Topic: Lending Limits
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We are a national bank. An executive officer of our bank has a loan with our bank exceeding $100,000 secured by a first mortgage on their primary residence. The officer also has another loan of less than $100,000 secured by a first mortgage on an investment property; we sold the loan to Fannie Mae and still service the loan. The officer would like a loan to purchase another non-owner occupied investment property, secured by a first mortgage on the property. The loan for the new investment property would exceed $100,000. Would Regulation O (or any other regulation) prevent us from keeping this loan on our books rather than selling it? Also, does the term “readily marketable collateral” refer to real estate?
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Yes, we believe Regulation O’s $100,000 lending limit on loans to executive officers would prevent you from making this loan — even if you intend to sell it. Regulation O generally prohibits banks from making loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is…
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We have an officer subject to Regulation O whose spouse owns a business that would like to apply for a Paycheck Protection Program (PPP) loan under the new CARES Act. The officer is a joint owner of the business. Would we be required to count this loan against the officer’s general $100,000 lending limit since the loan is 100% guaranteed by the Small Business Administration (SBA)? Is there any guidance on Regulation O lending limits with respect to government-guaranteed loans?
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Irrespective of Regulation O’s lending limits for executive officers, a lender may not extend a PPP loan to an entity in which one of the lender’s officers or their spouse has an interest. The SBA regulations generally provide that neither lenders nor their associates can own an equity interest in a business that has received…
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Can you confirm whether the Paycheck Protection Program (PPP) loans we extend under the new CARES Act will be exempt from our national bank lending limits since they are 100% guaranteed by the Small Business Administration (SBA)?
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Yes, we believe that PPP loans will be exempt from the national bank lending limits since they will be 100% guaranteed by the SBA. The national bank lending limit regulations provide that loans guaranteed by federal agencies are exempt from the national bank lending limits to the extent of the guarantee, and the OCC confirmed…
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Can a bank extend a majority stockholder (who owns more than 15% of the bank and is not an executive officer) more than $100,000 in loans and still comply with Regulation O’s lending limits if the loans are secured by a perfected security interest in liquid assets (such as a stock portfolio)?
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Yes, a bank generally may extend more than $100,000 in loans to a majority stockholder or “principal shareholder” (who controls or has the power to vote more than 10% of the bank’s voting securities), subject to the conditions noted below. Regulation O’s prohibition on loans to executive officers exceeding $100,000 is not applicable to principal…
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Can a bank extend one of its executive officers more than $100,000 in loans and still comply with Regulation O’s lending limits if the loans are secured by a perfected security interest in liquid assets (such as a stock portfolio)?
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There are several exceptions to Regulation O’s prohibition on loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is lower), as discussed below. However, we are not aware of any exceptions for loans to executive officers that are secured by stock portfolios (provided no other…
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Our bank made a loan to a customer that was under the legal lending limit at the time the loan was made. However, our capital has dropped and now the customer’s loan is above the legal lending limit. What procedures should be followed in this situation?
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We do not believe that your bank is required to take any corrective action, nor do we think that this loan constitutes a violation of the general lending limit in the Illinois Banking Act. The general lending limit for an Illinois state bank under Section 32 of the Illinois Banking Act is applied at the…
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How should legal lending limits be calculated in Illinois for an individual borrower who owns a percentage of a commercial entity with an outstanding debt to our bank? For example, if a potential borrower owns 10% of an entity, and has guaranteed 10% of the entity’s debt, should we consider only 10% of the entity’s debt in making our calculation? Alternatively, if the borrower has signed an unlimited guarantee, guaranteeing 100% of the entity’s debt, should our calculation include 100% of the entity’s debt?
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For an explanation of when to aggregate loans and guarantees for lending limits purposes, and a description of the differences between “guarantees of payment” and “guarantees of collection,” we recommend reviewing one of our guidances, CQ 2014-056, which provides a thorough discussion of this topic. Assuming that aggregation is required, we believe that your lending…
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A husband and wife both have individual loans with our bank, and neither spouse is obligated on the other spouse’s loans. For purposes of the legal lending limit, should we determine the limit for each spouse individually? Also, under Regulation O, if the husband is an executive officer of our bank, is it only his loans that must comply with Regulation O if he has not signed any of his wife’s loans?
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As to the general lending limits, we believe that your bank may calculate the lending limit for each spouse individually. The Illinois Banking Act’s lending limit provisions would not require that the spouses’ individual loans be aggregated, unless one of the spouses guaranteed the other spouse’s loans, or your bank relied on the non-borrowing spouse’s…
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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?
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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…
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Is real estate, such as farmland, considered “readily marketable collateral” for Regulation O proposes? Regulation O’s definition of “lending limit” references “loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations at least equal to the amount of the loan.”
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No, real estate (including farmland) is not considered to be “readily marketable collateral” under federal or state law. Although this term is not defined in Regulation O, the OCC’s lending limit rules define “readily marketable collateral” as “financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market…