

32.1 Authority, purpose and scope.

32.2 Definitions.

32.3 Lending limits.

32.4 Calculation of lending limits.

32.5 Combination rules.

32.6 Nonconforming loans.

Authority: 12 U.S.C. 1 et seq., 84, and 93a.

Sec. 32.1 Authority, purpose and scope.

(a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq.,

12 U.S.C. 84, and 12 U.S.C. 93a.

(b) Purpose. The purpose of this part is to protect the safety and

soundness of [[Page 8533]] national banks by preventing excessive loans

to one person, or to related persons that are financially dependent,

and to promote diversification of loans and equitable access to banking

services.

(c) Scope. (1) This part applies to all loans and extensions of

credit made by national banks and their domestic operating

subsidiaries. This part does not apply to loans made by a national bank

and its domestic operating subsidiaries to the bank's ``affiliates,''

as that term is defined in 12 U.S.C. 371c(b)(1), to the bank's

operating subsidiaries, or to Edge Act or Agreement Corporation

subsidiaries.

(2) The lending limits in this part are separate and independent

from the investment limits prescribed by 12 U.S.C. 24 (Seventh), and a

national bank may make loans or extensions of credit to one borrower up

to the full amount permitted by this part and also hold eligible

securities of the same obligor up to the full amount permitted under 12

U.S.C. 24 (Seventh) and 12 CFR part 1.

(3) Extensions of credit to executive officers, directors and

principal shareholders of national banks, and their related interests

are subject to limits prescribed by 12 U.S.C. 375a and 375b in addition

to the lending limits established by 12 U.S.C. 84 and this part.

(4) In addition to the foregoing, loans and extensions of credit

made by national banks and their domestic operating subsidiaries must

be consistent with safe and sound banking practices.

Sec. 32.2 Definitions.

(a) Borrower means a person who is named as a borrower or debtor in

a loan or extension of credit, or any other person, including a drawer,

endorser, or guarantor, who is deemed to be a borrower under the

``direct benefit'' or the ``common enterprise'' tests set forth in

Sec. 32.5.

(b) Capital and surplus means--

(1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-

based capital under the OCC's Minimum Capital Ratios in Appendix A of

part 3 of this chapter; plus

(2) The balance of a bank's allowance for loan and lease losses not

included in the bank's Tier 2 capital, for purposes of the calculation

of risk-based capital under part 3 of this chapter.

(c) Close of business means the time at which a bank closes its

accounting records for the business day.

(d) Consumer means the user of any products, commodities, goods, or

services, whether leased or purchased, but does not include any person

who purchases products or commodities for resale or fabrication into

goods for sale.

(e) Consumer paper means paper relating to automobiles, mobile

homes, residences, office equipment, household items, tuition fees,

insurance premium fees, and similar consumer items. Consumer paper also

includes paper covering the lease (where the bank is not the owner or

lessor) or purchase of equipment for use in manufacturing, farming,

construction, or excavation.

(f) Contractual commitment to advance funds. (1) The term includes

a bank's obligation to--

(i) Make payment (directly or indirectly) to a third person

contingent upon default by a customer of the bank in performing an

obligation and to make such payment in keeping with the agreed upon

terms of the customer's contract with the third person, or to make

payments upon some other stated condition;

(ii) Guarantee or act as surety for the benefit of a person;

(iii) Advance funds under a qualifying commitment to lend, as

defined in paragraph (l) of this section; and

(iv) Advance funds under a standby letter of credit as defined in

paragraph (p) of this section, a put, or other similar arrangement.

(2) The term does not include commercial letters of credit and

similar instruments where the issuing bank expects the beneficiary to

draw on the issuer, that do not guarantee payment, and that do not

provide for payment in the event of a default by a third party.

(g) Control is presumed to exist when a person directly or

indirectly, or acting through or together with one or more persons--

(1) Owns, controls, or has the power to vote 25 percent or more of

any class of voting securities of another person;

(2) Controls, in any manner, the election of a majority of the

directors, trustees, or other persons exercising similar functions of

another person; or

(3) Has the power to exercise a controlling influence over the

management or policies of another person.

(h) Current market value means the bid or closing price listed for

an item in a regularly published listing or an electronic reporting

service.

(i) Financial instrument means stocks, notes, bonds, and debentures

traded on a national securities exchange, OTC margin stocks as defined

in Regulation U, 12 CFR part 221, commercial paper, negotiable

certificates of deposit, bankers' acceptances, and shares in money

market and mutual funds of the type that issue shares in which banks

may perfect a security interest. Financial instruments may be

denominated in foreign currencies that are freely convertible to U.S.

dollars. The term ``financial instrument'' does not include mortgages.

(j) Loans and extensions of credit means a bank's direct or

indirect advance of funds to or on behalf of a borrower based on an

obligation of the borrower to repay the funds or repayable from

specific property pledged by or on behalf of the borrower.

(1) Loans or extensions of credit for purposes of 12 U.S.C. 84 and

this part include--

(i) A contractual commitment to advance funds, as defined in

paragraph (f) of this section;

(ii) A maker or endorser's obligation arising from a bank's

discount of commercial paper;

(iii) A bank's purchase of securities subject to an agreement that

the seller will repurchase the securities at the end of a stated

period, but not including a bank's purchase of Type I securities, as

defined in part 1 of this chapter, subject to a repurchase agreement,

where the purchasing bank has assured control over or has established

its rights to the Type I securities as collateral;

(iv) A bank's purchase of third-party paper subject to an agreement

that the seller will repurchase the paper upon default or at the end of

a stated period. The amount of the bank's loan is the total unpaid

balance of the paper owned by the bank less any applicable dealer

reserves retained by the bank and held by the bank as collateral

security. Where the seller's obligation to repurchase is limited, the

bank's loan is measured by the total amount of the paper the seller may

ultimately be obligated to repurchase. A bank's purchase of third party

paper without direct or indirect recourse to the seller is not a loan

or extension of credit to the seller;

(v) An overdraft, whether or not prearranged, but not an intra-day

overdraft for which payment is received before the close of business of

the bank that makes the funds available;

(vi) The sale of Federal funds with a maturity of more than one

business day, but not Federal funds with a maturity of one day or less

or Federal funds sold under a continuing contract; and

(vii) Loans or extensions of credit that have been charged off on

the books of the bank in whole or in part, unless the loan or extension

of credit--

(A) Is unenforceable by reason of discharge in bankruptcy;

(B) Is no longer legally enforceable because of expiration of the

statute of limitations or a judicial decision; or

(C) Is no longer legally enforceable for other reasons, provided

that the bank [[Page 8534]] maintains sufficient records to demonstrate

that the loan is unenforceable.

(2) The following items do not constitute loans or extensions of

credit for purposes of 12 U.S.C. 84 and this part--

(i) Additional funds advanced for the benefit of a borrower by a

bank for payment of taxes, insurance, utilities, security, and

maintenance and operating expenses necessary to preserve the value of

real property securing the loan, consistent with safe and sound banking

practices, but only if the advance is for the protection of the bank's

interest in the collateral, and provided that such amounts must be

treated as an extension of credit if a new loan or extension of credit

is made to the borrower;

(ii) Accrued and discounted interest on an existing loan or

extension of credit, including interest that has been capitalized from

prior notes and interest that has been advanced under terms and

conditions of a loan agreement;

(iii) Financed sales of a bank's own assets, including Other Real

Estate Owned, if the financing does not put the bank in a worse

position than when the bank held title to the assets;

(iv) A renewal or restructuring of a loan as a new ``loan or

extension of credit,'' following the exercise by a bank of reasonable

efforts, consistent with safe and sound banking practices, to bring the

loan into conformance with the lending limit, unless new funds are

advanced by the bank to the borrower (except as permitted by

Sec. 32.3(b)(5)), or a new borrower replaces the original borrower, or

unless the OCC determines that a renewal or restructuring was

undertaken as a means to evade the bank's lending limit;

(v) Amounts paid against uncollected funds in the normal process of

collection; and

(vi)(A) That portion of a loan or extension of credit sold as a

participation by a bank on a nonrecourse basis, provided that the

participation results in a pro rata sharing of credit risk

proportionate to the respective interests of the originating and

participating lenders. Where a participation agreement provides that

repayment must be applied first to the portions sold, a pro rata

sharing will be deemed to exist only if the agreement also provides

that, in the event of a default or comparable event defined in the

agreement, participants must share in all subsequent repayments and

collections in proportion to their percentage participation at the time

of the occurrence of the event.

(B) When an originating bank funds the entire loan, it must receive

funding from the participants before the close of business of its next

business day. If the participating portions are not received within

that period, then the portions funded will be treated as a loan by the

originating bank to the borrower. If the portions so attributed to the

borrower exceed the originating bank's lending limit, the loan may be

treated as nonconforming subject to Sec. 32.6, rather than a violation,

if:

(1) The originating bank had a valid and unconditional

participation agreement with a participating bank or banks that was

sufficient to reduce the loan to within the originating bank's lending

limit;

(2) The participating bank reconfirmed its participation and the

originating bank had no knowledge of any information that would permit

the participant to withhold its participation; and

(3) The participation was to be funded by close of business of the

originating bank's next business day.

(k) Person means an individual; sole proprietorship; partnership;

joint venture; association; trust; estate; business trust; corporation;

limited liability company; not-for-profit corporation; sovereign

government or agency, instrumentality, or political subdivision

thereof; or any similar entity or organization.

(l) Qualifying commitment to lend means a legally binding written

commitment to lend that, when combined with all other outstanding loans

and qualifying commitments to a borrower, was within the bank's lending

limit when entered into, and has not been disqualified.

(1) In determining whether a commitment is within the bank's

lending limit when made, the bank may deduct from the amount of the

commitment the amount of any legally binding loan participation

commitments that are issued concurrent with the bank's commitment and

that would be excluded from the definition of ``loan or extension of

credit'' under paragraph (j)(2)(vi) of this section.

(2) If the bank subsequently chooses to make an additional loan and

that subsequent loan, together with all outstanding loans and

qualifying commitments to a borrower, exceeds the bank's applicable

lending limit at that time, the bank's qualifying commitments to the

borrower that exceed the bank's lending limit at that time are deemed

to be permanently disqualified, beginning with the most recent

qualifying commitment and proceeding in reverse chronological order.

When a commitment is disqualified, the entire commitment is

disqualified and the disqualified commitment is no longer considered a

``loan or extension of credit.'' Advances of funds under a disqualified

or non-qualifying commitment may only be made to the extent that the

advance, together with all other outstanding loans to the borrower, do

not exceed the bank's lending limit at the time of the advance,

calculated pursuant to Sec. 32.4.

(m) Readily marketable collateral means financial instruments and

bullion that are salable under ordinary market conditions with

reasonable promptness at a fair market value determined by quotations

based upon actual transactions on an auction or similarly available

daily bid and ask price market.

(n) Readily marketable staple means an article of commerce,

agriculture, or industry, such as wheat and other grains, cotton, wool,

and basic metals such as tin, copper and lead, in the form of

standardized interchangeable units, that is easy to sell in a market

with sufficiently frequent price quotations.

(1) An article comes within this definition if--

(i) The exact price is easy to determine; and

(ii) The staple itself is easy to sell at any time at a price that

would not be considerably less than the amount at which it is valued as

collateral.

(2) Whether an article qualifies as a readily marketable staple is

determined on the basis of the conditions existing at the time the loan

or extension of credit that is secured by the staples is made.

(o) Sale of Federal funds means any transaction between depository

institutions involving the transfer of immediately available funds

resulting from credits to deposit balances at Federal Reserve Banks, or

from credits to new or existing deposit balances due from a

correspondent depository institution.

(p) Standby letter of credit means any letter of credit, or similar

arrangement, that represents an obligation to the beneficiary on the

part of the issuer:

(1) To repay money borrowed by or advanced to or for the account of

the account party;

(2) To make payment on account of any indebtedness undertaken by

the account party; or

(3) To make payment on account of any default by the account party

in the performance of an obligation.

Sec. 32.3 Lending limits.

(a) Combined general limit. A national bank's total outstanding

loans and extensions of credit to one borrower [[Page 8535]] may not

exceed 15 percent of the bank's capital and surplus, plus an additional

10 percent of the bank's capital and surplus, if the amount that

exceeds the bank's 15 percent general limit is fully secured by readily

marketable collateral, as defined in Sec. 32.2(m). To qualify for the

additional 10 percent limit, the bank must perfect a security interest

in the collateral under applicable law and the collateral must have a

current market value at all times of at least 100 percent of the amount

of the loan or extension of credit that exceeds the bank's 15 percent

general limit.

(b) Loans subject to special lending limits. The following loans or

extensions of credit are subject to the lending limits set forth below.

When loans and extensions of credit qualify for more than one special

lending limit, the special limits are cumulative.

(1) Loans secured by bills of lading or warehouse receipts covering

readily marketable staples. (i) A national bank's loans or extensions

of credit to one borrower secured by bills of lading, warehouse

receipts, or similar documents transferring or securing title to

readily marketable staples, as defined in Sec. 32.2(n), may not exceed

35 percent of the bank's capital and surplus in addition to the amount

allowed under the bank's combined general limit. The market value of

the staples securing the loan must at all times equal at least 115

percent of the amount of the outstanding loan that exceeds the bank's

combined general limit.

(ii) Staples that qualify for this special limit must be

nonperishable, may be refrigerated or frozen, and must be fully covered

by insurance if such insurance is customary. Whether a staple is non-

perishable must be determined on a case-by-case basis because of

differences in handling and storing commodities.

(iii) This special limit applies to a loan or extension of credit

arising from a single transaction or secured by the same staples,

provided that the duration of the loan or extension of credit is:

(A) Not more than ten months if secured by nonperishable staples;

or

(B) Not more than six months if secured by refrigerated or frozen

staples.

(iv) The holder of the warehouse receipts, order bills of lading,

documents qualifying as documents of title under the Uniform Commercial

Code, or other similar documents, must have control and be able to

obtain immediate possession of the staple so that the bank is able to

sell the underlying staples and promptly transfer title and possession

to a purchaser if default should occur on a loan secured by such

documents. The existence of a brief notice period, or similar

procedural requirements under applicable law, for the disposal of the

collateral will not affect the eligibility of the instruments for this

special limit.

(A) Field warehouse receipts are an acceptable form of collateral

when issued by a duly bonded and licensed grain elevator or warehouse

having exclusive possession and control of the staples even though the

grain elevator or warehouse is maintained on the premises of the owner

of the staples.

(B) Warehouse receipts issued by the borrower-owner that is a grain

elevator or warehouse company, duly-bonded and licensed and regularly

inspected by state or Federal authorities, may be considered eligible

collateral under this provision only when the receipts are registered

with an independent registrar whose consent is required before the

staples may be withdrawn from the warehouse.

(2) Discount of installment consumer paper. (i) A national bank's

loans and extensions of credit to one borrower that arise from the

discount of negotiable or nonnegotiable installment consumer paper, as

defined at Sec. 32.2(e), that carries a full recourse endorsement or

unconditional guarantee by the person selling the paper, may not exceed

10 percent of the bank's capital and surplus in addition to the amount

allowed under the bank's combined general limit. An unconditional

guarantee may be in the form of a repurchase agreement or separate

guarantee agreement. A condition reasonably within the power of the

bank to perform, such as the repossession of collateral, will not make

conditional an otherwise unconditional guarantee.

(ii) Where the seller of the paper offers only partial recourse to

the bank, the lending limits of this section apply to the obligation of

the seller to the bank, which is measured by the total amount of paper

the seller may be obligated to repurchase or has guaranteed.

(iii) Where the bank is relying primarily upon the maker of the

paper for payment of the loans or extensions of credit and not upon any

full or partial recourse endorsement or guarantee by the seller of the

paper, the lending limits of this section apply only to the maker. The

bank must substantiate its reliance on the maker with--

(A) Records supporting the bank's independent credit analysis of

the maker's ability to repay the loan or extension of credit,

maintained by the bank or by a third party that is contractually

obligated to make those records available for examination purposes; and

(B) A written certification by an officer of the bank authorized by

the bank's board of directors or any designee of that officer, that the

bank is relying primarily upon the maker to repay the loan or extension

of credit.

(iv) Where paper is purchased in substantial quantities, the

records, evaluation, and certification must be in a form appropriate

for the class and quantity of paper involved. The bank may use sampling

techniques, or other appropriate methods, to independently verify the

reliability of the credit information supplied by the seller.

(3) Loans secured by documents covering livestock. (i) A national

bank's loans or extensions of credit to one borrower secured by

shipping documents or instruments that transfer or secure title to or

give a first lien on livestock may not exceed 10 percent of the bank's

capital and surplus in addition to the amount allowed under the bank's

combined general limit. The market value of the livestock securing the

loan must at all times equal at least 115 percent of the amount of the

outstanding loan that exceeds the bank's combined general limit. For

purposes of this subsection, the term ``livestock'' includes dairy and

beef cattle, hogs, sheep, goats, horses, mules, poultry and fish,

whether or not held for resale.

(ii) The bank must maintain in its files an inspection and

valuation for the livestock pledged that is reasonably current, taking

into account the nature and frequency of turnover of the livestock to

which the documents relate, but in any case not more than 12 months

old.

(iii) Under the laws of certain states, persons furnishing

pasturage under a grazing contract may have a lien on the livestock for

the amount due for pasturage. If a lien that is based on pasturage

furnished by the lienor prior to the bank's loan or extension of credit

is assigned to the bank by a recordable instrument and protected

against being defeated by some other lien or claim, by payment to a

person other than the bank, or otherwise, it will qualify under this

exception provided the amount of the perfected lien is at least equal

to the amount of the loan and the value of the livestock is at no time

less than 115 percent of the portion of the loan or extension of credit

that exceeds the bank's combined general limit. When the amount due

under the grazing contract is dependent upon future performance, the

resulting lien does not meet the requirements of the exception.

(4) Loans secured by dairy cattle. A national bank's loans and

extensions of credit to one borrower that arise from the discount by

dealers in dairy cattle of [[Page 8536]] paper given in payment for the

cattle may not exceed 10 percent of the bank's capital and surplus in

addition to the amount allowed under the bank's combined general limit.

To qualify, the paper--

(i) Must carry the full recourse endorsement or unconditional

guarantee of the seller; and

(ii) Must be secured by the cattle being sold, pursuant to liens

that allow the bank to maintain a perfected security interest in the

cattle under applicable law.

(5) Additional advances to complete project financing pursuant to

renewal of a qualifying commitment to lend. A national bank may renew a

qualifying commitment to lend, as defined by Sec. 32.2(l), and complete

funding under that commitment if all of the following criteria are

met--

(i) The completion of funding is consistent with safe and sound

banking practices and is made to protect the position of the bank;

(ii) The completion of funding will enable the borrower to complete

the project for which the qualifying commitment to lend was made; and

(iii) The amount of the additional funding does not exceed the

unfunded portion of the bank's qualifying commitment to lend.

(c) Loans not subject to the lending limits. The following loans or

extensions of credit are not subject to the lending limits of 12 U.S.C.

84 or this part.

(1) Loans arising from the discount of commercial or business

paper. (i) Loans or extensions of credit arising from the discount of

negotiable commercial or business paper that evidences an obligation to

the person negotiating the paper. The paper--

(A) Must be given in payment of the purchase price of commodities

purchased for resale, fabrication of a product, or any other business

purpose that may reasonably be expected to provide funds for payment of

the paper; and

(B) Must bear the full recourse endorsement of the owner of the

paper, except that paper discounted in connection with export

transactions, that is transferred without recourse, or with limited

recourse, must be supported by an assignment of appropriate insurance

covering the political, credit, and transfer risks applicable to the

paper, such as insurance provided by the Export-Import Bank.

(ii) A failure to pay principal or interest on commercial or

business paper when due does not result in a loan or extension of

credit to the maker or endorser of the paper; however, the amount of

such paper thereafter must be counted in determining whether additional

loans or extensions of credit to the same borrower may be made within

the limits of 12 U.S.C. 84 and this part.

(2) Bankers' acceptances. A bank's acceptance of drafts eligible

for rediscount under 12 U.S.C. 372 and 373, or a bank's purchase of

acceptances created by other banks that are eligible for rediscount

under those sections; but not including--

(i) A bank's acceptance of drafts ineligible for rediscount (which

constitutes a loan by the bank to the customer for whom the acceptance

was made, in the amount of the draft);

(ii) A bank's purchase of ineligible acceptances created by other

banks (which constitutes a loan from the purchasing bank to the

accepting bank, in the amount of the purchase price); and

(iii) A bank's purchase of its own acceptances (which constitutes a

loan to the bank's customer for whom the acceptance was made, in the

amount of the purchase price).

(3)(i) Loans secured by U.S. obligations. Loans or extensions of

credit, or portions thereof, to the extent fully secured by the current

market value of:

(A) Bonds, notes, certificates of indebtedness, or Treasury bills

of the United States or by similar obligations fully guaranteed as to

principal and interest by the United States;

(B) Loans to the extent guaranteed as to repayment of principal by

the full faith and credit of the U.S. government, as set forth in

paragraph (c)(4)(ii) of this section.

(ii) To qualify under this paragraph, the bank must perfect a

security interest in the collateral under applicable law.

(4) Loans to or guaranteed by a Federal agency. (i) Loans or

extensions of credit to any department, agency, bureau, board,

commission, or establishment of the United States or any corporation

wholly owned directly or indirectly by the United States.

(ii) Loans or extensions of credit, including portions thereof, to

the extent secured by unconditional takeout commitments or guarantees

of any of the foregoing governmental entities. The commitment or

guarantee--

(A) Must be payable in cash or its equivalent within 60 days after

demand for payment is made;

(B) Is considered unconditional if the protection afforded the bank

is not substantially diminished or impaired if loss should result from

factors beyond the bank's control. Protection against loss is not

materially diminished or impaired by procedural requirements, such as

an agreement to take over only in the event of default, including

default over a specific period of time, a requirement that notification

of default be given within a specific period after its occurrence, or a

requirement of good faith on the part of the bank.

(5) Loans to or guaranteed by general obligations of a State or

political subdivision. Loans or extensions of credit to a State or

political subdivision that constitutes a general obligation of the

State or political subdivision, as defined in Part 1 of this chapter,

and for which the lending bank has obtained the opinion of counsel that

the loan or extension of credit is a valid and enforceable general

obligation of the borrower, and loans or extensions of credit,

including portions thereof, to the extent guaranteed or secured by a

general obligation of a State or political subdivision and for which

the lending bank has obtained the opinion of counsel that the guarantee

or collateral is a valid and enforceable general obligation of that

public body.

(6) Loans secured by segregated deposit accounts. Loans or

extensions of credit, including portions thereof, to the extent secured

by a segregated deposit account in the lending bank, provided a

security interest in the deposit has been perfected under applicable

law.

(i) Where the deposit is eligible for withdrawal before the secured

loan matures, the bank must establish internal procedures to prevent

release of the security without the lending bank's prior consent.

(ii) A deposit that is denominated and payable in a currency other

than that of the loan or extension of credit that it secures may be

eligible for this exception if the currency is freely convertible to

U.S. dollars.

(A) This exception applies to only that portion of the loan or

extension of credit that is covered by the U.S. dollar value of the

deposit.

(B) The lending bank must establish procedures to revalue foreign

currency deposits to ensure that the loan or extension of credit

remains fully secured at all times.

(7) Loans to financial institutions with the approval of the

Comptroller. Loans or extensions of credit to any financial institution

or to any receiver, conservator, superintendent of banks, or other

agent in charge of the business and property of a financial institution

when an emergency situation exists and a national bank is asked to

provide assistance to another financial institution, and the loan is

approved by the Comptroller. For purposes of this

[[Page 8537]] paragraph, financial institution means a commercial bank,

savings bank, trust company, savings association, or credit union.

(8) Loans to the Student Loan Marketing Association. Loans or

extensions of credit to the Student Loan Marketing Association.

(9) Loans to industrial development authorities. A loan or

extension of credit to an industrial development authority or similar

public entity created to construct and lease a plant facility,

including a health care facility, to an industrial occupant will be

deemed a loan to the lessee, provided that--

(i) The bank evaluates the creditworthiness of the industrial

occupant before the loan is extended to the authority;

(ii) The authority's liability on the loan is limited solely to

whatever interest it has in the particular facility;

(iii) The authority's interest is assigned to the bank as security

for the loan or the industrial occupant issues a promissory note to the

bank that provides a higher order of security than the assignment of a

lease; and

(iv) The industrial occupant's lease rentals are assigned and paid

directly to the bank.

(10) Loans to leasing companies. A loan or extension of credit to a

leasing company for the purpose of purchasing equipment for lease will

be deemed a loan to the lessee, provided that--

(i) The bank evaluates the creditworthiness of the lessee before

the loan is extended to the leasing corporation;

(ii) The loan is without recourse to the leasing corporation;

(iii) The bank is given a security interest in the equipment and in

the event of default, may proceed directly against the equipment and

the lessee for any deficiency resulting from the sale of the equipment;

(iv) The leasing corporation assigns all of its rights under the

lease to the bank;

(v) The lessee's lease payments are assigned and paid to the bank;

and

(vi) The lease terms are subject to the same limitations that would

apply to a national bank acting as a lessor.

Sec. 32.4 Calculation of lending limits.

(a) Calculation date. For purposes of determining compliance with

12 U.S.C. 84 and this part, a bank's lending limit shall be calculated

as of the most recent of the following dates--

(1) When the bank's Consolidated Report of Condition and Income is

required to be filed; or

(2) When there is a change in the bank's capital category for

purposes of 12 U.S.C. 1831o and part 6 of this chapter.

(b) Authority of OCC to require more frequent calculations. If the

OCC determines for safety and soundness reasons that a bank should

calculate its lending limit more frequently than required by paragraph

(a) of this section, the OCC may provide written notice to the bank

directing the bank to calculate its lending limit at a more frequent

interval, and the bank shall thereafter calculate its lending limit at

that interval until further notice.

Sec. 32.5 Combination rules.

(a) General rule. Loans or extensions of credit to one borrower

will be attributed to another person and each person will be deemed a

borrower--

(1) When proceeds of a loan or extension of credit are to be used

for the direct benefit of the other person, to the extent of the

proceeds so used; or

(2) When a common enterprise is deemed to exist between the

persons.

(b) Direct benefit. The proceeds of a loan or extension of credit

to a borrower will be deemed to be used for the direct benefit of

another person and will be attributed to the other person when the

proceeds, or assets purchased with the proceeds, are transferred to

another person, other than in a bona fide arm's length transaction

where the proceeds are used to acquire property, goods, or services.

(c) Common enterprise. A common enterprise will be deemed to exist

and loans to separate borrowers will be aggregated:

(1) When the expected source of repayment for each loan or

extension of credit is the same for each borrower and neither borrower

has another source of income from which the loan (together with the

borrower's other obligations) may be fully repaid. An employer will not

be treated as a source of repayment under this paragraph because of

wages and salaries paid to an employee, unless the standards of

paragraph (c)(2) of this section are met;

(2) When loans or extensions of credit are made--

(i) To borrowers who are related directly or indirectly through

common control, including where one borrower is directly or indirectly

controlled by another borrower; and

(ii) Substantial financial interdependence exists between or among

the borrowers. Substantial financial interdependence is deemed to exist

when 50 percent or more of one borrower's gross receipts or gross

expenditures (on an annual basis) are derived from transactions with

the other borrower. Gross receipts and expenditures include gross

revenues/expenses, intercompany loans, dividends, capital

contributions, and similar receipts or payments;

(3) When separate persons borrow from a bank to acquire a business

enterprise of which those borrowers will own more than 50 percent of

the voting securities or voting interests, in which case a common

enterprise is deemed to exist between the borrowers for purposes of

combining the acquisition loans; or

(4) When the OCC determines, based upon an evaluation of the facts

and circumstances of particular transactions, that a common enterprise

exists.

(d) Special rule for loans to a corporate group. (1) Loans or

extensions of credit by a bank to a corporate group may not exceed 50

percent of the bank's capital and surplus. This limitation applies only

to loans subject to the combined general limit. A corporate group

includes a person and all of its subsidiaries. For purposes of this

paragraph, a corporation or a limited liability company is a subsidiary

of a person if the person owns or beneficially owns directly or

indirectly more than 50 percent of the voting securities or voting

interests of the corporation or company.

(2) Except as provided in paragraph (d)(1) of this section, loans

or extensions of credit to a person and its subsidiary, or to different

subsidiaries of a person, are not combined unless either the direct

benefit or the common enterprise test is met.

(e) Special rules for loans to partnerships, joint ventures, and

associations.--(1) Partnership loans. Loans or extensions of credit to

a partnership, joint venture, or association are deemed to be loans or

extensions of credit to each member of the partnership, joint venture,

or association. This rule does not apply to limited partners in limited

partnerships or to members of joint ventures or associations if the

partners or members, by the terms of the partnership or membership

agreement, are not held generally liable for the debts or actions of

the partnership, joint venture, or association, and those provisions

are valid under applicable law.

(2) Loans to partners. (i) Loans or extensions of credit to members

of a partnership, joint venture, or association are not attributed to

the partnership, joint venture, or association unless either the direct

benefit or the common enterprise tests are met. Both the direct benefit

and common enterprise tests are met between a member of a partnership,

joint venture or association and such partnership, joint venture or

association, [[Page 8538]] when loans or extensions of credit are made

to the member to purchase an interest in the partnership, joint venture

or association.

(ii) Loans or extensions of credit to members of a partnership,

joint venture, or association are not attributed to other members of

the partnership, joint venture, or association unless either the direct

benefit or common enterprise test is met.

(f) Loans to foreign governments, their agencies, and

instrumentalities.--(1) Aggregation. Loans and extensions of credit to

foreign governments, their agencies, and instrumentalities will be

aggregated with one another only if the loans or extensions of credit

fail to meet either the means test or the purpose test at the time the

loan or extension of credit is made.

(i) The means test is satisfied if the borrower has resources or

revenue of its own sufficient to service its debt obligations. If the

government's support (excluding guarantees by a central government of

the borrower's debt) exceeds the borrower's annual revenues from other

sources, it will be presumed that the means test has not been

satisfied.

(ii) The purpose test is satisfied if the purpose of the loan or

extension of credit is consistent with the purposes of the borrower's

general business.

(2) Documentation. In order to show that the means and purpose

tests have been satisfied, a bank must, at a minimum, retain in its

files the following items:

(i) A statement (accompanied by supporting documentation)

describing the legal status and the degree of financial and operational

autonomy of the borrowing entity;

(ii) Financial statements for the borrowing entity for a minimum of

three years prior to the date the loan or extension of credit was made

or for each year that the borrowing entity has been in existence, if

less than three;

(iii) Financial statements for each year the loan or extension of

credit is outstanding;

(iv) The bank's assessment of the borrower's means of servicing the

loan or extension of credit, including specific reasons in support of

that assessment. The assessment shall include an analysis of the

borrower's financial history, its present and projected economic and

financial performance, and the significance of any financial support

provided to the borrower by third parties, including the borrower's

central government; and

(v) A loan agreement or other written statement from the borrower

which clearly describes the purpose of the loan or extension of credit.

The written representation will ordinarily constitute sufficient

evidence that the purpose test has been satisfied. However, when, at

the time the funds are disbursed, the bank knows or has reason to know

of other information suggesting that the borrower will use the proceeds

in a manner inconsistent with the written representation, it may not,

without further inquiry, accept the representation.

(3) Restructured loans.--(i) Non-combination rule. Notwithstanding

paragraphs (a) through (e) of this section, when previously outstanding

loans and other extensions of credit to a foreign government, its

agencies, and instrumentalities (i.e., public-sector obligors) that

qualified for a separate lending limit under paragraph (f)(1) of this

section are consolidated under a central obligor in a qualifying

restructuring, such loans will not be aggregated and attributed to the

central obligor. This includes any substitution in named obligors,

solely because of the restructuring. Such loans (other than loans

originally attributed to the central obligor in their own right) will

not be considered obligations of the central obligor and will continue

to be attributed to the original public-sector obligor for purposes of

the lending limit.

(ii) Qualifying restructuring. Loans and other extensions of credit

to a foreign government, its agencies, and instrumentalities will

qualify for the non-combination process under paragraph (f)(3)(i) of

this section only if they are restructured in a sovereign debt

restructuring approved by the OCC, upon request by a bank for

application of the non combination rule. The factors that the OCC will

use in making this determination include, but are not limited to, the

following:

(A) Whether the restructuring involves a substantial portion of the

total commercial bank loans outstanding to the foreign government, its

agencies, and instrumentalities;

(B) Whether the restructuring involves a substantial number of the

foreign country's external commercial bank creditors;

(C) Whether the restructuring and consolidation under a central

obligor is being done primarily to facilitate external debt management;

and

(D) Whether the restructuring includes features of debt or debt-

service reduction.

(iii) 50 percent aggregate limit. With respect to any case in which

the non-combination process under paragraph (f)(3)(i) of this section

applies, a national bank's loans and other extensions of credit to a

foreign government, its agencies and instrumentalities, (including

restructured debt) shall not exceed, in the aggregate, 50 percent of

the bank's capital and surplus.

Sec. 32.6 Nonconforming loans.

(a) A loan, within a bank's legal lending limit when made, will not

be deemed a violation but will be treated as nonconforming if the loan

is no longer in conformity with the bank's lending limit because--

(1) The bank's capital has declined, borrowers have subsequently

merged or formed a common enterprise, lenders have merged, the lending

limit or capital rules have changed; or

(2) Collateral securing the loan to satisfy the requirements of a

lending limit exception has declined in value.

(b) A bank must use reasonable efforts to bring a loan that is

nonconforming as a result of paragraph (a)(1) of this section into

conformity with the bank's lending limit unless to do so would be

inconsistent with safe and sound banking practices.

(c) A bank must bring a loan that is nonconforming as a result of

circumstances described in paragraph (a)(2) of this section into

conformity with the bank's lending limit within 30 calendar days,

except when judicial proceedings, regulatory actions or other

extraordinary circumstances beyond the bank's control prevent the bank

from taking action.

Dated: February 6, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-3363 Filed 2-14-95; 8:45 am]

BILLING CODE 4810-33-P