Topic: Lending Limits
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We extended a commercial loan for the purchase of real estate that our customer had been leasing. The lease provided an option to purchase the property at a certain price after five years. We financed 100% of the purchase price stated in the lease, but an appraisal of the property put the transaction at a 75% loan-to-value ratio. For purposes of the supervisory loan-to-value ratio limits, should we apply a loan-to-value ratio based on the property’s purchase price or appraised value?
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We believe the loan-to-value ratio should be based on the property’s purchase price in this case. The Interagency Guidelines for Real Estate Lending Policies generally require the loan-to-value ratio for a purchase loan to be calculated with the property value defined as “the lesser of the actual acquisition cost or the estimate of value.” The…
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When reporting loans in excess of our supervisory loan-to-value limits under Part 365 of the FDIC’s regulations, how should we determine the value of a property in a purchase transaction that includes funds for improvements? For example, if the purchase price is $50,000, the loan amount is $75,000, and the appraised as-completed value is $100,000, is the property value the purchase price or the as-completed value? It appears that “value” is defined as the lesser of the purchase price or appraised value, and we do not see any exceptions for loans that include funds for improvements.
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We agree that the value of the property in your example would be the purchase price of $50,000, and not the as-completed value of $100,000. We also agree that there do not appear to be any applicable exceptions. The Interagency Guidelines outlining the calculation and reporting of loan-to-value ratios generally define the property value for…
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Do you have a template or form that goes over how to calculate the Illinois legal lending limit? Or can you direct me to the place in the statute regarding how to calculate the Illinois legal lending limit?
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We do not have a template or form going over how to calculate the Illinois legal lending limit. We will make a request to our Compliance Division Advisory Committee for sample templates or forms and will send you any submissions we receive. Calculations of the general lending limit for Illinois-chartered banks are governed by Sections…
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We have a commercial loan coming due that we placed in forbearance under Section 4013 of the CARES Act for 18 months. Since the customer was not making full payments, the accrued interest increased substantially. We are planning to renew the loan and add the accrued interest to the principal at renewal. Are there any laws or regulations that would prevent us from capitalizing the interest on this loan?
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No, we are not aware of any laws or regulations that would prevent you from adding accrued interest to the loan’s principal balance (i.e., capitalizing the interest). However, we recommend reviewing the terms of your loan contract and forbearance agreement to determine whether the capitalization is contractually permissible. Section 4013 of the CARES Act allows…
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When calculating our liabilities outstanding to one person for purposes of compliance with the Illinois Banking Act’s 25% lending limit, can we include loans to a borrower that may be subject to an exception, just to ensure we are still under the lending limit in the event that we later find out that the exception does not actually apply? Also, is there an exception that applies based on the type of collateral covering the loan?
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We do not foresee any problems that would arise from including loans in your lending limit calculations that could potentially be excluded under the Illinois Banking Act. In general, the Illinois Banking Act prohibits a state bank’s outstanding liabilities to any one person from exceeding 25% of the bank’s unimpaired capital and unimpaired surplus. However,…
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One of our directors is the President and CEO (but not an owner) of company that would like to borrow money from our bank. If the director has “control” of the company for purposes of Regulation O, we believe we will exceed our legal lending limit for this borrower. Are we correct that an individual can have “control” of a company without having an ownership interest in the company?
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Yes, we believe it is possible for a person to have “control” of a company, as defined in Regulation O, without having an ownership interest in the company. Under Regulation O, a person has control of a company if the person “owns, controls, or has the power to vote 25 percent or more of any…
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When reporting loans in excess of our supervisory loan-to-value limits under Part 365 of the FDIC’s regulations, we are wondering if we should report loans that exceed our supervisory loan-to-value limits if they are covered under private mortgage insurance. Would these loans be considered excluded transactions as “guaranteed or insured by a state, municipal or local government, or an agency thereof”?
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No, we do not believe that a mortgage loan with private mortgage insurance (PMI) would be treated as insured (or guaranteed) by a governmental agency. PMI providers are by definition “private,” so we would not view PMI as provided by a public entity and would not view a loan covered by PMI as an excluded…
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If we sell a loan to another bank due to our legal lending limit, can we purchase back portions of the loan without amending the related participation agreement? I know we can purchase the entire loan back, but would we be violating any laws or regulations if we purchased back only portions of the loan?
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We are not aware of any laws or regulations that would prohibit a national bank from repurchasing portions of a loan originally sold pursuant to a participation agreement, provided that the purchase does not violate your institution’s current legal lending limits at the time of repurchasing and provided that the repurchase is not in violation…
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A borrower has asked if we can increase the maximum loan limit on a maturing HELOC to save them the time and fees associated with obtaining a new loan. The borrower also would like to extend the maturity date and change the interest rate from variable to fixed. Is this possible?
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Yes, we believe it is possible to modify the terms of an existing HELOC before maturity to increase the loan limit, extend the maturity date, and change the interest rate from a variable rate to a fixed rate — provided the borrower signs a modification agreement reflecting these terms and they receive a notice of…
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We are a state-chartered bank subject to the Illinois Banking Act’s lending limits. Does federal law permit a higher lending limit for a guarantor who guarantees loans made to several separate stand-alone corporations? Would the Illinois Banking Act’s “wild card” provision allow a state bank to take advantage of the higher lending limit for national banks and exceed Illinois’s lending limit?
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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…