Letter interprets the common source of repayment test in 12 C.F.R. 32.5(c)(1) and finds that, on the specific facts presented, the test does not result in the combination of loans to members of the Indian Community with loans to other members or with a loan to the Community.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #979

December 18, 2003 January 2004

12 USC 84

Subject:

Applicability of Lending Limit to Loans to [ ] Indian Community

of [ City, State ]and its members

Dear [ ]:

I am writing in response to your request for our opinion as to the application of the lending limit,

12 U.S.C. § 84, to loans [ NB, City, State ] (Bank) has

made, and plans to make, to [ ] Indian Community of [ City, State ]

(Community) and to members of the Community. Based on the information in your letter and in

subsequent telephone conversations, it is my opinion that for purposes of the lending limit a loan

to one member would generally not be combined with a loan to another member, and that loans

to members would generally not be combined with loans made to the Community.

Facts

The Community is located on the south side of the [ ] in [ ] County, two

miles south of [ City ] and ten miles from the Bank in [ City, State ]. The population

resident on the [ ] acre reservation of the Community was approximately 300 in the year

2000.1 The population of [ Bank’s City ] is approximately 1,300 and is largely dependent on

the tribal enterprises run by the Community.

The Bank has made a loan to the Community, the purpose of which is to finance several loans

that the Community wishes to make to several members of the Community and to augment a

loan fund from which the Community will make loans to other members. The loan to the

Community is secured by an assignment of the underlying loans made by the Community to the

members

rprises run by the Community.

The Bank has made a loan to the Community, the purpose of which is to finance several loans

that the Community wishes to make to several members of the Community and to augment a

loan fund from which the Community will make loans to other members. The loan to the

Community is secured by an assignment of the underlying loans made by the Community to the

members. The source of repayment for the loan to the Community is ultimately the income from

various tribal enterprises. This income supports the Community’s payment of monthly stipends

to the members and these stipends in turn are used by the members to repay their loans to the

Community. The principal tribal enterprise is the [ ] casino. A gas station and

1 [ ].

convenience store built in [ ] are adjacent to the casino. The Community also owns the nearby

[ ]Motel with 122 rooms and swimming pool, a recreational vehicle park, and a six-

story hotel with convention center that was built in [ ].

The Bank has also made general consumer loans to members of the Community that are secured

by an assignment of the members’ monthly stipends that they receive from the Community. The

Bank may make further such loans although it is expected that no member will borrow from both

the Bank and from the Community loan fund described above at the same time. The source of

repayment for the Bank’s loans to the members is the monthly stipends (currently $5,200) that

Community members are allotted by the Community. Tribal enterprises, such as the casino, and

not the Bank’s loan to the Community, support payment of these stipends by the Community. It

is a requirement for receipt of the monthly stipend that the members live within a ten-mile radius

of the Community’s trust lands

he Bank’s loans to the members is the monthly stipends (currently $5,200) that

Community members are allotted by the Community. Tribal enterprises, such as the casino, and

not the Bank’s loan to the Community, support payment of these stipends by the Community. It

is a requirement for receipt of the monthly stipend that the members live within a ten-mile radius

of the Community’s trust lands. Some members also receive wages from Community

enterprises, though the Bank has never asked for an assignment of wages to secure loans to

members of the Community, and it is assumed for the purposes of this analysis that the members

do not receive sufficient wages from which their loans and other obligations may be fully repaid.

Legal Analysis

The purpose of the lending limit is to protect the safety and soundness of national banks by

preventing excessive loans to one person and to promote diversification of loans and equitable

access to banking services. Generally, a national bank’s total outstanding loans to one borrower

may not exceed 15 percent of the bank’s capital and surplus, plus an additional 10 percent of

capital and surplus if the amount over the 15 percent general limit is fully secured by readily

marketable collateral.2 Also, loans to one borrower will be attributed to another person and both

will be considered a borrower when, among other things, (1) the proceeds are used for the direct

benefit of the other person, or (2) a common enterprise is deemed to exist between the persons

ercent of

capital and surplus if the amount over the 15 percent general limit is fully secured by readily

marketable collateral.2 Also, loans to one borrower will be attributed to another person and both

will be considered a borrower when, among other things, (1) the proceeds are used for the direct

benefit of the other person, or (2) a common enterprise is deemed to exist between the persons.

The proceeds of a loan to a borrower will be deemed to be used for the direct benefit of another

person and will be attributed to that other person when the proceeds, or assets purchased with

such proceeds, are transferred to that other person, other than in a bona fide arm’s length

transaction where the proceeds are used to acquire property, goods, or services.3

A common enterprise is deemed to exist, inter alia, “[w]hen the expected source of repayment

for each loan … 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 [the common control and substantial

financial interdependence test]4 are met.”5

2 12 U.S.C. § 84(a) and 12 C.F.R. § 32.3(a).

3 12 C.F.R. § 32.5(b).

4 That test provides that a common enterprise is deemed to exist when borrowers are related through common

control and there is substantial financial interdependence between or among the borrowers.

5 12 C.F.R. § 32.5(c)(1).

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financial interdependence test]4 are met.”5

2 12 U.S.C. § 84(a) and 12 C.F.R. § 32.3(a).

3 12 C.F.R. § 32.5(b).

4 That test provides that a common enterprise is deemed to exist when borrowers are related through common

control and there is substantial financial interdependence between or among the borrowers.

5 12 C.F.R. § 32.5(c)(1).

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1.

Direct Benefit

The proceeds of the loan to the Community are used by the Community to make loans to

members of the Community.6 However, such members do not also borrow from the Bank.

Thus, while the direct benefit test requires that the loan to the Community be attributed to the

members to whom the Community makes loans, those attributed loans are not combined with

any other loans under the direct benefit test.7

There is no information in your letter regarding the transfer of proceeds of the loans to the

members (or of assets purchased with such proceeds) from one member to another member or

from the members to the Community. Accordingly, without further facts, there is nothing to

support attribution of the loans to members to other members or to the Community.8

2.

Common Enterprise

The expected source of repayment for the loan to the Community is the repayment of the

Community’s loans to the members that is dependent on the monthly stipends that are supported

by income from tribal enterprises, principally the [ ] casino. The expected source

of repayment for the current and future loans to the members of the Community is the monthly

stipends that each member receives from the Community and that are derived from the same

tribal enterprises. The expected source of repayment for the loan to the Community and the

loans to the members is thus the same. Further, no borrower – neither the Community nor any

member -- has another source of income from which the borrower’s loan, and the borrower’s

other obligations, can be fully repaid

ds that each member receives from the Community and that are derived from the same

tribal enterprises. The expected source of repayment for the loan to the Community and the

loans to the members is thus the same. Further, no borrower – neither the Community nor any

member -- has another source of income from which the borrower’s loan, and the borrower’s

other obligations, can be fully repaid. Accordingly, absent an exception, the loans would be

combinable under the common source of repayment test – the members’ loans with other

members’ loans9 and the members’ loans with the loan to the Community.

6 Since the proceeds of the loan to the Community do not fund the stipends that the Community pays to members,

the payment of stipends does not cause the direct benefit test to require that the loan to the Community be attributed

to members.

7 If a member borrowed from both the Bank and from the Community, the direct benefit test would require that the

part of the Bank’s loan to the Community that the Community re-loaned to the member be combined with the

Bank’s loan to the member. The transfer of proceeds by the Community to such members would not be excepted by

the exception for bona fide arm’s length transactions where proceeds are used to acquire property, goods, or

services. It is an established OCC position that “borrowed funds that are re-loaned to a third party would be

attributed to the third party under this test.” 59 Fed. Reg. 6593, 6596 (Feb. 11, 1994).

8 I assume that the members may acquire property, goods or services from the Community or its enterprises and that

the Bank’s loans to the members may support such transactions. Provided such transactions are bona fide arm’s

length transactions, they would not cause the direct benefit test to require the loans to the members to be attributed

to the Community

. Reg. 6593, 6596 (Feb. 11, 1994).

8 I assume that the members may acquire property, goods or services from the Community or its enterprises and that

the Bank’s loans to the members may support such transactions. Provided such transactions are bona fide arm’s

length transactions, they would not cause the direct benefit test to require the loans to the members to be attributed

to the Community.

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9 Some OCC precedent, beginning with interpretations of prior versions of the lending limit regulation, has taken the

position that the common source of repayment test hinges on whether the repayment capacity of one borrower is

dependent upon the financial health of another borrower rather than whether repayment will be made from the same

expected source. Under this view, absent an exception a loan to a member of the Community would only be

combined under the common source of repayment test with the loan to the Community on which the member is

dependent, not with a loan to another member, since no member is dependent on another member. However, other

As noted above, an employer will not be treated as a common source of repayment because of

wages and salaries paid to its employees, unless the employees control10 the employer and there

is substantial financial interdependence between them. This position is sometimes referred to as

the “company town” exception since it was originally intended to facilitate the granting of credit

to employees in such a town. A “company town” is a town in which residents are dependent on

the economic support of a single firm for maintenance of retail stores, schools, hospitals, and

housing.11 Without the exception, it would be difficult for a local bank to serve effectively the

credit needs of the town’s residents. As noted above, one of the purposes of the lending limit is

to promote equitable access to banking services

ny town” is a town in which residents are dependent on

the economic support of a single firm for maintenance of retail stores, schools, hospitals, and

housing.11 Without the exception, it would be difficult for a local bank to serve effectively the

credit needs of the town’s residents. As noted above, one of the purposes of the lending limit is

to promote equitable access to banking services.

The current case is very similar to the company town scenario in that all the members of the

Community live in a single, small geographic location and are uniquely associated with, and

dependent on, a single entity that is the community hub from a commercial and socioeconomic

perspective. Thus, the need for equitable access to banking services is as important in the current

factual circumstances as it is in the company town scenario. Further, there is a strong public

interest in making available to Indian tribes and their members access to banking services,

including credit products.12 Although in the current case, payments received by the members are

principally stipends rather than wages and salaries, the so-called company town exception is

available in this case because of the unique and compelling similarities between the employer-

employee relationship in a company town and the relationship between the Community and its

members here. Accordingly, the loans to the members need not be combined under the common

source of repayment test with loans to other members or with the loan to the Community.

http://www.occ.treas.gov/cdd/

OCC precedent has held loans to be combinable under the common source of repayment test in circumstances in

which one borrower was not financially dependent on another borrower, based on the commonality of the source of

repayment

urce of repayment test with loans to other members or with the loan to the Community.

http://www.occ.treas.gov/cdd/

OCC precedent has held loans to be combinable under the common source of repayment test in circumstances in

which one borrower was not financially dependent on another borrower, based on the commonality of the source of

repayment. The current regulation on its face does not require dependence on another borrower but rather requires

neither borrower to have another source of income to fully repay its loan and other obligations. In light of this

regulatory clarity, the correct position under 12 C.F.R. part 32 is that dependence on another borrower is not

required under the common source of repayment test.

10 I note that the Community is comprised only of its members and those members elect a governing council to run

the affairs of the Community. Such a democratic system does not involve concerted action by the members and

does not constitute “control” for the purposes of this provision.

11 See The American Heritage Dictionary of the English Language (4th ed., 2000).

12 An entire Federal agency program – the Bureau of Indian Affairs’ Loan Guaranty, Insurance, and Interest Subsidy

Program, 25 C.F.R. part 103 – exists to encourage eligible borrowers to develop viable Indian businesses through

conventional lender financing. The program helps borrowers secure conventional financing that might otherwise be

unavailable. The OCC has long regarded access to banking services by Indian tribes and their members as an

important public policy objective. For example, among other initiatives, the OCC hosts the Native American

Banking Resource Directory at http://www.occ.treas.gov/cdd/nativeam.htm and has published “A Guide to

Mortgage Lending in Indian Country” (Jul. 1997) and “Providing Financial Services to Native Americans in Indian

Country (Jul. 1997)

king services by Indian tribes and their members as an

important public policy objective. For example, among other initiatives, the OCC hosts the Native American

Banking Resource Directory at http://www.occ.treas.gov/cdd/nativeam.htm and has published “A Guide to

Mortgage Lending in Indian Country” (Jul. 1997) and “Providing Financial Services to Native Americans in Indian

Country (Jul. 1997). In addition, the OCC hosted a Native American Banking Forum in 2002 at which the OCC”s

First Senior Deputy Comptroller and Chief Counsel noted “that the presence of banks is crucial for any community’s

economic strength” and that “banks are developing a greater understanding that exploring and serving the financial

needs of underserved populations fits in with their long-term self-interest.” See

Williams101602.pdf.

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Please note that this letter responds only to the common enterprise lending limit issue raised in

your letter. It does not address safety and soundness risks that may be posed by the loan to the

Community or by loans to the Community members, individually or in the aggregate. Under

12 C.F.R. § 32.1(c)(4), the lending limit requires that loans made by national banks must be

consistent with safe and sound banking practices.

Please also note that in reaching the foregoing conclusion, I have relied on the factual

representations contained in your letter and in telephone conversations with OCC staff. The

position set forth in this letter depends upon the accuracy and completeness of those

representations and the facts set forth in this letter. Any change in circumstances could result in

a different conclusion.

I trust the foregoing is responsive to your inquiry.

Sincerely,

/s/ Jonathan Fink

Jonathan Fink

Senior Attorney

Bank Activities & Structure