# OCC Interpretive Letter No. 956: Letter details several aspects of bank's arrangement with third party, including (1) bank's authority to take share of borrower's profits as part of interest on loan, 12 CFR 7.1006; (2) authority of bank and borrower to negotiate percentage of profits bank will take; and (3) nature and form of compensation paid by bank to entity for originating loan opportunities is consistent with OCC precedent

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0956

## Section

- **Citation:** OCC Interpretive Letter No. 956
- **Heading:** Letter details several aspects of bank's arrangement with third party, including (1) bank's authority to take share of borrower's profits as part of interest on loan, 12 CFR 7.1006; (2) authority of bank and borrower to negotiate percentage of profits bank will take; and (3) nature and form of compensation paid by bank to entity for originating loan opportunities is consistent with OCC precedent
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Letter details several aspects of bank's arrangement with third party, including (1) bank's authority to take share of borrower's profits as part of interest on loan, 12 CFR 7.1006 › (2) authority of bank and borrower to negotiate percentage of profits bank will take › and (3) nature and form of compensation paid by bank to entity for originating loan opportunities is consistent with OCC precedent.

## Text

O

Comptroller of the Currency
Administrator of National Banks

Washington, DC 20219

Interpretive Letter #956
January 31, 2003 February 2003
12 USC 24(7)

Re:
Request for Opinion

Dear [ ]:

This letter is in response to your request for a legal opinion confirming the permissibility
of several aspects of an agreement entered into by [ Bank ], [ City,
State ] (“Bank”) and [ ], a California corporation (“[ ]”). The Bank
and [ ] have executed an Opportunity Development Agreement (“Agreement”), pursuant
to which the Bank finances [ ]’s purchase of real properties and then benefits from the
appreciation in such properties. You have requested that we confirm that this lending
arrangement is permissible pursuant to Interpretive Ruling 7.1006, 12 C.F.R. § 7.1006 (2002),
the OCC’s regulation permitting national banks to take a share of the borrower’s profits as part
of the interest on the loan. You have also requested that we confirm that each of the lender
covenants imposed by the Bank as part of the financing it provides to [ ] is legally
permissible. Finally, you have requested that we confirm that the nature of compensation paid
by the Bank to [ ] is consistent with OCC precedent. For the reasons discussed below,
we confirm each of your requests.

A.
Background

As represented by the Bank, the facts are as follows. The relationship between the Bank
and [ ]’s principals (“the Principals”) began in the 1980s when the parties entered into
an agreement for the Principals to manage certain of the Bank’s other real estate owned
(“OREO”) portfolio. Based upon the Principals’ successful management of the OREO assets,
the Bank and [ ] entered into the Agreement
facts are as follows. The relationship between the Bank
and [ ]’s principals (“the Principals”) began in the 1980s when the parties entered into
an agreement for the Principals to manage certain of the Bank’s other real estate owned
(“OREO”) portfolio. Based upon the Principals’ successful management of the OREO assets,
the Bank and [ ] entered into the Agreement.

Pursuant to the Agreement, [ ] seeks out potential real estate investment
opportunities for the Bank to finance. After identifying an opportunity, [ ] gathers
comprehensive information regarding the property and presents that information to the Bank to

- 2 -
assist the Bank in evaluating the lending opportunity.1 The Bank then applies its underwriting
criteria to determine whether to make the loan. If the Bank extends credit for [ ] to
purchase the property (“Bank Loan”), the purchase money for the property consists of the
proceeds of the Bank Loan (95 percent) and an equity contribution from the Principals (five
percent). With limited exceptions, each Bank Loan has been an unsecured, five-year loan with
an eight percent rate of interest. The Agreement requires that [ ] personally manage
each property after purchase.

In consideration for the performance of [ ]’s services, the Bank contributes to the
cost of [ ]’s general expenses, including the expenses associated with the pre-investment
evaluation of potential real property financing opportunities. The Bank does so (i) by providing
[ ] with office space and associated services and (ii) by contributing, each calendar
quarter, $100,000 for [ ]’s expenses.2 Once the Bank approves a Bank Loan, the deal-
specific expenses are included in the loan to [ ] if the deal is consummated or, if not
consummated, the expenses are shared 95 percent by the Bank and five percent by [ ]
] with office space and associated services and (ii) by contributing, each calendar
quarter, $100,000 for [ ]’s expenses.2 Once the Bank approves a Bank Loan, the deal-
specific expenses are included in the loan to [ ] if the deal is consummated or, if not
consummated, the expenses are shared 95 percent by the Bank and five percent by [ ].

In addition to the Bank Loans, the Bank has a right of first refusal to provide
conventional, secured commercial financing to either [ ] or the business entity in which
[ ] is investing (“Primary Loan”). Even if the Bank chooses to make a Bank Loan, it
may decline to make a Primary Loan. The Bank has made several Primary Loans secured by the
ultimate real estate assets; in other instances, another lender has made the Primary Loan.

The Agreement provides for the use of funds received by [ ], whether realized from
the sale or refinance of a property or from some other source. These funds are used first to repay
principal and interest on the Primary Loan and the principal amounts of the Bank Loan and the
Principals’ equity contribution. Any remaining funds are used next to pay the base interest
amount on the Bank Loan and to provide the Principals with a base return on their equity
contribution. Finally, [ ] pays any remaining funds as contingent interest, in the amount of
80 percent to the Bank and 20 percent to [ ].3

Consistent with its role as a lender, the Bank imposes certain lender covenants to protect
its loans to [ ].

1 The Agreement provides that neither [ ] nor its principals are employees or agents of the
Bank. Further, the Agreement states that the Bank and [ ] are not engaged in a partnership or joint
venture.
2 One-half of this amount is reimbursable out of [ ]’s cash flow
ender, the Bank imposes certain lender covenants to protect
its loans to [ ].

1 The Agreement provides that neither [ ] nor its principals are employees or agents of the
Bank. Further, the Agreement states that the Bank and [ ] are not engaged in a partnership or joint
venture.
2 One-half of this amount is reimbursable out of [ ]’s cash flow. Pursuant to the personal
services agreement entered into by the Principals, which is described infra, [ ] pays the Principals
$45,000 each quarter for their services.
3 The Agreement also provides that, prior to the payment of contingent interest, [ ] must
use any remaining funds to pay the Bank an amount equal to the full principal amount of any other Bank
Loan as to which the Bank has determined that the prospect of repayment from the related real property
underlying such Bank Loan is for any reason impaired.

- 3 -
•
First, the Bank conditions the continuation of the Agreement upon the Principals’
maintaining 100% ownership of [ ];
•
Second, the Bank requires that the Principals maintain a personal services agreement
with [ ], pursuant to which they agree to devote as much time as “reasonably
necessary for a satisfactory performance of their duties”;
•
Third, the Bank precludes [ ] from purchasing properties not financed by Bank
Loans;
•
Fourth, the Bank retains approval rights upon the sale of a portion (as opposed to all)
of a real property and the distribution of [ ]’s assets;
•
Fifth, the Bank imposes a debt to equity ratio of 19-to-1 in cases where it provides the
Bank Loan. As described above, the Bank finances 95 percent of the acquisition
costs and [ ]’s Principals put up the remaining five percent; and
•
Sixth, the Bank requires [ ] to provide various financial statements and reports.

B.
Discussion

1
]’s assets;
•
Fifth, the Bank imposes a debt to equity ratio of 19-to-1 in cases where it provides the
Bank Loan. As described above, the Bank finances 95 percent of the acquisition
costs and [ ]’s Principals put up the remaining five percent; and
•
Sixth, the Bank requires [ ] to provide various financial statements and reports.

B.
Discussion

1.
The Lending Arrangement

a.
Interpretive Ruling 7.1006, 12 C.F.R. § 7.1006

The OCC has long recognized the authority of national banks to share in the profit,
income, or earnings from a business enterprise as a full or partial substitute for interest on a loan.
Interpretive Ruling 7.1006 provides that:

[a] national bank may take as consideration for a loan a share in the profit, income, or
earnings from a business enterprise of a borrower…. The share … may be taken in
addition to, or in lieu of, interest. The borrower’s obligation to repay principal, however,
may not be conditioned upon the value of the profit, income, or earnings of the business
enterprise …

This ruling recognizes that extensions of credit may take many forms. In order for
national banks to have a greater degree of flexibility in their lending activities, Interpretive
Ruling 7.1006 makes clear that repayment of an extension is not necessarily limited to a bank’s
receipt of principal and a specified amount of interest on a demand or installment basis over
time.4 Moreover, this ruling represents the OCC’s long-standing position on the authority of
national banks to employ participatory financing arrangements. In November 1966, the OCC
added Paragraph 7312 to the “Comptroller’s Manual for National Banks.” Paragraph 7312
provided that:

4 See Letter from John G. Heimann, Comptroller of the Currency (May 21, 1980) (unpublished);
Letter from Charles F. Byrd, Asst. Director, Legal Advisory Services Division (Oct. 18, 1977)
(unpublished).
l banks to employ participatory financing arrangements. In November 1966, the OCC
added Paragraph 7312 to the “Comptroller’s Manual for National Banks.” Paragraph 7312
provided that:

4 See Letter from John G. Heimann, Comptroller of the Currency (May 21, 1980) (unpublished);
Letter from Charles F. Byrd, Asst. Director, Legal Advisory Services Division (Oct. 18, 1977)
(unpublished).

- 4 -
[a] national bank may take as consideration for a loan a share in the profit, income or
earnings from a business enterprise of a borrower. Such share may be in addition to or in
lieu of interest. The borrower’s obligation to repay principal, however, shall not be
conditioned upon the profit, income, or earnings of the business enterprise.

Several interpretive letters in 1969 and 1970, citing to Paragraph 7312, confirmed that a
national bank could accept a share in the profit, income, or earnings of a business enterprise as
consideration for a loan in lieu of interest or partially in lieu of interest.5 However, the authority
to share in the profit, income, or earnings from a business enterprise as a full or partial substitute
for interest pursuant to Interpretive Ruling 7.1006 is subject to certain limitations. These
limitations are designed to ensure that the bank’s role in providing such financing is that
traditionally assumed as a lender.6 First, there must be no risk to loan principal other than that
arising from a borrower’s default; in this regard, Interpretative Ruling 7.1006 requires that the
obligation to repay principal shall not be conditioned upon the profit, income, or earnings of the
business enterprise. Second, in keeping with the provisions of 12 U.S.C. §§ 24(7) and 29, a
national bank can have no possessory or ownership interest in a borrower’s business or real
estate
n that
arising from a borrower’s default; in this regard, Interpretative Ruling 7.1006 requires that the
obligation to repay principal shall not be conditioned upon the profit, income, or earnings of the
business enterprise. Second, in keeping with the provisions of 12 U.S.C. §§ 24(7) and 29, a
national bank can have no possessory or ownership interest in a borrower’s business or real
estate.

Within these parameters, a national bank may calculate its share of the profit, income, or
earnings on the basis of either the appreciation of the borrower’s business or the appreciation of
individual assets.7 The OCC has never limited the amount of contingent interest – in the form of
a share of the profit, income, or earnings – that a national bank may accept. Rather, OCC
precedent treats the percentage of profit, income, or earnings that a bank accepts as a contractual
matter to be agreed upon by the parties.

Based upon the facts as represented, we find that the arrangement, as described, between
the Bank and [ ] is permissible pursuant to Interpretive Ruling 7.1006. The Bank provides
financing for [ ] to acquire real properties. The principal of these loans is not at risk,
beyond the general default risk inherent in any loan transaction. [ ] is obligated to pay the
principal and base interest on all outstanding loans regardless of the ultimate profitability of any

5 Letter from Patrick Parise, Regional Counsel (Oct. 16, 1970) (unpublished) (warrants); Letter
from Thomas G. DeShazo, Deputy Comptroller of the Currency (Aug. 26, 1969) (unpublished) (profits);
Letter from Robert Bloom, Chief Counsel (May 26, 1969) (unpublished) (warrants). In 1971, the OCC
codified Paragraph 7312 as Interpretive Ruling 7.7312, 12 C.F.R. § 7.7312. The current ruling,
Interpretive Ruling 7.1006, replaced Interpretive Ruling 7.7312 without substantive change in April 1996.
6 See, e.g., Interpretive Letter No
er of the Currency (Aug. 26, 1969) (unpublished) (profits);
Letter from Robert Bloom, Chief Counsel (May 26, 1969) (unpublished) (warrants). In 1971, the OCC
codified Paragraph 7312 as Interpretive Ruling 7.7312, 12 C.F.R. § 7.7312. The current ruling,
Interpretive Ruling 7.1006, replaced Interpretive Ruling 7.7312 without substantive change in April 1996.
6 See, e.g., Interpretive Letter No. 620, reprinted in [1993-1994 Transfer Binder] Fed. Banking L.
Rep. (CCH) ¶ 83,502 (July 15, 1992); Interpretive Letter No. 204, reprinted in [1981-1982 Transfer
Binder] Fed. Banking L. Rep. (CCH) ¶85,285 (June 17, 1981).
7 Interpretive Letter No. 244, reprinted in [1983-1984 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 85,408 (Jan. 26, 1982) (bank may accept a set percentage of the sales price upon sale of each
developed real estate unit; bank may also accept a set percentage of the appreciation in the value of a
business developed and operated on the mortgaged property); Interpretive Letter No. 216, reprinted in
[1981-1982 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,297 (Sep. 8, 1981) (bank may accept a set
percentage share of the net appreciation of the mortgaged property at the end of a stated term).

- 5 -
transactions financed by the Bank. Moreover, the Bank has not assumed a possessory or
ownership interest in [ ]’s business or any real property. By agreeing to “take as
consideration for a loan a share in the profit, income, or earnings from a business enterprise” of
[ ], the Bank is merely exercising its authority under Interpretive Ruling 7.1006. The
Bank’s share is based upon the available funds of [ ] as a business enterprise, and such
basis is consistent with Interpretive Ruling 7.1006. Finally, because OCC precedent treats the
percentage of profit, income, or earnings that a bank accepts as a contractual matter to be agreed
upon by the parties, the Bank’s 80 percent share is consistent with such precedent.

b
The
Bank’s share is based upon the available funds of [ ] as a business enterprise, and such
basis is consistent with Interpretive Ruling 7.1006. Finally, because OCC precedent treats the
percentage of profit, income, or earnings that a bank accepts as a contractual matter to be agreed
upon by the parties, the Bank’s 80 percent share is consistent with such precedent.

b.
Lender covenants

From a national banking perspective, it is sound public policy for banks to include
covenants in their lending relationships.8 Indeed, the more lender covenants that a bank
includes, the more protection the bank has. In this case, the Bank imposes a series of lender
covenants. First, the Bank conditioned continuation of the Agreement upon the Principals’
maintaining 100 percent ownership of [ ]. Second, the Bank required the Principals to
enter into a personal services agreement with [ ]. With respect to both covenants, the Bank
believes that the Principals’ continued involvement is essential to the overall success of its
relationship with [ ] and the on-going stability of the Bank’s unsecured loans. We find that
these covenants are permissible prudential measures designed to protect the Bank’s position
given the limited purpose of [ ] and the Bank’s unsecured position.

Third, the Bank precludes [ ]’s purchase of properties not financed by Bank Loans.
The Bank’s outstanding loans to [ ] are unsecured and its contingent interest payment is
based upon the success of [ ]. The Bank believes it has a vested interest in ensuring that
[ ]’s subsequent investments are economically sound. We find that this covenant is a
permissible prudential measure designed to protect the Bank’s position given the limited purpose
of [ ] and the Bank’s unsecured position
and its contingent interest payment is
based upon the success of [ ]. The Bank believes it has a vested interest in ensuring that
[ ]’s subsequent investments are economically sound. We find that this covenant is a
permissible prudential measure designed to protect the Bank’s position given the limited purpose
of [ ] and the Bank’s unsecured position.

Fourth, the Bank imposes approval rights upon the sale of a portion (as opposed to all) of
a real estate property and the distribution of [ ]’s assets. The Bank believes doing so
protects its right to be repaid on its outstanding loans. We find that this covenant is a permissible
prudential measure designed to protect the Bank’s position given the limited purpose of [ ]
and the Bank’s unsecured position.

Fifth, the Bank imposes a debt to equity ratio of 19-to-1 in cases where it provides the
Bank Loan. The Bank does so to ensure that [ ] has an equity interest in each transaction.
We find that this covenant is a permissible prudential measure designed to protect the Bank’s
position given the limited purpose of [ ] and the Bank’s unsecured position.

8 See Interagency Guidelines for Real Estate Lending Policies, at Appendix A to Subpart D of 12
C.F.R. part 34. See generally Comptroller’s Handbooks, “Agricultural Lending” (Dec. 1998), “Loan
Portfolio Management” (Apr. 1998), and “Commercial Real Estate and Construction Lending” (Nov.
1995).
position given the limited purpose of [ ] and the Bank’s unsecured position.

8 See Interagency Guidelines for Real Estate Lending Policies, at Appendix A to Subpart D of 12
C.F.R. part 34. See generally Comptroller’s Handbooks, “Agricultural Lending” (Dec. 1998), “Loan
Portfolio Management” (Apr. 1998), and “Commercial Real Estate and Construction Lending” (Nov.
1995).

- 6 -

Sixth, the Bank requires [ ] to provide various financial statements and reports to
permit the Bank to monitor the financial condition of the business. We find that this covenant is
a permissible prudential measure designed to protect the Bank’s position given the limited
purpose of [ ] and the Bank’s unsecured position.

Finally, we find that these covenants, taken collectively, are a permissible prudential
measure designed to protect the Bank’s position.

2.
Compensation Paid by Bank to [ ]

Rather than paying a per-loan fee, the Bank compensates [ ] for its services by
providing [ ] with office space and paying a portion of [ ]’s operating expenses.
Twelve C.F.R. § 7.1004(a) provides that “a national bank may use the services of, and
compensate persons not employed by, the bank for originating loans.” As a legal matter, the
OCC has neither specified nor limited the nature and amount of compensation that a bank may
pay a third party for originating loans.9 Therefore, the nature and amount of the Bank’s
compensation to [ ], in the form of office space and expenses, is consistent with OCC
precedent.

C.
Conclusion

For the reasons discussed above, we conclude that the Bank’s lending arrangement with
[ ] is permissible pursuant to Interpretive Ruling 7.1006
that a bank may
pay a third party for originating loans.9 Therefore, the nature and amount of the Bank’s
compensation to [ ], in the form of office space and expenses, is consistent with OCC
precedent.

C.
Conclusion

For the reasons discussed above, we conclude that the Bank’s lending arrangement with
[ ] is permissible pursuant to Interpretive Ruling 7.1006. We further conclude that the
lender covenants described above, individually and collectively, are permissible prudential
measures designed to protect the Bank’s position. Finally, we conclude that the nature of
compensation paid by the Bank to [ ] is permissible. If you have any questions about
the foregoing analysis, please feel free to contact me at (202) 874-5300.

Sincerely,

Eric Thompson

Eric Thompson
Director
Bank Activities & Structure Division

9 See Letter from Charles F. Byrd, Assistant Director, LASD (October 30, 1977) (unpublished).
As a supervisory matter, the bank must not compensate the third party in a manner that adversely affects
the safety and soundness of the bank.

## Nearby sections

- [OCC Interpretive Letter No. 719 Letter concludes that an ESOP is a "company' for purposes of 12 U.S.C. 371c and that an ESOP that controls at least 25% of a bank's voting stock is an "affiliate" under sec. 371c (supersedes existing OCC interpretive letter #261). (10/26/89)](https://www.frixlaw.com/law-library/statutes/OCC_INT0719.md)
- [OCC Interpretive Letter No. 720 Group of affiliate national banks may collectively own, through operating subsidiaries, minority interest in a merchant credit card processing subsidiary. (01/26/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0720.md)
- [OCC Interpretive Letter No. 722 A national bank may invest CIF assets in mutual funds, including mutual funds that pay the bank a servicing fee, without the bank having to reduce its trustee fees, if the bank concludes, based upon a reasoned opinion of trust counsel, that such an arrangement is authorized by applicable state law, is consistent with the trust instrument, is appropriate for the particular trust accounts, and is consistent with OCC regulations, including in particular 12 C.F.R. 9.18(b)(12). (03/12/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0722.md)
- [OCC Interpretive Letter No. 724 Bank can sell vehicle service contracts to customers who use home equity loan proceeds to purchase a vehicle, and the maturity of the service contract may be different from the maturity of the loan. (04/22/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0724.md)
- [OCC Interpretive Letter No. 725 National bank to establish an operating subsidiary to engage in permissible derivatives-related activities. (05/10/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0725.md)
- [OCC Interpretive Letter No. 726 Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0726.md)
- [OCC Interpretive Letter No. 730 Letter concludes that loans proposed by the bank to an unaffiliated distributor of mutual funds would not be subject to interaffiliate lending restrictions contained in 12 U.S.C. 371C. (05/29/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0730.md)
- [OCC Interpretive Letter No. 732 National bank may make a 5.5% investment in software company which is engaged in the design, development, marketing and maintenance of a network for electronic funds transfers and electronic data interchange, including transacting electronic commerce and marketing software products for use on its world-wide electronic commerce network. (05/10/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0732.md)
- [OCC Interpretive Letter No. 733 National bank receiver is subject to the rights of secured creditors and creditors entitled to setoff. U.S. legal principles regarding enforcement of security interests are applicable to a receivership of a federal branch or agency conducted under National Bank Act. Therefore, receiver of an uninsured federal branch or agency does not have the right to interfere with the rights of secured creditors, including application of collateral held in U.S. to obligations of a non-U.S. office of the bank. (06/19/96).](https://www.frixlaw.com/law-library/statutes/OCC_INT0733.md)
- [OCC Interpretive Letter No. 736 Lending limit exception for participations not limited to banks. Non-banks may act as participants. (07/25/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0736.md)
- [OCC Interpretive Letter No. 737 Huntington National Bank's acquisition of minority interest in a limited liability company providing stored value systems. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0737.md)
- [OCC Interpretive Letter No. 738 National bank's participation in a guaranty issued by an agent for a syndication of lenders with respect to their borrower's letter of credit reimbursement obligations to another bank or financial institution is permissible under I.R. 7.1016. (08/14/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0738.md)
- [OCC Interpretive Letter No. 740 Letter advises the Bank as follows: 1) The question of whether "salary" as used in 12 C.F.R. 2.4 includes an officer's base salary, bonuses, director's fees and/or any other compensation paid by the Bank must be determined by the Bank's management; 2) the question of whether the payment bonuses for credit life sales under 12 C.F.R. 2.4 is based on salary received by the recipient in a calendar year, a fiscal year, or any 12-month period must be determined by the Bank's management; and 3) pursuant to 12 C.F.R. 2.4, if the Bank's CEO is a loan officer and the CEO participates in the bonus plan under which payments based on credit life insurance sales are made, the CEO must be included in averaging the salaries of loan officers that participate in the Bank's bonus or incentive plan. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0740.md)
- [OCC Interpretive Letter No. 741 National bank may acquire majority interest in company which operates call center facility which operates programs by which potential customers for new or used automobiles may access databases containing information on the used and new car inventories of numerous automobile dealerships in its metropolitan area. (08/19/96)](https://www.frixlaw.com/law-library/statutes/OCC_INT0741.md)

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0956. Check the current official text before relying on it. Not legal advice.