How should legal lending limits be calculated in Illinois for an individual borrower who owns a percentage of a commercial entity with an outstanding debt to our bank? For example, if a potential borrower owns 10% of an entity, and has guaranteed 10% of the entity’s debt, should we consider only 10% of the entity’s debt in making our calculation? Alternatively, if the borrower has signed an unlimited guarantee, guaranteeing 100% of the entity’s debt, should our calculation include 100% of the entity’s debt?

For an explanation of when to aggregate loans and guarantees for lending limits purposes, and a description of the differences between “guarantees of payment” and “guarantees of collection,” we recommend reviewing one of our guidances, CQ 2014-056, which provides a thorough discussion of this topic.

Assuming that aggregation is required, we believe that your lending limit calculation involving a guarantee generally would be governed by the percentage of debt covered by the guarantee. An Illinois Department of Financial and Professional Regulation (IDFPR) Interpretive Letter from 1992* provides that when aggregating guarantees of payment, “the total amount guaranteed for all borrowers collectively cannot exceed [25%] of the bank’s unimpaired capital and surplus.” In our view, the “total amount guaranteed” would be the percentage of the debt guaranteed by the guarantor. Thus, if your guarantor guaranteed 10% of the entity’s debt, your lending limit calculation for this guarantor would include 10% of the debt. Whereas, if your guarantor guaranteed 100% of the entity’s debt, 100% of the debt would be factored into your calculation.

Likewise, we believe that when aggregating guarantees of collection — which combined with the guarantor’s other liabilities to your bank may not exceed 50% of the bank’s total unimpaired capital and unimpaired surplus — only the percentage of the debt guaranteed by the guarantor would be used in your calculation.

However, we spoke with an attorney at the IDFPR who advised that if your bank extended a loan to a borrower in reliance on a guarantor’s net worth or earnings for a greater portion of the borrower’s loan than the amount of the guarantor’s guarantee (unlikely as this may be), then the amount imputed to the guarantor for lending limit purposes could be greater than the amount guaranteed. Consequently, we recommend reviewing your underwriting documentation to determine the extent to which your bank relied on the guarantor’s creditworthiness when it extended the loan to the borrower to determine what percentage of the borrower’s debt should be used in your calculation.

(*Note that the IDFPR letter referenced above was written in 1992, when the lending limit for loans and guarantees of payment was 20%. The Illinois Banking Act has since been amended to increase this lending limit to 25%, but otherwise the rules have not changed. Therefore, we continue to rely on the 1992 IDFPR letter for guidance, when appropriate.)

For resources related to our guidance, please see:

IBA Compliance Question CQ 2014-056.

IDFPR Interpretive Letter 92-13 (September 3, 1992) (“Two separate limitations apply to guarantees. If the clearing firm guarantees payment of the loans, then the total amount guaranteed for all borrowers collectively cannot exceed 20% of the bank's unimpaired capital and surplus. Whether the clearing firm issues one guarantee or individual guarantees is irrelevant for this analysis. If the clearing firm acts as a collection guarantor, then collectively the clearing firm can guaranty up to 50% of the bank's unimpaired capital and surplus.”)

Illinois Banking Act, 205 ILCS 5/32 (“The liabilities outstanding at one time to a state bank of a person for money borrowed, including the liabilities of a partnership or joint venture in the liabilities of the several members thereof, shall not exceed 25% of the amount of the unimpaired capital and unimpaired surplus of the bank. . . .

The following shall not be considered as money borrowed within the meaning of this Section:

* * * * *

(5) The liability to a state bank of a person who is an accommodation party to, or guarantor of payment for, any evidence of indebtedness of another person who obtains a loan from or discounts paper with or sells paper to the state bank; but the total liability to a state bank of a person as an accommodation party or guarantor of payment in respect of such evidences of indebtedness shall not exceed 25% of the amount of the unimpaired capital and unimpaired surplus of the bank; provided however that the liability of an accommodation party to paper excepted under subsection 2 of this Section shall not be included in the computation of this limitation.

(6) The liability to a state bank of a person, who as a guarantor, guarantees collection of the obligation or indebtedness of another person.”)

Illinois Banking Act, 205 ILCS 5/32 (“The total liabilities of any one person, for money borrowed, or otherwise, shall not exceed 25% of the deposits of the bank, and those total liabilities shall at no time exceed 50% of the amount of the unimpaired capital and unimpaired surplus of the bank.”)

IDFPR Administrative Rules, 38 Ill. Adm. Code 330.10 (“‘Loan or Extension of Credit’ means any direct or indirect advance of funds that results in a liability of any person for money borrowed or otherwise. An indirect advance of funds shall include, but not be limited to, a purchase by a bank of a note or obligation from another person.”)

IDFPR Administrative Rules, 38 Ill. Adm. Code 330.110(b) (“Factors which may be relevant in determining whether a loan or extension of credit to one person can be justified without reliance on the credit worthiness of a second person include the following:

Will the credit analysis and documentation on file at the bank at the time the loan or extension of credit was made substantiate that the one person has or will have the financial capacity to generate sufficient funds from his or her own assets and operations to repay the loan or extension of credit or is the source of repayment the second person?;

Were the proceeds of the loan or extension of credit to one person used for the primary benefit of the one person or was a substantial portion of the proceeds used for the benefit of the second person without a corresponding economic benefit to the one person?;

In instances involving a guaranty or other secondary liability, is the liability of the second person that an accommodation party pursuant to Section 32(5) of the Act, namely a person who becomes obligated on the loan or extension of credit to one person and does not receive any of the proceeds thereof, or is the purpose of the guaranty or other secondary liability to enhance the loan or extension of credit for reasons other than repayment, such as to obtain an investment grade rating or to reduce the rate of interest charged on the loan or extension of credit, or would the loan or extension of credit to one person not have been made without the second person's guaranty or other secondary liability?”)