|
Definition of “Loan or Extension of Credit” |
| Renewals |
In most cases, the two
definitions of “loan or extension of credit” are equivalent. A
difference exists, however, in the treatment of renewals. Under
part 215, a renewal of a loan to an “insider” (which, unless noted
otherwise, includes a bank's executive officers, directors,
principal shareholders, and “related interests” of such persons) is
considered to be an extension of credit. Under part 32, renewals
generally are not considered to be an extension of credit if the
bank exercises reasonable efforts, consistent with safe and sound
banking practices, to bring the loan into conformance with the
lending limit. Renewals would be considered an extension of credit
under part 32, however, if new funds are advanced to the borrower,
a new borrower replaces the original borrower, or the OCC
determines that the renewal was undertaken to evade the lending
limits. |
| Commitments to
extend credit.. |
A binding commitment to make a
loan is treated as an extension of credit under part 215. Under
part 32, a commitment to make a loan will not be treated as an
extension of credit if the amount of the commitment exceeds the
lending limit. Rather, the commitment will be deemed a
“nonqualifying commitment” under part 32 and advances may be made
thereunder only if the advance, together with all other outstanding
loans to the borrower, will not exceed the bank's lending
limit. |
| Overdrafts |
An advance by means of an
overdraft (except for an intraday overdraft) generally is
considered to be an extension of credit under both parts 32 and
215. However, indebtedness in amounts up to $5,000 is excluded from
the definition of “extension of credit” under part 215 if the
indebtedness arises pursuant to a written, preauthorized,
interest-bearing plan or written, preauthorized transfer of funds
from another account. Under part 215, if an overdraft is not made
pursuant to this type of plan or transfer, a bank is prohibited
from paying an overdraft of an insider (which, in this case,
includes only an executive officer or director of the insider's
bank) unless the overdraft is inadvertent, in amounts not exceeding
$1,000, outstanding for not more than 5 business days, and subject
to the bank's standard overdraft fee. Part 32 does not contain
these exceptions for overdrafts, and simply treats overdrafts
(except for intraday overdrafts) as extensions of credit subject to
lending limits. |
| Guarantees |
Generally speaking, guarantees
are included in the part 215 definition of “extension of credit”
but are not included in the definition of “extension of credit” in
part 32 unless other criteria are satisfied. Part 215 applies to
any transaction as a result of which an insider becomes obligated
to pay money to a bank, whether the obligation arises (i) directly
or indirectly, (ii) because of an endorsement on an obligation or
otherwise, or (iii) by any means whatsoever. Accordingly, a loan
guaranteed by an insider will be deemed to have been made to that
insider. In contrast, part 32 does not consider a loan on which
someone signs as guarantor as having been made to the guarantor
unless that person is deemed to be a borrower under the “direct
benefit” or “common enterprise” tests (see discussion of these
tests in the discussion of the “General Rule” under
“Combination/Attribution Rules,” below). |
|
Exclusions to Definition |
| Funds advanced for
taxes, etc., necessary to preserve collateral or that are
incidental to indebtedness |
Both rules exclude funds
advanced for items such as taxes, insurance, or other expenses
related to existing indebtedness. However, part 32 includes these
advances for the purpose of determining whether subsequent loans
meet the lending limit, whereas part 215 excludes these advances
for all purposes. Part 215 contains no such requirement. |
| Loan
participations |
Both rules exclude loan
participations if the participation is without recourse. However,
part 32 elaborates on this exclusion by requiring that the
participation result in a pro rata sharing of credit risk
proportionate to the respective interests of the originating and
participating lenders. Part 32 also requires the originating bank,
if funding the entire loan, to receive funding from the
participants before the close of the next business day. Otherwise,
the portion funded will be treated as a loan by the originating
bank to the underlying borrower, and may be treated as a
“nonconforming” loan rather than a violation if (i) the originating
bank had an agreement with the participating bank that reduced the
loan to an amount within the originating bank's lending limit, (ii)
the participating bank reconfirmed its participation and the
originating bank had no knowledge of information that would permit
the participating bank to withhold its participation, and (iii) the
participation was to be funded by close of business of the
originating bank's next business day. |
| Acquisition of
debt through merger or foreclosure |
Under part 215, a note or
other evidence of indebtedness acquired through a merger is
excluded from the definition of “extension of credit.” Under part
32, the indebtedness is deemed to be a loan or extension of credit.
However, if a loan that conformed with part 32 when originally made
exceeds the lending limits following a merger after the loan is
aggregated with other extensions of credit to the same borrower,
the loan will not be deemed to be a lending limits violation.
Rather, the loan will be treated as “nonconforming,” and the bank
will have to exercise reasonable efforts to bring the loan into
compliance unless to do so would be inconsistent with safe and
sound banking practices. |
| Credit card
indebtedness |
An insider may incur up to
$15,000 in debt on a credit card or similar open-end credit plan
offered by the insider's bank without the debt counting as an
extension of credit under part 215. The terms of the credit card or
other credit plan must be no more favorable than those offered by
the bank to the general public. Part 32 does not exclude credit
card debt from the lending limits. |
|
Combination/ Attribution Rules |
| General rule |
Under part 215, a loan will be
attributed to an insider if the loan proceeds are “transferred to,”
or used for the “tangible economic benefit of,” the insider or if
the loan is made to a “related interest” of the insider. Under part
32, a loan will be attributed to another person when either (i) the
proceeds of the loan are to be used for the direct benefit of the
other person or (ii) a common enterprise exists between the
borrower and the other person. The “transfer” test and “tangible
economic benefit” test of part 215 are substantially the same as
the “direct benefit” test of part 32. Under each of these tests, a
loan will be attributed to another person where the proceeds are
transferred to the other person, unless the proceeds are used in a
bona fide arm's length transaction to acquire property, goods, or
services. However, the “related interest” test of part 215 and the
“common enterprise” test under part 32 will lead to different
results in many instances. Under part 215, a “related interest” is
a company or a political or campaign committee that is “controlled”
by an insider. Part 215 defines “control” as meaning, generally
speaking, that someone owns or controls at least 25 percent of a
class of voting securities of a company, controls the election of a
majority of the company's directors, or can “exercise a controlling
influence” over the company. Part 32 uses the same definition of
“control” in the “common enterprise” test, but a mere finding of
“control” is not, by itself, a sufficient basis to find that a
common enterprise exists. Part 32 will attribute a loan under the
“common enterprise” test if the borrowers are under common control
(including where one of the persons in question controls the other)
and there is “substantial financial interdependence” between the
borrowers (i.e., where at least 50 percent of the gross receipts or
expenditures of one borrower comes from transactions with the
other). If there is not both common control and substantial
financial interdependence, the OCC will not attribute a loan under
the “common enterprise” test unless (i) the expected source of
repayment for a loan is the same for each borrower and neither
borrower has another source of income from which the loan may be
repaid, (ii) two people borrow to acquire a business of which they
will own a majority of the voting securities, or (iii) OCC
determines that a common enterprise exists based on facts and
circumstances of a particular transaction. |