IBA Compliance Connection

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I understand that we cannot lend more than 25% of our unimpaired capital and surplus to any one borrower. What if we extend loans to several family members who operate a family farm as an LLC? We have extended some loans to the LLC and other loans to the family members as individuals, but all of the loans are secured by the same farm property. The borrowers qualified for the loans on their own, without relying on other family members or the LLC.

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No, we do not believe that these loans necessarily must be aggregated. However, there is a possibility that IDFPR examiners could criticize this concentration of loans because they are all secured by the same property.

As a general rule, loans of an LLC and its individual members are not aggregated for lending limit purposes, unless there are additional facts that require aggregation (such as an individual relying on the LLC’s creditworthiness to qualify for a loan). The IDFPR’s administrative rules do require aggregation if the creditworthiness of one borrower did not justify an extension of credit without relying on another party’s creditworthiness. Additionally, IDFPR guidance has noted that even in the absence of a lending limit violation, an examiner still may find that loans to related parties “constitute a concentration of credit to affiliated interests.”

In this case, you have indicated that the individual borrowers and the LLC qualified for their loans without reliance on each other’s creditworthiness. However, the fact that your institution is relying on the same collateral to secure all of these loans — and a single borrower’s default could trigger collateral issues for the other loans — could form the basis of an examiner’s criticism of the loans, even in the absence of a technical lending limit violation. To mitigate the risks of this finding, we recommend consulting with the IDFPR before making such loans going forward, which would help avert potential disagreements with your examiners.

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 5/2 (“‘Person’ means an individual, corporation, limited liability company, partnership, joint venture, trust, estate, or unincorporated association.”)
  • IDFPR Interpretive Letter 95-10 (October 2, 1995) (“[T]he members [of an LLC] will not, under ordinary circumstances, be liable for a loan to Company and no aggregation with members’ personal borrowings would occur for lending limit purposes.”)
  • IDFPR Administrative Rules, 38 Ill. Adm. Code 330.110(a) (“A loan or extension of credit to one person shall be considered a loan or extension of credit to a second person if the credit worthiness of the one person does not justify the loan or extension of credit without reliance on the credit worthiness of the second person.”)
  • IDFPR Interpretive Letter 01-03 (July 9, 2001) (“Although the transactions may not cause a lending limit violation, Agency examination staff could potentially note in an examination report that the loans constitute a concentration of credit to affiliated interests.”)