We do not believe that national banks are subject to a higher lending limit for guarantors who guarantee multiple loans made to separate stand-alone corporations.

Under the National Bank Act and its implementing regulations, a national bank’s extension of credit to one borrower may not exceed 15% of its capital and surplus, plus an additional 10% if the amount that exceeds the 15% limit is fully secured by readily marketable collateral. A guarantor is treated as a borrower for purposes of these lending limits if the guarantor meets one of two tests under the OCC’s combination rules: the “direct benefit” or “common enterprise” test. Both tests are fairly complex, but in very general terms, a guarantor is treated as a borrower due to receiving a “direct benefit” when loan proceeds are transferred to the guarantor, “other than in a bona fide arm’s length transaction where the proceeds are used to acquire property, goods, or services,” and a guarantor is treated as a borrower when the borrower and guarantor are part of a single “common enterprise.”

While the OCC’s rules also include a higher lending limit of 50% of the bank’s capital and surplus, this lending limit only applies to loans or extensions of credit made to corporate groups (i.e., a person and all of its subsidiaries). Consequently, the lower 15% (or 25%) lending limit for national banks would apply to loans made to separate stand-alone corporations, rather than the higher 50% lending limit, even if the loans are all guaranteed by the same guarantor (assuming that the guarantor meets either the “direct benefit” or “common enterprise” tests described above).

While the “wild card” provision in the Illinois Banking Act allows state banks to do any act permitted by law applicable to national banks, it does not appear to be useful here, as the Illinois Banking Act’s general lending limits are higher than the National Bank Act’s limits — the Illinois limit to a person for money borrowed is 25% of the amount of the bank’s unimpaired capital and unimpaired surplus, and up to 30% of the bank’s unimpaired capital and unimpaired surplus if the amount exceeding 25% is fully secured by readily marketable collateral.

Additionally, the Illinois Banking Act imposes a potentially higher lending limit specific to guarantors. As outlined in IDFPR interpretive letters, there are two alternative lending limits that can apply to guarantors under the Illinois Banking Act. “Guarantors of Payment” are subject to a lending limit of 25% of the bank’s unimpaired capital and unimpaired surplus (which is calculated without including amounts of loans provided to the guarantor by the relevant bank). A person is a guarantor of payment when they must pay the relevant instrument when due without resort by the holder to any other party. “Guarantors of Collection” are subject to a lending limit of 25% of the bank’s total deposits or 50% of the bank’s unimpaired capital and unimpaired surplus — but any loans made directly to the guarantor and any other guarantees of payment or collection must be aggregated to determine compliance with the lending limit. A person is a guarantor of collection when they are obliged to pay the amount due on the relevant instrument only if payment cannot be obtained from the party whose obligation is guaranteed.

We note that the IDFPR also will apply the direct benefit and common enterprise tests discussed above to aggregate loan amounts with guarantees for the purpose of determining compliance with the applicable lending limit. Additionally, the Illinois Administrative Code provides that the amount of a loan and a guarantee must be aggregated if the creditworthiness of the borrower does not justify the extension of credit without relying on the guarantor’s creditworthiness.

For resources related to our guidance, please see:

• National Bank Act, 12 CFR 32.3 (“A national bank’s or savings association’s total outstanding loans and extensions of credit to one borrower may not exceed 15 percent of the bank’s or savings association’s capital and surplus, plus an additional 10 percent of the bank’s or savings association’s capital and surplus, if the amount that exceeds the bank’s or savings association’s 15 percent general limit is fully secured by readily marketable collateral, as defined in § 32.2(v). To qualify for the additional 10 percent limit, the bank or savings association must perfect a security interest in the collateral under applicable law and the collateral must have a current market value at all times of at least 100 percent of the amount of the loan or extension of credit that exceeds the bank’s or savings association’s 15 percent general limit.”)

• OCC Lending Limits Rules, 12 CFR 32.5 (“Loans or extensions of credit to one borrower will be attributed to another person and each person will be deemed a borrower –

(1) When proceeds of a loan or extension of credit are to be used for the direct benefit of the other person, to the extent of the proceeds so used; or

(2) When a common enterprise is deemed to exist between the persons.”)

• OCC Lending Limits Rules, 12 CFR 32.5(b) (“The proceeds of a loan or extension of credit to a borrower will be deemed to be used for the direct benefit of another person and will be attributed to the other person when the proceeds, or assets purchased with the proceeds, are transferred to another person, other than in a bona fide arm’s length transaction where the proceeds are used to acquire property, goods, or services.”)

• OCC Lending Limits Rules, 12 CFR 32.5(c) (“A common enterprise will be deemed to exist and loans to separate borrowers will be aggregated:

(1) When the expected source of repayment for each loan or extension of credit is the same for each borrower and neither borrower has another source of income from which the loan (together with the borrower’s other obligations) may be fully repaid. An employer will not be treated as a source of repayment under this paragraph because of wages and salaries paid to an employee, unless the standards of paragraph (c)(2) of this section are met;

(2) When loans or extensions of credit are made –

• (i) To borrowers who are related directly or indirectly through common control, including where one borrower is directly or indirectly controlled by another borrower; and
   
• (ii) Substantial financial interdependence exists between or among the borrowers. Substantial financial interdependence is deemed to exist when 50 percent or more of one borrower’s gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other borrower. Gross receipts and expenditures include gross revenues/expenses, intercompany loans, dividends, capital contributions, and similar receipts or payments;

(3) When separate persons borrow from a national bank or savings association to acquire a business enterprise of which those borrowers will own more than 50 percent of the voting securities or voting interests, in which case a common enterprise is deemed to exist between the borrowers for purposes of combining the acquisition loans; or

(4) When the appropriate Federal banking agency determines, based upon an evaluation of the facts and circumstances of particular transactions, that a common enterprise exists.”)

• OCC Lending Limits Rules, 12 CFR 32.5(d)(1) (“Loans or extensions of credit by a national bank or savings association to a corporate group may not exceed 50 percent of the bank’s or savings association’s capital and surplus. This limitation applies only to loans subject to the combined general limit. A corporate group includes a person and all of its subsidiaries. For purposes of this paragraph, a corporation or a limited liability company is a subsidiary of a person if the person owns or beneficially owns directly or indirectly more than 50 percent of the voting securities or voting interests of the corporation or company.”)

• Illinois Banking Act, 205 ILCS 5/5 (“A bank organized under this Act or subject hereto shall . . . have all the powers conferred by this Act and the following additional general corporate powers: . . . (11) Notwithstanding any other provisions of this Act or any other law, to do any act and to own, possess, and carry as assets property of the character, including stock, that is at the time authorized or permitted to national banks by an Act of Congress, but subject always to the same limitations and restrictions as are applicable to national banks by the pertinent federal law and subject to applicable provisions of the Financial Institutions Insurance Sales Law.”)

• 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 liabilities to any state bank of a person may exceed 25% of the unimpaired capital and unimpaired surplus of the bank, provided that (i) the excess amount from time to time outstanding is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available quotations, at least equal to the excess amount outstanding; and (ii) the total liabilities shall not exceed 30% of the unimpaired capital and unimpaired surplus of the bank.”)

• Illinois Banking Act, 205 ILCS 5/32 (“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.”)

• Illinois Banking Act, 205 ILCS 5/32 (“The following shall not be considered as money borrowed within the meaning of this Section: . . . (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, Interpretive Letter 93-013 (“To determine the type of guarantee, the language of the guarantee and the resulting obligations will control. The Illinois Uniform Commercial Code (‘UCC’) makes a distinction between a guarantee of collection and a guarantee of payment.”)

• IDFPR, Interpretive Letter 93-013 (“Section 3-416 of the UCC provided that the term ‘payment guarantee,’ when added to a signature, meant that the guarantor would pay the instrument when due without resort by the holder to any other party.”)

• IDFPR, Interpretive Letter 93-013 (“Section 3-419(d) of the UCC, 810 ILCS 5/3-419, defines when a party guarantees collection: If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if (i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or (iv) it is otherwise apparent that payment cannot be obtained from the party whose obligation is guaranteed.”)

• IDFPR, Interpretive Letter 93-013 (“If the Guarantor’s obligations under the Program are primary or if its intent is ambiguous, its guarantees will be deemed to be payment guarantees. The payment guarantees will then be aggregated with any other of the Guarantor’s payment guarantees of loans made by the Bank, and therefore are limited to 20% of unimpaired capital plus 20% of unimpaired surplus.”) [Note that this IDFPR letter was written in 1993, when the lending limit was set at 20%. The Illinois Banking Act has since been amended to increase the lending limit to 25%, but it otherwise has not changed.]

• IDFPR, Interpretive Letter 93-013 (“If the signature of the Guarantor clearly and unambiguously indicates that the guarantees are collection guarantees, then the applicable limit will be 25% of deposits, but not more than 50% of unimpaired capital and surplus. In applying this limit, any direct loans to the Guarantor and any other collection and payment guarantees will be aggregated with the collection guarantees made under the Program.”)

• IDFPR, Interpretive Letter 92-13 (“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.”)

• 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 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.”)