IBA Compliance Connection

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One of our directors has a line of credit that is up for renewal within the week. The loan complied with our insider lending limits when it was made, but because our capital levels are lower today (due to the new Basel III standards), the loan now exceeds our insider lending limits. Can we renew the loan without violating our insider lending limits?

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No, the loan must comply with Regulation O’s insider lending limits when it is renewed. Regulation O applies to any extension of credit, including the renewal of an existing loan. Regulation O’s lending limits are based on your institution’s “unimpaired capital and unimpaired surplus,” a calculation that includes all Tier 1 and Tier 2 capital as calculated in your institution’s most recent Call Report, plus any allowance for loan and lease losses (ALLL) that was excluded from your Tier 2 capital calculation. Under Regulation O, loans to one insider may not exceed 15% of that amount (unless fully secured by readily marketable collateral, in which case the limit increases to 25%).

In addition, the Illinois Banking Act’s basic lending limits — which apply to all borrowers, irrespective of whether they are or are not insiders of the bank — applied to the loan when it was made. But the basic lending limits do not apply to a loan renewal, so they would not apply in this situation.

For resources related to our guidance, please see:

  • Regulation O, 12 CFR 215.3(a) (“An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever . . . .”)
  • Regulation O, 12 CFR 215.2(i) (“A member bank’s unimpaired capital and unimpaired surplus equals: (1) The bank’s Tier 1 and Tier 2 capital included in the bank’s risk-based capital under the capital guidelines of the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and (2) The balance of the bank’s allowance for loan and lease losses not included in the bank’s Tier 2 capital for purposes of the calculation of risk-based capital by the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3).”)
  • Illinois Banking Act, 205 ILCS 5/32 (“The liabilities outstanding at one time to a state bank of a person for money borrowed . . . shall not exceed 25% of the amount of the unimpaired capital and unimpaired surplus of the bank . . . .”)
  • Illinois Lending Limit Rules, 38 Ill. Adm. Code 320.20 (For purposes of the Illinois Banking Act’s basic lending limits, “a renewal of a loan or extension of credit shall not be deemed to be a new loan or extension of credit except in instances when interest on the renewed loan or extension of credit is capitalized”)