# OCC Interpretive Letter No. 979: 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

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0979

## Section

- **Citation:** OCC Interpretive Letter No. 979
- **Heading:** 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
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / 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.

## Text

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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2
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).
- -
2

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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3
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.
- -
4

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5
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0979. Check the current official text before relying on it. Not legal advice.