[Federal Register Volume 59, Number 29 (Friday, February 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3184]


[[Page Unknown]]

[Federal Register: February 11, 1994]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 94-02]
RIN 1557-AA72

 

Lending Limits

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to comprehensively revise its rules governing national bank 
lending limits. This proposal is the first in a series of proposals 
intended to simplify OCC regulations and reduce compliance costs. The 
proposed revisions clarify the scope and application of the lending 
limits; reorganize the regulation to group related subjects together; 
update the rules to address frequently asked questions and incorporate 
significant OCC interpretations of the lending limits; simplify 
calculation of the lending limits by relying primarily on quarterly 
Call Report information, rather than requiring that lending limits be 
calculated on a daily basis; revise the definition of capital and 
surplus upon which lending limits are based to rely on capital 
components that a bank must already calculate for Call Report purposes; 
add and amend definitions and consolidate definitions at the beginning 
of the regulation; restructure and clarify the loan combination rules; 
and add a new exception to the lending limits to allow a bank to 
advance funds to renew and complete funding a loan commitment under 
circumstances where the additional advance will protect the position of 
the bank. The purpose of the proposed revisions is to clarify the 
limits set by the regulation and, consistent with statutory 
requirements, focus the lending limits on situations where excessive 
loans to a borrower present safety and soundness concerns.

DATES: Comments must be received by April 12, 1994.

ADDRESSES: Comments should be directed to: Communications Division, 250 
E Street, SW., Washington, DC 20219, Attention: Docket No. 94-02.
    Comments will be available for public inspection and photocopying 
at the same location.

FOR FURTHER INFORMATION CONTACT: Deborah Katz, Senior Attorney, 
Enforcement and Compliance Division, (202) 874-4800; Stephen Freeland, 
Bank Operations and Assets Division, (202) 874-4460; William C. Kerr, 
National Bank Examiner, Traditional Activities, (202) 874-5170; Nancy 
E. Chase, Assistant Director, Legislative, Regulatory and International 
Activities, (202) 874-5090; William W. Templeton, Senior Attorney, 
Legislative, Regulatory and International Activities, (202) 874-5090.

SUPPLEMENTARY INFORMATION:

Background

OCC Regulation Review Program

    The OCC is proposing revisions to the national bank lending limits 
as part of its program to review all the OCC's rules and eliminate 
provisions that do not contribute significantly to maintaining safety 
and soundness and accomplishing the OCC's other statutory 
responsibilities. The OCC believes that the regulatory process should 
strive for an environment in which risk is prudently managed by banks 
and appropriately monitored by their regulator, without imposing 
excessive regulatory costs and without undermining the ability of banks 
efficiently to provide products and services to their customers. A 
central objective of the regulation review effort is to target 
regulation to those risks that present unacceptable exposure to the 
Federal deposit insurance system. Rules that are not necessary to 
protect against unacceptable risks, that do not support equitable 
access to banking services for all consumers, or that are not needed to 
accomplish other statutory responsibilities of the OCC will be 
eliminated.
    Where risks are meaningful and regulation is appropriate, rules 
will be examined to determine if they achieve their purpose at the 
least possible cost. In this regard, the OCC recognizes that one source 
of regulatory cost is the failure of regulations to provide clear 
guidance because they are simply difficult to follow and understand. 
Therefore, an important component of the OCC's effort will be to revise 
regulations, where appropriate, to improve clarity and better 
communicate the standards that the rules are intended to embody.

Lending Limits

    The national bank lending limits are one of the oldest and most 
important components of bank supervision. The first version of the 
lending limits was enacted over 130 years ago as part of the Currency 
Act of 1863,1 and the lending limits have been revised several 
times since then.
---------------------------------------------------------------------------

    \1\Act of February 25, 1863, 12 Stat. 665 et seq.
---------------------------------------------------------------------------

    The Garn-St Germain Depository Institutions Act, Public Law 97-320 
(1982), represents the most recent major statutory revision of the 
lending limits for national banks. Section 401(a) of that Act amended 
12 U.S.C. 84 to raise the amount that a national bank may lend to a 
single borrower from 10 to 15 percent of the bank's unimpaired capital 
and unimpaired surplus. It also added new exceptions, defined key 
terms, and provided express authority for the OCC to issue regulations 
to implement the statute, including regulations to define or further 
define terms and to establish limits or requirements other than those 
contained in the statute for particular classes or categories of loans.
    The OCC implemented the amended 12 U.S.C. 84 with a final rule 
published on April 12, 1983 (48 FR 15844). This final rule created a 
new part 32 in title 12 of the Code of Federal Regulations which 
replaced and restructured existing interpretive rulings previously 
found at 12 CFR part 7. The OCC proposed another major regulatory 
revision of the lending limits for national banks on October 24, 1989 
(54 FR 43398). A final rule was never adopted, however.
    The revisions proposed today address developments that have 
occurred since the lending limits were last revised and also seek to 
implement the goals of the OCC's regulation review program, described 
above.

Proposal

    The proposal revises the text of the regulation to improve clarity 
and to address frequently asked questions. For ease of reference, the 
regulation is reorganized to group related subjects together, and to 
incorporate interpretive rulings and significant OCC interpretive 
positions. The proposed regulation begins with the authority, purpose, 
and scope (Sec. 32.1), followed by the definitions (Sec. 32.2), the 
general and special lending limits, and exceptions to the lending 
limits (Sec. 32.3), the date for calculating lending limits 
(Sec. 32.4), the combination rules (Sec. 32.5), and the treatment of 
nonconforming loans (Sec. 32.6).
    The following discussion identifies and explains significant 
proposed changes to the regulation. The OCC is requesting general 
comment on all aspects of the proposed regulation, as well as specific 
comment on major changes in the rules. A table summarizing the areas 
where changes are proposed is set forth at the end of this preamble.

Authority, Purpose and Scope (Sec. 32.1)

    The proposal amends the ``Purpose'' paragraph to add explicit 
reference to the objectives of safety and soundness, as well as the 
goals of loan diversification and equitable access to banking services. 
The ``Scope'' paragraph (1) clarifies language; (2) incorporates the 
interpretation that currently appears at 12 CFR 32.111, which states 
that the lending limits found in 12 CFR part 32 are separate and 
distinct from the limits on investment securities, found in 12 CFR part 
1; and (3) clarifies that extensions of credit to insiders of national 
banks are subject to additional limitations found at 12 U.S.C. 375a and 
375b, as interpreted by 12 CFR parts 31 and 215.

Definitions (Sec. 32.2)

    The proposal brings the definitions that are currently located in 
various places in the regulation into a single definitions section at 
the beginning of the regulation. It adds new definitions and revises 
many existing definitions to clarify their meaning and incorporate 
interpretative rulings and other significant OCC interpretive 
positions. Of particular note are the following proposed revisions:
Capital and Surplus
    The current definition of ``unimpaired capital and unimpaired 
surplus,'' which is the basis for calculating a bank's lending limits, 
refers to a special definition of ``capital and surplus,'' ultimately 
found at 12 CFR 3.100. This special definition differs from the 
components of Tier 1 and Tier 2 capital that are used for capital 
adequacy purposes. Capital adequacy also is generally determined on a 
quarterly basis, using information contained in a bank's Report of 
Condition and Income (Call Report). In contrast, the OCC's current 
lending limit rule requires lending limits to be calculated as of the 
date a loan is made.
    The OCC believes that the use of a special definition of capital as 
the basis for calculating lending limits, and the requirement to 
calculate limits as of the dates loans are made, may be unnecessarily 
burdensome and complicated. The OCC recognizes that national banks must 
currently comply with a number of regulations each of which define 
``capital and surplus'' according to a separate formula. As part of a 
general effort to reduce the number of capital formulas applicable to 
national banks, this proposal ties the formula and the date for 
determining capital and surplus that a bank must use for lending limit 
purposes to a capital figure that can be derived from its Call Report 
on a quarterly basis.
    The proposed definition of ``capital and surplus,'' found at 
Sec. 32.2(b), is composed of the bank's Tier 1 and Tier 2 capital, plus 
the balance of the bank's allowance for loan and lease losses (ALLL) 
not included in the total of the bank's Tier 1 and Tier 2 capital. The 
OCC is proposing to include the full amount of a bank's ALLL in the 
base for calculating a bank's lending limits because the full amount is 
currently included in that base. The OCC believes it is inadvisable to 
constrict the lending limit base at a time when concerns about credit 
availability are widespread, and believes this proposed change will not 
impact credit availability. Commenters are specifically requested to 
address this issue. Commenters also are specifically requested to 
address (1) the significance of the ALLL component in their lending 
limit calculations; (2) whether any other component of the current 
lending limit base should be included in the revised definition of 
``capital and surplus''; and (3) whether, on balance, an approach using 
Tier 1 and Tier 2 capital alone, would be preferable because of its 
simplicity.
    The revised definition of ``capital and surplus,'' together with 
the new dates for calculating capital, as described in more detail 
below, should be substantially easier for a bank to implement than the 
current definition, since all the components of the lending limits 
would be derived from calculations a bank must make for its Call 
Report.
Loans and Extensions of Credit
    The proposal amends the definition of ``loans and extensions of 
credit,'' found at paragraph (i), to incorporate interpretative rulings 
and other significant OCC interpretive positions that clarify the term. 
Paragraph (i)(1)(iii) adds the requirement that, in order for a bank's 
purchase of Type I securities subject to a repurchase agreement to be 
excluded from the definition of ``loans and extensions of credit,'' the 
bank must have assured control over or established its rights to the 
securities.
    Paragraph (i)(1)(vi) incorporates the OCC's current position that 
giving credit for uncollected items is a loan and extension of credit. 
However, the paragraph also creates an exception for instances where 
payment is required by Regulation CC of the Federal Reserve Board, 12 
CFR part 229. (Regulation CC specifies certain timeframes within which 
funds must be made available.)
    Paragraph (i)(2) lists items that are not ``loans and extensions of 
credit'' and contains several new provisions. Paragraph (i)(2)(i) 
excludes from the definition of ``loans and extensions of credit'' 
additional funds advanced to a borrower by a bank for taxes or 
insurance if the advance is for the protection of the bank. The 
additional advance would be treated as an extension of credit and taken 
into account in calculating the bank's lending limit, however, if the 
bank sought to make another loan to the borrower. Commenters are 
requested to address whether payments for purposes other than for taxes 
and insurance should be excluded from the definition of ``loans and 
extensions of credit'' and, if so, what standards should apply to those 
advances.
    Paragraph (i)(2)(ii) clarifies the types of accrued and discounted 
interest that qualify for an exclusion from the definition of ``loans 
and extensions of credit,'' and incorporates existing OCC policy by 
treating the accrued and discounted interest as an extension of credit 
if the bank seeks to make another loan to the borrower.
    Paragraph (i)(2)(iii) incorporates a longstanding OCC position 
excluding from the definition of ``loans and extensions of credit'' 
financed sales of a bank's own assets (including Other Real Estate 
Owned) if the financing does not put the bank in a worse position than 
when it held the asset.
    Paragraph (i)(2)(iv) adopts an OCC interpretive position and 
excludes from the definition of ``loans and extensions of credit'' 
certain loan renewals or restructurings if the bank first exercised 
best efforts to bring the loan into conformity with its lending limit.
    Paragraph (i)(2)(v) incorporates the treatment of loan 
participations currently set forth in Sec. 32.105 into the basic 
definition of ``loans and extensions of credit.'' Commenters are 
requested to address whether further clarifications are needed in that 
paragraph regarding the time period within which participations must be 
funded.
    Finally, commenters are also asked to identify whether there are 
other categories of transactions that should be included or 
specifically excluded from the definition of ``loans and extensions of 
credit.''

Lending Limits (Sec. 32.3)

    This proposed section brings together all the general and special 
lending limit rules and all the exceptions to the lending limits. 
Paragraph (a) incorporates and integrates the substance of current 
Sec. 32.3 (general limit) and Sec. 32.4 (additional general limit). 
Paragraph (b) collects into one paragraph all the types of loans that 
are subject to special lending limits and clarifies that loans secured 
by various types of collateral may qualify for more than one exception, 
i.e., that the exceptions may be cumulative. Paragraph (c) collects in 
one subsection all the types of loans that are not subject to the 
lending limits. Throughout this section, provisions have been revised 
to delete verbatim repetition of the statutory language.
    Paragraph (a) introduces the term ``combined general limit,'' which 
consists of the 15 percent general limit plus the 10 percent additional 
general limit for loans secured by readily marketable collateral. The 
revised paragraph eliminates specific language regarding monthly 
foreign exchange valuations. Financial instruments denominated in 
foreign currencies should be revalued in accordance with the procedures 
developed by the bank consistent with the treatment of other readily 
marketable collateral.
    Paragraph (b)(2) clarifies that in order to qualify for the special 
lending limit for loans arising from the discount of installment 
consumer paper, a bank must substantiate its reliance on the maker for 
payment with specific documentation supporting the bank's independent 
credit analysis and a certification from an authorized official of the 
bank that the bank is relying on the maker for repayment.
    Paragraph (b)(3)(ii) requires an inspection and valuation of 
livestock that is ``current, taking into account the nature and 
frequency of turnover of the livestock'' in order to qualify for the 
special lending limit for loans secured by documents covering 
livestock. The current rule requires an ``inspection and appraisal 
report'' performed at least every 12 months or more frequently as 
deemed prudent. This proposed change seeks to address the differences 
among livestock businesses and to remove the presumption that an 
inspection and appraisal report performed every 12 months is adequate. 
Commenters are specifically requested to address whether the revised 
language provides sufficient guidance regarding the timing of 
appraisals.
    Paragraph (b)(5) provides a new exception to the lending limits to 
enable a bank to renew a qualifying commitment to lend in order to 
complete the financing of a project in process. The purpose of the 
advance must be to protect the position of the bank, and the amount of 
the additional advance may not exceed the lesser of the unfunded 
portion of the original commitment or 5 percent of the bank's capital 
and surplus. This exception addresses situations in which developers 
and builders are unable to obtain funding from their original lender or 
substitute lenders to finish partially completed projects. By allowing 
a lender to complete funding, this exception reduces the likelihood 
that property will become OREO for the lending bank.
    The OCC requests commenters to address, consistent with safety and 
soundness, the merits of this proposed exception and address any other 
situations that may warrant consideration.
    Paragraph (c)(10) incorporates a longstanding OCC interpretive 
position regarding lease-note financing also known as the ``U.S. 
Leasing'' exception. The exception treats loans to leasing corporations 
for the purpose of purchasing equipment for lease as loans to the 
underlying lessees in certain circumstances.

Calculation of Lending Limits (Sec. 32.4)

    The proposal changes the way in which banks must calculate their 
lending limits. Instead of requiring that a bank calculate its capital 
each time it makes a loan, a bank generally will be able to use a 
capital figure that can be derived from its quarterly Call Report to 
determine its lending limit. This capital figure would be used to 
determine whether a bank's loans were legal when made and to determine 
whether a bank's existing loans have remained in conformity with the 
lending limit. The OCC anticipates that most banks will be able to rely 
exclusively on their Call Reports to determine their lending limit and, 
therefore, their the lending limit will not change between Call Report 
dates.
    A bank would, however, be required to calculate its limit between 
these quarterly dates if there were a change in the bank's capital 
category for purposes of prompt corrective action, or if a ``material 
event'' occurred and that event caused the bank's capital to decrease 
or increase by 10 percent or more. The proposal envisions that a 
``material event'' for this purpose need not be a single event 
occurring on a single day, but could include a series of related events 
that, in the aggregate, are material to the bank. The OCC believes it 
would be inappropriate for banks experiencing capital declines between 
quarterly Call Report dates to look only to a change in their prompt 
corrective action capital category as a basis for requiring 
recalculation of their lending limits. The OCC also expects banks to 
conscientiously evaluate whether capital declines between quarterly 
Call Report dates require recalculation of a bank's lending limit under 
the ``material event'' trigger.
    Commenters are specifically requested to address this new 
methodology and, in particular, whether a ``material event'' is a 
sufficiently definite concept to use as part of the recalculation 
standard, or whether a single percentage test, such as a 10 percent 
increase or decrease in capital, would be preferable. Commenters also 
are requested to address how this proposed approach would be affected 
by implementation of Statement of Financial Accounting Standards No. 
115, ``Accounting For Certain Investments in Debt and Equity 
Securities,'' which creates a new component of stockholders' equity 
based on unrealized holding gains or losses on securities available for 
sale.
    The proposal also retains for the OCC the ability to determine for 
safety and soundness reasons that a bank should calculate its lending 
limit more frequently than otherwise provided, for example, where a 
bank regularly lends close to its lending limit. In such cases, the OCC 
may give written notice to a bank directing the bank to calculate its 
lending limit at a more frequent interval. The notice will briefly 
explain why the OCC has determined to require the more frequent 
calculation.

Combination Rules (Sec. 32.5)

    The proposal restructures and clarifies aspects of the loan 
combination rules. The revised ``direct benefit'' test, found in 
paragraph (b), narrows the situations where a loan to one person is 
attributed to a third person because the third person receives the loan 
proceeds. As revised, the test does not attribute a loan to a third 
party when proceeds are transferred to the third party to acquire 
property, goods, or services from that party in a bona fide arms-length 
transaction. However, borrowed funds that are re-loaned to a third 
party would be attributed to the third party under this test. 
Commenters are specifically requested to address whether additional 
clarifications of, or limitations on, the test are appropriate, 
including whether the test should be eliminated, given the scope of the 
``common enterprise'' test, discussed below.
    The proposal also revises and reorganizes the ``common enterprise'' 
test, found in paragraph (c), to clarify its impact. Paragraph (c)(1) 
incorporates the OCC's current position regarding circumstances where 
loans to several borrowers will be combined under the ``common 
enterprise'' test because they depend upon a common source of 
repayment. Paragraph (c)(1) also incorporates the OCC's current 
position regarding the treatment of employer/employee situations for 
purposes of the ``common enterprise'' test by providing that an 
employer will not be treated as a source of repayment because of wages 
or salaries paid to an employee unless the employee controls the 
employer.
    Commenters are specifically requested to address these proposed 
changes and whether further simplification of the combination rules is 
appropriate. In particular, commenters are requested to address whether 
they would prefer a simpler test, which may contain ambiguities, or 
``bright line'' attribution rules that may be complex to apply in some 
situations, but which provide more certainty.

Nonconforming Loans (Sec. 32.6)

    This new section incorporates OCC policy that a bank will not be in 
violation of the lending limits when a loan that was legal when made 
becomes nonconforming as a result of several specifically defined 
events, provided the bank exercises best efforts to bring the loan into 
conformity with the lending limit. The events included in the 
regulation are: a decline in the bank's capital, a merger of borrowers, 
a merger of lenders, or a change in the lending limit rules.
    Commenters are specifically asked to address (1) whether the 
phrase, ``best efforts,'' needs additional clarification, and if so, 
how it might be defined or should be documented for the purposes of 
this section and Sec. 32.2(i)(2)(iv) on renewals of loans and 
extensions of credit, and (2) whether other events, if any, should be 
added to the list of circumstances that may cause a loan to become 
nonconforming.
    The regulation also notes that where an existing loan becomes 
nonconforming because of a decline in the value of collateral securing 
the loan, a bank will be given five business days, as is currently the 
case, to bring the loan into conformance with the bank's lending limit.
    Commenters are specifically asked to address whether this dual 
approach is reasonable. Commenters are also asked to discuss the effect 
of the new quarterly calculation of capital on conformity of existing 
loans with the lending limit.
    The OCC also welcomes comments on any aspect of the proposed 
regulation, and in particular, those issues specifically noted in this 
preamble, and those that could have an impact on credit availability.

Derivation Table.--Only Substantive Modifications, Additions and Changes
                              are Indicated                             
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   Revised provision       Original provision            Comments       
------------------------------------------------------------------------
Sec. 32.1..............  Sec. 32.1, Sec. 32.111.  Modified.             
Sec. 32.2(a)...........  Sec. 32.101............  Added and modified.   
  (b)..................  Sec. 32.2(c)...........  Significant change.   
  (c)..................  Sec. 32.6(h)(3)........  ......................
  (d)..................  Sec. 32.6(h)(4)........  ......................
  (e)..................  Sec. 32.2(d)...........  ......................
  (f)..................  Sec. 32.5 (a) (2) (v)..  Modified.             
  (g)..................  Sec. 32.4(b)...........  ......................
  (h)..................  Sec. 32.4(c) and (e)...  ......................
  (i)(1)(i)............  Sec. 32.2(a)...........  ......................
  (i)(1)(ii)...........  Sec. 32.2(a)...........                        
  (i)(1)(iii)..........  Sec. 32.103............  Modified.             
  (i)(1)(iv)...........  Sec. 32.104............  Modified.             
  (i)(1)(v)............  Sec. 32.105............  ......................
  (i)(1)(vi)...........  .......................  Added.                
  (i)(1)(vii)..........  Sec. 32.102(b).........  ......................
  (i)(1)(viii).........  Sec. 32.106............  Modified.             
  (i)(2)(i)............  .......................  Added.                
  (i)(2)(ii)...........  Sec. 32.108............  Modified.             
  (i)(2)(iii)..........  .......................  Added.                
  (i)(2)(iv)...........  .......................  Added.                
  (i)(2)(v)............  Sec. 32.107............  Modified.             
  (j)..................  Sec. 32.2(b)...........  ......................
  (k)..................  Sec. 32.2(f)...........  ......................
  (l)..................  Sec. 32.4(c)...........  ......................
  (m)..................  Sec. 32.6(c)(3)........  ......................
  (n)..................  Sec. 32.102(a).........  ......................
  (o)..................  Sec. 32.2(e)...........  ......................
Sec. 32.3(a)...........  Sec. 32.3 and Sec. 32.4  Modified.             
  (b)(1)...............  Sec. 32.6(c)...........  ......................
  (b)(2)...............  Sec. 32.6(h)...........  Modified.             
  (b)(3)...............  Sec. 32.6(i)(1)........  Modified.             
  (b)(4)...............  Sec. 32.6(i)(2)........  ......................
  (b)(5)...............  .......................  Significant addition. 
  (b)(6)...............  Sec. 32.8..............  ......................
  (c)(1)...............  Sec. 32.6(a)...........  ......................
  (c)(2)...............  Sec. 32.6(b)...........  ......................
  (c)(3)...............  Sec. 32.6(d)...........  ......................
  (c)(4)...............  Sec. 32.6(e)...........  ......................
  (c)(5)...............  Sec. 32.109............  ......................
  (c)(6)...............  Sec. 32.6(f)...........  ......................
  (c)(7)...............  Sec. 32.6(g)...........  ......................
  (c)(8)...............  Sec. 32.6(j)...........  ......................
  (c)(9)...............  Sec. 32.110............  ......................
  (c)(10)..............  .......................  Added.                
Sec. 32.4..............  .......................  Significant addition. 
Sec. 32.5(a)...........  Sec. 32.5(a)(1)........  ......................
  (b)..................  .......................  Significant change.   
  (c)..................  Sec. 32.5(a)(2)........  Modified.             
  (d)..................  Sec. 32.5(b)...........  ......................
  (e)..................  Sec. 32.5(c)...........  ......................
  (f)..................  Sec. 32.5(d)...........  ......................
Sec. 32.6..............  Sec. 32.7..............  Modified.             
------------------------------------------------------------------------

Regulatory Flexibility Act

    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
regulation will reduce the regulatory burden on national banks, 
regardless of size, by simplifying and clarifying existing regulatory 
requirements.

Executive Order 12866

    It has been determined that this document is not a significant 
regulatory action. The impact of this proposed rule is expected to be 
slight and will benefit banks by simplifying and clarifying existing 
regulatory requirements.

List of Subjects in 12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set out in the preamble, part 32 of chapter I of 
title 12 of the Code of Federal Regulations is proposed to be revised 
to read as follows:

PART 32--LENDING LIMITS

Sec.
32.1  Authority, purpose and scope.
32.2  Definitions.
32.3  Lending limits.
32.4  Calculation of lending limits.
32.5  Combination rules.
32.6  Nonconforming loans.

    Authority: 12 U.S.C. 1 et seq., 84, and 93a.


Sec. 32.1  Authority, purpose and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 84, and 12 U.S.C. 93a.
    (b) Purpose. The purpose of this part is to protect the safety and 
soundness of national banks by preventing excessive loans to one 
person, or to related persons that are financially dependent, and to 
promote diversification of loans and equitable access to banking 
services.
    (c) Scope. (1) This part applies to all loans and extensions of 
credit made by national banks and their domestic operating 
subsidiaries. This part does not apply to loans made by a national bank 
and its domestic operating subsidiaries to the bank's ``affiliates,'' 
as that term is defined in 12 U.S.C. 371c(b)(1), or to the bank's 
operating subsidiaries, or to Edge Act or Agreement Corporation 
subsidiaries.
    (2) The lending limits in this part are separate and independent 
from the investment limits prescribed by 12 U.S.C. 24(7), and a 
national bank may make loans or extensions of credit to one borrower up 
to the full amount permitted by this part and also hold eligible 
investment securities of the same obligor up to the full amount 
permitted under 12 U.S.C. 24(7) and 12 CFR part 1.
    (3) Extensions of credit to executive officers, directors and 
principal shareholders of national banks, and their related interests 
are subject to limits prescribed by 12 U.S.C. 375a and 375b in addition 
to the lending limits established by 12 U.S.C. 84 and this part.


Sec. 32.2  Definitions.

    (a) Borrower means a person who is named as a borrower or debtor in 
a loan or extension of credit, or any other person, including a drawer, 
endorser, or guarantor, who is deemed to be a borrower under the 
``direct benefit'' or the ``common enterprise'' tests set forth in 
Sec. 32.5.
    (b) Capital and surplus means--
    (1) A bank's Tier 1 and Tier 2 capital as defined in the OCC's 
Minimum Capital Ratios in part 3 of this chapter; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 1 and Tier 2 capital, for purposes of the 
calculation of risk-based capital under part 3 of this chapter.
    (c) Consumer means the user of any products, commodities, goods, or 
services, whether leased or purchased, but does not include any person 
who purchases products or commodities for resale or fabrication into 
goods for sale.
    (d) Consumer paper means paper relating to automobiles, mobile 
homes, residences, office equipment, household items, tuition fees, 
insurance premium fees, and similar consumer items. Consumer paper also 
includes paper covering the lease (where the bank is not the owner or 
lessor) or purchase of equipment for use in manufacturing, farming, 
construction, or excavation.
    (e) Contractual commitment to advance funds. (1) The term includes 
a bank's obligation to--
    (i) Make payment (directly or indirectly) to a third person 
contingent upon default by a customer of the bank in performing an 
obligation and to make such payment in keeping with the agreed upon 
terms of the customer's contract with the third person, or to make 
payments upon some other stated condition;
    (ii) Guarantee or act as surety for the benefit of a person;
    (iii) Advance funds under a qualifying commitment to lend, as 
defined in paragraph (k) of this section; and
    (iv) Advance funds under a standby letter of credit as defined in 
Sec. 32.2(o), put, or other similar arrangement.
    (2) The term does not include commercial letters of credit and 
similar instruments where the issuing bank expects the beneficiary to 
draw on the issuer, that do not guarantee payment, and that do not 
provide for payment in the event of a default by a third party.
    (f) Control is presumed to exist when a person directly or 
indirectly, or acting through or together with one or more persons--
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person.
    (g) Current market value means the bid or closing price listed for 
an item in a regularly published listing or an electronic reporting 
service.
    (h) Financial instrument means stocks, notes, bonds, and debentures 
traded on a national securities exchange, OTC margin stocks as defined 
in Regulation U, 12 CFR part 221, commercial paper, negotiable 
certificates of deposit, bankers' acceptances, and shares in money 
market and mutual funds of the type that issue shares in which banks 
may perfect a security interest. Financial instruments may be 
denominated in foreign currencies that are freely convertible to U.S. 
dollars. The term ``financial instrument'' does not include mortgages.
    (i) Loans and extensions of credit means a bank's direct or 
indirect advance of funds to a borrower based on an obligation of that 
borrower to repay the funds or repayable from specific property pledged 
by or on behalf of the borrower.
    (1) Loans or extensions of credit for purposes of 12 U.S.C. 84 and 
this part include--
    (i) A contractual commitment to advance funds, as defined in 
paragraph (e) of this section;
    (ii) A maker or endorser's obligation arising from a bank's 
discount of commercial paper;
    (iii) A bank's purchase of securities subject to an agreement that 
the seller will repurchase the securities at the end of a stated 
period, but not including a bank's purchase of Type I securities, as 
defined in Sec. 1.3(c) of this chapter, subject to a repurchase 
agreement, where the purchasing bank has assured control over or has 
established its rights to the Type I securities as collateral;
    (iv) A bank's purchase of third-party paper subject to an agreement 
that the seller will repurchase the paper upon default or at the end of 
a stated period. The amount of the bank's loan is the total unpaid 
balance of the paper owned by the bank less any applicable dealer 
reserves retained by the bank and held by the bank as collateral 
security. Where the seller's obligation to repurchase is limited, the 
bank's loan is measured by the total amount of the paper the seller may 
ultimately be obligated to repurchase. A bank's purchase of third party 
paper without direct or indirect recourse to the seller is not a loan 
or extension of credit to the seller;
    (v) An overdraft, whether or not prearranged, but not an intra-day 
or daylight overdraft;
    (vi) Amounts paid against uncollected funds, except as required by 
12 CFR part 229;
    (vii) The sale of Federal funds with a maturity of more than one 
business day, but not Federal funds with a maturity of one day or less 
or Federal funds sold under a continuing contract; and
    (viii) Loans or extensions of credit that have been charged off on 
the books of the bank in whole or in part, unless the loan or extension 
of credit--
    (A) Has become unenforceable by reason of discharge in bankruptcy; 
or
    (B) Is no longer legally enforceable because of expiration of the 
statute of limitations or a judicial decision.
    (2) The following items do not constitute loans or extensions of 
credit for purposes of 12 U.S.C. 84 and this part--
    (i) Additional funds advanced to a borrower by a bank for taxes or 
for insurance if the advance is for the protection of the bank, and 
provided that such amounts must be treated as an extension of credit if 
a new loan or extension of credit is made to the borrower;
    (ii) Accrued and discounted interest on an existing loan or 
extension of credit, including interest that has been capitalized from 
prior notes and interest that has been advanced under terms and 
conditions of a loan agreement, and provided that such amounts must be 
treated as an extension of credit if a new loan or extension of credit 
is made to the borrower;
    (iii) Financed sales of a bank's own assets, including Other Real 
Estate Owned, if the financing does not put the bank in a worse 
position than when the bank held title to the assets;
    (iv) A renewal or restructuring of a loan as a new ``loan or 
extension of credit,'' following the exercise by a bank of best 
efforts, consistent with safe and sound banking practices, to bring the 
loan into conformance with the lending limit, unless new funds are 
advanced by the bank to the borrower (except as permitted by 
Sec. 32.3(b)(5)), or a new borrower is substituted for the original 
borrower, or unless the OCC determines that a renewal or restructuring 
was undertaken as a means to evade the bank's lending limit; and
    (v) That portion of a loan or extension of credit sold as a 
participation by a bank on a nonrecourse basis, provided that the 
participation results in a pro rata sharing of credit risk 
proportionate to the respective interests of the originating and 
participating lenders. Where a participation agreement provides that 
repayment must be applied first to the portions sold, a pro rata 
sharing will be deemed to exist only if the agreement also provides 
that, in the event of a default or comparable event defined in the 
agreement, participants must share in all subsequent repayments and 
collections in proportion to their percentage participation at the time 
of the occurrence of the event. Where an originating bank funds the 
entire loan, it must receive funding from the participants on the same 
day or the portions funded will be treated as loans by the originating 
bank to the borrower.
    (j) Person means an individual; sole proprietorship; partnership; 
joint venture; association; trust; estate; business trust; corporation; 
not-for-profit corporation; sovereign government or agency, 
instrumentality, or political subdivision thereof; or any similar 
entity or organization.
    (k) Qualifying commitment to lend means a legally binding written 
commitment to lend that, when combined with all other outstanding loans 
and qualifying commitments to a borrower, was within the bank's lending 
limit when entered into, and has not been disqualified.
    (1) In determining whether a commitment is within the bank's 
lending limit when made, the bank may deduct from the amount of the 
commitment the amount of any legally binding loan participation 
commitments that are issued concurrent with the bank's commitment and 
that would be excluded from the definition of ``loan or extension of 
credit'' under Sec. 32.2(i)(2)(v).
    (2) If the bank subsequently chooses to make an additional loan and 
that subsequent loan, together with all outstanding loans and 
qualifying commitments to a borrower, exceeds the bank's applicable 
lending limit at that time, the bank's qualifying commitments to the 
borrower that exceed the bank's lending limit at that time are deemed 
to be permanently disqualified, beginning with the most recent 
qualifying commitment and proceeding in reverse chronological order. 
When a commitment is disqualified, the entire commitment is 
disqualified and the disqualified commitment is no longer considered a 
``loan or extension of credit.'' Advances of funds under a disqualified 
or non-qualifying commitment may only be made to the extent that the 
advance, together with all other outstanding loans to the borrower, do 
not exceed the bank's lending limit at the time of the advance, 
calculated pursuant to Sec. 32.4.
    (l) Readily marketable collateral means financial instruments and 
bullion that are salable under ordinary market conditions with 
reasonable promptness at a fair market value determined by quotations 
based upon actual transactions on an auction or similarly available 
daily bid and ask price market.
    (m) Readily marketable staple means an article of commerce, 
agriculture, or industry, such as wheat and other grains, cotton, wool, 
and basic metals such as tin, copper and lead, in the form of 
standardized interchangeable units, that is easy to sell in a market 
with sufficiently frequent price quotations.
    (1) An article comes within this definition if--
    (i) The exact price is easy to determine; and
    (ii) The staple itself is easy to sell at any time at a price that 
would not be considerably less than the amount at which it is valued as 
collateral.
    (2) Whether an article qualifies as a readily marketable staple is 
determined on the basis of the conditions existing at the time the loan 
or extension of credit that is secured by the staples is made.
    (n) Sale of Federal funds means any transaction between depository 
institutions involving the transfer of immediately available funds 
resulting from credits to deposit balances at Federal Reserve Banks, or 
from credits to new or existing deposit balances due from a 
correspondent depository institution.
    (o) Standby letter of credit means any letter of credit, or similar 
arrangement, that represents an obligation to the beneficiary on the 
part of the issuer:
    (1) To repay money borrowed by or advanced to or for the account of 
the account party;
    (2) To make payment on account of any indebtedness undertaken by 
the account party; or
    (3) To make payment on account of any default by the account party 
in the performance of an obligation.


Sec. 32.3  Lending limits.

    (a) Combined general limit. A national bank's total outstanding 
loans and extensions of credit to one borrower may not exceed 15 
percent of the bank's capital and surplus, plus an additional 10 
percent of the bank's capital and surplus, if the amount that exceeds 
the bank's 15 percent general limit is fully secured by readily 
marketable collateral, as defined in Sec. 32.2(l). To qualify for the 
additional 10 percent limit, the bank 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 15 percent 
general limit.
    (b) Loans subject to special lending limits. The following loans or 
extensions of credit are subject to the lending limits set forth below. 
When loans and extensions of credit qualify for more than one special 
lending limit, the special limits are cumulative.
    (1) Loans secured by bills of lading or warehouse receipts covering 
readily marketable staples. (i) A national bank's loans or extensions 
of credit to one borrower secured by bills of lading, warehouse 
receipts, or similar documents transferring or securing title to 
readily marketable staples, as defined in Sec. 32.2(m), may not exceed 
35 percent of the bank's capital and surplus in addition to the amount 
allowed under the bank's combined general limit. The market value of 
the staples securing the loan must at all times equal at least 115 
percent of the amount of the outstanding loan that exceeds the bank's 
combined general limit.
    (ii) Staples that qualify for this special limit must be 
nonperishable, may be refrigerated or frozen, and must be fully covered 
by insurance if such insurance is customary. Whether a staple is non-
perishable must be determined on a case-by-case basis because of 
differences in handling and storing commodities.
    (iii) This special limit applies to a loan or extension of credit 
arising from a single transaction or secured by the same staples, 
provided that the duration of the loan or extension of credit is:
    (A) Not more than 10 months if secured by nonperishable staples; or
    (B) Not more than six months if secured by refrigerated or frozen 
staples.
    (iv) The holder of the warehouse receipts, order bills of lading, 
documents qualifying as documents of title under the Uniform Commercial 
Code, or other similar documents, must have control and be able to 
obtain immediate possession of the staple so that the bank is able to 
sell the underlying staples and promptly transfer title and possession 
to a purchaser if default should occur on a loan secured by such 
documents. The existence of a brief notice period, or similar 
procedural requirements under applicable law, for the disposal of the 
collateral will not affect the eligibility of the instruments for this 
special limit.
    (A) Field warehouse receipts are an acceptable form of collateral 
when issued by a duly bonded and licensed grain elevator or warehouse 
having exclusive possession and control of the staples even though the 
grain elevator or warehouse is maintained on the premises of the owner 
of the staples.
    (B) Warehouse receipts issued by the borrower-owner that is a grain 
elevator or warehouse company, duly-bonded and licensed and regularly 
inspected by state or Federal authorities, may be considered eligible 
collateral under this provision only when the receipts are registered 
with an independent registrar whose consent is required before the 
staples may be withdrawn from the warehouse.
    (2) Discount of installment consumer paper. (i) A national bank's 
loans and extensions of credit to one borrower that arise from the 
discount of negotiable or nonnegotiable installment consumer paper, as 
defined at Sec. 32.2(d), that carries a full recourse endorsement or 
unconditional guarantee by the person selling the paper, may not exceed 
10 percent of the bank's capital and surplus in addition to the amount 
allowed under the bank's combined general limit. An unconditional 
guarantee may be in the form of a repurchase agreement or separate 
guarantee agreement. A condition reasonably within the power of the 
bank to perform, such as the repossession of collateral, will not make 
conditional an otherwise unconditional guarantee.
    (ii) Where the seller of the paper offers only partial recourse to 
the bank, the lending limits of this section apply to the obligation of 
the seller to the bank, which is measured by the total amount of paper 
the seller may be obligated to repurchase or has guaranteed.
    (iii) Where the bank is relying primarily upon the maker of the 
paper for payment of the loans or extensions of credit and not upon any 
full or partial recourse endorsement or guarantee by the seller of the 
paper, the lending limits of this section apply only to the maker. The 
bank must substantiate its reliance on the maker with--
    (A) Records supporting the bank's independent credit analysis of 
the maker's ability to repay the loan or extension of credit, 
maintained by the bank or by a third party that is contractually 
obligated to make those records available for examination purposes; and
    (B) A written certification by an officer of the bank authorized by 
the bank's board of directors or any designee of that officer, that the 
bank is relying primarily upon the maker to repay the loan or extension 
of credit.
    (iv) Where paper is purchased in substantial quantities, the 
records, evaluation, and certification must be in a form appropriate 
for the class and quantity of paper involved. The bank may use sampling 
techniques, or other appropriate methods, to independently verify the 
reliability of the credit information supplied by the seller.
    (3) Loans secured by documents covering livestock. (i) A national 
bank's loans or extensions of credit to one borrower secured by 
shipping documents or instruments that transfer or secure title to or 
give a first lien on livestock may not exceed 10 percent of the bank's 
capital and surplus in addition to the amount allowed under the bank's 
combined general limit. The market value of the livestock securing the 
loan must at all times equal at least 115 percent of the amount of the 
outstanding loan that exceeds the bank's combined general limit. For 
purposes of this paragraph, the term ``livestock'' includes dairy and 
beef cattle, hogs, sheep, goats, horses, mules, poultry and fish, 
whether or not held for resale.
    (ii) The bank must maintain in its files an inspection and 
valuation for the livestock pledged that is reasonably current, taking 
into account the nature and frequency of turnover of the livestock to 
which the documents relate.
    (iii) Under the laws of certain states, persons furnishing 
pasturage under a grazing contract may have a lien on the livestock for 
the amount due for pasturage. If a lien that is based on pasturage 
furnished by the lienor prior to the bank's loan or extension of credit 
is assigned to the bank by a recordable instrument and protected 
against being defeated by some other lien or claim, by payment to a 
person other than the bank, or otherwise, it will qualify under this 
exception provided the amount of the perfected lien is at least equal 
to the amount of the loan and the value of the livestock is at no time 
less than 115 percent of the portion of the loan or extension of credit 
that exceeds the bank's combined general limit. When the amount due 
under the grazing contract is dependent upon future performance, the 
resulting lien does not meet the requirements of the exception.
    (4) Loans secured by dairy cattle. A national bank's loans and 
extensions of credit to one borrower that arise from the discount by 
dealers in dairy cattle of paper given in payment for the cattle may 
not exceed 10 percent of the bank's capital and surplus in addition to 
the amount allowed under the bank's combined general limit. To qualify, 
the paper--
    (i) Must carry the full recourse endorsement or unconditional 
guarantee of the seller; and
    (ii) Must be secured by the cattle being sold, pursuant to liens 
that allow the bank to maintain a perfected security interest in the 
cattle under applicable law.
    (5) Additional advances to complete project financing pursuant to 
renewal of a qualifying commitment to lend. A national bank may renew a 
qualifying commitment to lend, as defined by Sec. 32.2(k), and complete 
funding under that commitment if all of the following criteria are 
met--
    (i) The advance is made to protect the position of the bank;
    (ii) The advance will enable the borrower to complete the project 
for which the qualifying commitment to lend was made; and
    (iii) The amount of the additional advance does not exceed the 
lesser of the unfunded portion of the bank's qualifying commitment to 
lend, or 5 percent of the bank's capital and surplus.
    (6) Agricultural or oil and gas loans--(i) Definitions. For 
purposes of this section--
    (A) Agricultural loans include loans or extensions of credit 
secured by farmland, loans to finance agricultural production and other 
loans to farmers reported in the bank's Report of Condition and Income 
(Call Report). Examples of these types of loans are loans for growing 
and storing of crops, breeding and marketing of livestock, financing 
fisheries, purchasing of farm machinery and equipment, maintaining and 
operating farms, and purchasing discounted notes of farmers.
    (B) Oil and gas loans include loans or extensions of credit to oil 
companies, petroleum refiners, and companies primarily engaged in the 
oil- and gas-related business, such as operating oil and gas field 
properties, contract drilling, performing exploration services on a 
contract basis, performing oil and gas field services, manufacturing or 
leasing of oil field machinery and equipment, transporting petroleum by 
pipeline, transmitting or distributing natural gas, and investing in 
oil and gas royalties or leases.
    (C) Special category loan charge-offs means agricultural or oil and 
gas loans charged-off during the period from January 1, 1986 through 
December 31, 1989, that have been reported in a special memorandum item 
in the bank's Call Report in accordance with the OCC's capital 
forbearance policy.
    (ii) Substitute lending limit. A national bank that had special 
category loan charge-offs resulting in a reduction in its capital and 
surplus since December 31, 1985, may substitute a lending limit 
calculated under this section for the bank's 15 percent general limit, 
up to a maximum amount of 20 percent of the bank's capital and surplus, 
until January 1, 1995.
    (iii) Calculation of lending limit. The substitute lending limit in 
paragraph (b)(6)(ii) of this section is the lesser of the following 
amounts:
    (A) 15 percent of the bank's capital and surplus on December 31, 
1985; or
    (B) 15 percent of the total of--
    (1) The difference between the sum of special category loan charge-
offs and the sum of recoveries on those charge-offs; plus
    (2) Capital and surplus; or
    (C) 20 percent of capital and surplus.
    (iv) Expiration. Paragraph (b)(6) of this section expires on 
January 1, 1995.
    (c) Loans not subject to the lending limits. The following loans or 
extensions of credit are not subject to the lending limits of 12 U.S.C. 
84 or this part.
    (1) Loans arising from the discount of commercial or business 
paper. (i) Loans or extensions of credit arising from the discount of 
negotiable commercial or business paper that evidences an obligation to 
the person negotiating the paper. The paper--
    (A) Must be given in payment of the purchase price of commodities 
purchased for resale, fabrication of a product, or any other business 
purpose that may reasonably be expected to provide funds for payment of 
the paper; and
    (B) Must bear the full recourse endorsement of the owner of the 
paper, except that paper discounted in connection with export 
transactions, that is transferred without recourse, or with limited 
recourse, must be supported by an assignment of appropriate insurance 
covering the political, credit, and transfer risks applicable to the 
paper, such as insurance provided by the Export-Import Bank, or the 
Foreign Credit Insurance Association.
    (ii) A failure to pay principal or interest on commercial or 
business paper when due does not result in a loan or extension of 
credit to the maker or endorser of the paper; however, the amount of 
such paper thereafter must be counted in determining whether additional 
loans or extensions of credit to the same borrower may be made within 
the limits of 12 U.S.C. 84 and this part.
    (2) Bankers' acceptances. A bank's acceptance of drafts eligible 
for rediscount under 12 U.S.C. 372 and 373, or a bank's purchase of 
acceptances created by other banks that are eligible for rediscount 
under those sections; but not including--
    (i) A bank's acceptance of drafts ineligible for rediscount (which 
constitutes a loan by the bank to the customer for whom the acceptance 
was made, in the amount of the draft);
    (ii) A bank's purchase of ineligible acceptances created by other 
banks (which constitutes a loan from the purchasing bank to the 
accepting bank, in the amount of the purchase price); and
    (iii) A bank's purchase of its own acceptances (which constitutes a 
loan to the bank's customer for whom the acceptance was made, in the 
amount of the purchase price).
    (3) Loans secured by U.S. obligations. Loans or extensions of 
credit, or portions thereof, to the extent fully secured by the current 
market value of bonds, notes, certificates of indebtedness, or Treasury 
bills of the United States or by similar obligations fully guaranteed 
as to principal and interest by the United States, where a security 
interest in the collateral has been perfected under applicable state 
law.
    (4) Loans to or guaranteed by a Federal agency.
    (i) Loans or extensions of credit to any department, agency, 
bureau, board, commission, or establishment of the United States or any 
corporation wholly owned directly or indirectly by the United States.
    (ii) Loans or extensions of credit, including portions thereof, to 
the extent secured by unconditional takeout commitments or guarantees 
of any of the foregoing governmental entities. The commitment or 
guarantee--
    (A) Must be payable in cash or its equivalent within 60 days after 
demand for payment is made;
    (B) Is considered unconditional if the protection afforded the bank 
is not substantially diminished or impaired if loss should result from 
factors beyond the bank's control. Protection against loss is not 
materially diminished or impaired by procedural requirements, such as 
an agreement to take over only in the event of default, including 
default over a specific period of time, a requirement that notification 
of default be given within a specific period after its occurrence, or a 
requirement of good faith on the part of the bank.
    (5) Loans to or guaranteed by general obligations of a State or 
political subdivision. Loans or extensions of credit to a State or 
political subdivision that constitutes a general obligation of the 
State or political subdivision, as defined in Sec. 1.3(g) of this 
chapter, and for which the lending bank has obtained the opinion of 
counsel that the loan or extension of credit is a valid and enforceable 
general obligation of the borrower, and loans or extensions of credit, 
including portions thereof, to the extent guaranteed or secured by a 
general obligation of a State or political subdivision and for which 
the lending bank has obtained the opinion of counsel that the guarantee 
or collateral is a valid and enforceable general obligation of that 
public body.
    (6) Loans secured by segregated deposit accounts. Loans or 
extensions of credit, including portions thereof, to the extent secured 
by a segregated deposit account in the lending bank, provided a 
security interest in the deposit has been perfected under applicable 
law.
    (i) Where the deposit is eligible for withdrawal before the secured 
loan matures, the bank must establish internal procedures to prevent 
release of the security without the bank's prior consent.
    (ii) A deposit that is denominated and payable in a currency other 
than that of the loan or extension of credit that it secures may be 
eligible for this exception if the currency is freely convertible to 
U.S. dollars.
    (iii) This exception applies to only that portion of the loan or 
extension of credit that is covered by the U.S. dollar value of the 
deposit.
    (iv) The lending bank must establish procedures to revalue foreign 
currency deposits to ensure that the loan or extension of credit 
remains fully secured at all times.
    (7) Loans to financial institutions with the approval of the 
Comptroller. Loans or extensions of credit to any financial institution 
or to any receiver, conservator, superintendent of banks, or other 
agent in charge of the business and property of a financial institution 
when an emergency situation exists and a national bank is asked to 
provide assistance to another financial institution, and the loan is 
approved by the Comptroller. For purposes of this paragraph, financial 
institution means a commercial bank, savings bank, trust company, 
savings association, or credit union.
    (8) Loans to the Student Loan Marketing Association. Loans or 
extensions of credit to the Student Loan Marketing Association.
    (9) Loans to industrial development authorities. A loan or 
extension of credit to an industrial development authority or similar 
public entity created to construct and lease a plant facility, 
including a health care facility, to an industrial occupant will be 
deemed a loan to the lessee, provided that--
    (i) The bank evaluates the creditworthiness of the industrial 
occupant before the loan is extended to the authority;
    (ii) The authority's liability on the loan is limited solely to 
whatever interest it has in the particular facility;
    (iii) The authority's interest is assigned to the bank as security 
for the loan or the industrial occupant issues a promissory note to the 
bank that provides a higher order of security than the assignment of a 
lease; and
    (iv) The industrial occupant's lease rentals are assigned and paid 
directly to the bank.
    (10) Loans to leasing corporations. A loan or extension of credit 
to a leasing corporation for the purpose of purchasing equipment for 
lease will be deemed a loan to the lessee, provided that--
    (i) The bank evaluates the creditworthiness of the lessee before 
the loan is extended to the leasing corporation;
    (ii) The loan is without recourse to the leasing corporation;
    (iii) The bank is given a security interest in the equipment and in 
the event of default, may proceed directly against the equipment and 
the lessee for any deficiency resulting from the sale of the equipment;
    (iv) The leasing corporation assigns all of its rights under the 
lease to the bank;
    (v) The lessee's lease payments are assigned and paid directly to 
the bank; and
    (vi) The lease payments assigned to the bank are sufficient to 
satisfy the loan to the leasing corporation with no allowance for 
salvage value or rents that could accrue through renewal or extension 
of the lease.


Sec. 32.4  Calculation of lending limits.

    (a) Calculation date. For purposes of determining compliance with 
12 U.S.C. 84 and this part, a bank's lending limit shall be calculated 
as of the most recent of the following dates--
    (1) When the bank's Consolidated Report of Condition and Income is 
required to be filed with the OCC;
    (2) When there is a change in the bank's capital category for 
purposes of 12 U.S.C. 1831o and part 6 of this chapter; or
    (3) When a material event (including a series of related events 
that are material in the aggregate) occurs that reduces or increases 
the bank's capital and surplus calculated under paragraphs (a)(1) or 
(a)(2) of this section by 10 percent or more.
    (b) Authority of OCC to require more frequent calculations. If the 
OCC determines for safety and soundness reasons that a bank should 
calculate its lending limit more frequently than required by paragraph 
(a) of this section, the OCC may provide written notice to the bank 
directing the bank to calculate its lending limit at a more frequent 
interval, and the bank shall thereafter calculate its lending limit at 
that interval.


Sec. 32.5  Combination rules.

    (a) General rule. 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.
    (b) Direct benefit. 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--
    (1) 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; or
    (2) When the OCC determines, based upon an evaluation of the facts 
and circumstances, that a party has directly benefited from a loan or 
extension of credit from the bank through the use of a nominee 
borrower.
    (c) Common enterprise. 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 as defined in Sec. 32.2(f), including where one borrower 
is directly or indirectly controlled by another borrower; and
    (ii) Substantial financial interdependence exists among 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 bank to acquire a business 
enterprise of which those borrowers will own more than 50 percent of 
the voting securities, in which case a common enterprise is deemed to 
exist between the borrowers; or
    (4) When the OCC determines, based upon an evaluation of the facts 
and circumstances of particular transactions, that a common enterprise 
exists.
    (d) Special rule for loans to a corporate group. (1) Loans or 
extensions of credit by a bank to a corporate group may not exceed 50 
percent of the bank'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 is a subsidiary of any person that owns or 
beneficially owns directly or indirectly more than 50 percent of the 
voting stock of the corporation.
    (2) Loans or extensions of credit to a person and its subsidiary, 
or to subsidiaries of a person, are not combined unless either the 
direct benefit or the common enterprise test is met.
    (e) Special rules for loans to partnerships, joint ventures, and 
associations. (1) Loans or extensions of credit to a partnership, joint 
venture, or association are deemed to be loans or extensions of credit 
to each member of the partnership, joint venture, or association. This 
rule does not apply to limited partners in limited partnerships or to 
members of joint ventures or associations if the partners or members, 
by the terms of the partnership or membership agreement, are not to be 
held generally liable for the debts or actions of the partnership, 
joint venture, or association, and those provisions are valid under 
applicable law.
    (2) Loans or extensions of credit to members of a partnership, 
joint venture, or association are not attributed to the partnership, 
joint venture, or association unless either the direct benefit or the 
common enterprise tests are met. Both the direct benefit and common 
enterprise tests are met between a member of a partnership, joint 
venture or association and such partnership, joint venture or 
association, when loans or extensions of credit are made to the member 
to purchase an interest in the partnership, joint venture or 
association.
    (3) Loans or extensions of credit to members of a partnership, 
joint venture, or association are not attributed to other members of 
the partnership, joint venture, or association unless either the direct 
benefit or common enterprise test is met.
    (f) Loans to foreign governments, their agencies, and 
instrumentalities--(1) Aggregation. Loans and extensions of credit to 
foreign governments, their agencies, and instrumentalities will be 
aggregated with one another only if the loans or extensions of credit 
fail to meet either the means test or the purpose test at the time the 
loan or extension of credit is made.
    (i) The means test is satisfied if the borrower has resources or 
revenue of its own sufficient to service its debt obligations. If the 
government's support (excluding guarantees by a central government of 
the borrower's debt), exceeds the borrower's annual revenues from other 
sources, it will be presumed that the means test has not been 
satisfied.
    (ii) The purpose test is satisfied if the purpose of the loan or 
extension of credit is consistent with the purposes of the borrower's 
general business.
    (2) Documentation. In order to show that the means and purpose 
tests have been satisfied, a bank must, at a minimum, retain in its 
files the following items:
    (i) A statement (accompanied by supporting documentation) 
describing the legal status and the degree of financial and operational 
autonomy of the borrowing entity;
    (ii) Financial statements for the borrowing entity for a minimum of 
three years prior to the date the loan or extension of credit was made 
or for each year that the borrowing entity has been in existence, if 
less than three;
    (iii) Financial statements for each year the loan or extension of 
credit is outstanding;
    (iv) The bank's assessment of the borrower's means of servicing the 
loan or extension of credit, including specific reasons in support of 
that assessment. The assessment shall include an analysis of the 
borrower's financial history, its present and projected economic and 
financial performance, and the significance of any financial support 
provided to the borrower by third parties, including the borrower's 
central government; and
    (v) A loan agreement or other written statement from the borrower 
which clearly describes the purpose of the loan or extension of credit. 
The written representation will ordinarily constitute sufficient 
evidence that the purpose test has been satisfied. However, when, at 
the time the funds are disbursed, the bank knows or has reason to know 
of other information suggesting that the borrower will use the proceeds 
in a manner inconsistent with the written representation, it may not, 
without further inquiry, accept the representation.
    (3) Restructured loans--(i) Non-combination rule. Notwithstanding 
paragraphs (a) through (e) of this section, when previously outstanding 
loans and other extensions of credit to a foreign government, its 
agencies, and instrumentalities (i.e., public-sector obligors) that 
qualified for a separate lending limit under paragraph (f)(1) of this 
section are consolidated under a central obligor in a qualifying 
restructuring, such loans will not be aggregated and attributed to the 
central obligor, notwithstanding any substitution in named obligors, 
solely because of the restructuring. Such loans (other than loans 
originally attributed to the central obligor in their own right) will 
not be considered obligations of the central obligor and will continue 
to be attributed to the original public-sector obligor for purposes of 
the lending limit.
    (ii) Qualifying restructuring. Loans and other extensions of credit 
to a foreign government, its agencies, and instrumentalities will 
qualify for the non-combination process under paragraph (f)(3)(i) of 
this section only if they are restructured in a sovereign debt 
restructuring approved by the OCC, upon request by a bank for 
application of the non-combination rule. The factors that the OCC will 
use in making this determination include, but are not limited to, the 
following:
    (A) Whether the restructuring involves a substantial portion of the 
total commercial bank loans outstanding to the foreign government, its 
agencies, and instrumentalities;
    (B) Whether the restructuring involves a substantial number of the 
foreign country's external commercial bank creditors;
    (C) Whether the restructuring and consolidation under a central 
obligor is being done primarily to facilitate external debt management; 
and
    (D) Whether the restructuring includes features of debt or debt-
service reduction.
    (iii) 50 percent aggregate limit. With respect to any case in which 
the non-combination process under paragraph (f)(3)(i) of this section 
applies, a national bank's loans and other extensions of credit to a 
foreign government, its agencies, instrumentalities, all other public-
sector borrowers (including restructured debt) shall not exceed, in the 
aggregate, 50 percent of the bank's unimpaired capital and unimpaired 
surplus.


Sec. 32.6  Nonconforming loans.

    (a) A loan, within a bank's legal lending limit when made, will 
become nonconforming if it is no longer in conformity with the bank's 
lending limit because--
    (1) the bank's capital has declined, borrowers have merged, lenders 
have merged, the lending limit rules have changed; or
    (2) collateral securing the loan to satisfy the requirements of a 
lending limit exception has declined in value.
    (b) A bank must exercise best efforts, consistent with safe and 
sound banking practices, to bring a loan that is nonconforming as a 
result of paragraph (a)(1) of this section into conformity with the 
lending limit.
    (c) A bank must bring a loan that is nonconforming as a result of 
paragraph (a)(2) of this section into conformity with the lending limit 
within five business days, except when judicial proceedings, regulatory 
actions or other extraordinary circumstances beyond the bank's control 
prevent the bank from taking action.


    Dated: October 10, 1993.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-3184 Filed 2-10-94; 8:45 am]
BILLING CODE 4810-33-P