If a loan has a loan-to-value ratio of less than 50%, and we have performed two separate appraisals, is the loan exempt from the lending limits in Section 32 of the Illinois Banking Act?

This loan might have a higher lending limit under Section 32 of the Illinois Banking Act, but it would not be entirely exempt from lending limits.

Section 32’s basic lending limit of 25% of the bank’s unimpaired capital and unimpaired surplus does not apply to loans that meet the requirements of Section 32(3). Such loans must be secured by: (1) a mortgage or deed of trust, (2) with a first lien, (3) on “productive real estate,” (4) with an appraised value of at least double the amount of the loan principal, “as ascertained by the oath of 2 qualified appraisers, neither of whom shall be an officer, director, or employee of the bank or of any subsidiary or affiliate of the bank.”

However, note that such loans are not entirely exempt from the Illinois Banking Act’s lending limits — they remain subject to a higher lending limit of 50% of the bank’s unimpaired capital and unimpaired surplus (or 25% of deposits).

For resources related to our guidance, please see:

Illinois Banking Act, 205 ILCS 5/32 (“Basic loaning limits. 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: . . .

(3) The purchase of or loaning money in exchange for evidences of indebtedness which shall be secured by mortgage or trust deed upon productive real estate the value of which, as ascertained by the oath of 2 qualified appraisers, neither of whom shall be an officer, director, or employee of the bank or of any subsidiary or affiliate of the bank, is double the amount of the principal debt secured at the time of the original purchase of evidence of indebtedness or loan of money and which is still double the amount of the principal debt secured at the time of any renewal of the indebtedness or loan, and which mortgage or trust deed is shown, either by a guaranty policy of a title guaranty company approved by the Commissioner or by a registrar’s certificate of title in any county having adopted the provisions of the Registered Titles (Torrens) Act, or by the opinion of an attorney-at-law, to be a first lien upon the real estate therein described, and real estate shall not be deemed to be encumbered within the meaning of this subsection (3) by reason of the existence of instruments reserving rights-of-way, sewer rights and rights in wells, building restrictions or other restrictive covenants, nor by reason of the fact it is subject to lease under which rents or profits are reserved by the owners. . . .

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 Interpretive Letter 95-018 (September 2, 1994) (“As stated in Section 32 of the Act, the liability of any one person to a bank for money borrowed may not to exceed 20% of the bank's unimpaired capital and unimpaired surplus. Credit extended pursuant to Section 32(3), however, is not considered as money borrowed. Consequently, a state bank may make loans or purchase evidences of indebtedness with respect to a borrower of up to 50% of the bank’s unimpaired capital and unimpaired surplus (or 25% of deposits) if the credit extension satisfies all of the criteria of Section 32(3), assuming that the borrower has no additional liabilities to the bank.”)

IDFPR Policy Statement 2001 — Eliminating Violations of Law Pertaining to Lending, Investment, and Lease Limits (“A violation of Section 32(3) shall occur if any of the following conditions are not satisfied at the time the liability is incurred:

a. The real estate securing the loan is productive real estate;

b. The lien securing the real estate is a first lien;

c. The real estate securing the debt is appraised by two qualified appraisers;

d. The qualified appraisers are not directors, officers or employees of the bank; or

e. Both of the qualified appraisers certify that the value of the real estate securing the loan is double the value of the principal debt at the time of origination of the debt or at any subsequent renewal of the debt.”)