Our bank made a loan to a customer that was under the legal lending limit at the time the loan was made. However, our capital has dropped and now the customer’s loan is above the legal lending limit. What procedures should be followed in this situation?

We do not believe that your bank is required to take any corrective action, nor do we think that this loan constitutes a violation of the general lending limit in the Illinois Banking Act.

The general lending limit for an Illinois state bank under Section 32 of the Illinois Banking Act is applied at the time a loan is extended, and a loan “will not be deemed a violation . . . if there is a subsequent decrease in the [lending] limit.” In other words, if a loan was under the legal lending limit when it was extended, a bank is not required to take any corrective action even if the lending limit later is decreased.

For resources related to our guidance, please see:

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. . . .”)

Illinois Banking Act, 205 ILCS 5/39(a) (“ . . . No director or officer of a State bank shall be held liable in his or her personal or individual capacity under this Section, however, for a loan, investment, lease, or other transaction that complied in good faith with the applicable provisions of Section 32, 33, 34, 35.1, or 35.2, when made or acquired by the State bank, but later violated the provisions of Section 32, 33, 34, 35.1, or 35.2 solely because of a subsequent reduction in the amount of the unimpaired capital or unimpaired surplus of the State bank. . . .”)

IDFPR Policy Statement 2001 — Eliminating Violations of Law Pertaining to Lending, Investment, and Lease Limits (“[L]oans and other liabilities of a person that are within the lending limit when extended will not be deemed a violation of Section 32 if there is a subsequent decrease in the limit. Additionally, a subsequent merger of the borrowers or merger of the lenders that causes the liabilities of a person to a bank to exceed the limit shall not be deemed a violation of Section 32, if such loans and liabilities were within the limit when extended.”)

IDFPR Policy Statement 2001 — Eliminating Violations of Law Pertaining to Lending, Investment, and Lease Limits (“Section 32 now provides ‘the liabilities outstanding at one time to a state bank . . . shall not exceed . . . .’ This language was enacted to clarify that a loan that is within the lending limit when made would not be a violation if there is a subsequent decrease in the lending limit or borrowers merge or lenders merge, causing the liabilities of a borrower to be combined . . . .”)

IDFPR Policy Statement 2001 — Eliminating Violations of Law Pertaining to Lending, Investment, and Lease Limits (“The Examination Guideline sets forth a number of methods by which a bank could cause violations of the lending limits under Section 32 and the loan, lease and investment limits under Sections 33, 34, 35.1 and 35.2 to cease to exist. For these sections of the Banking Act, the Agency continues to recognize that only the portion of a liability that exceeds the lending limit at the time the liability is incurred requires corrective action.”)