[Federal Register Volume 61, Number 204 (Monday, October 21, 1996)]
[Rules and Regulations]
[Pages 54533-54538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26849]



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  Federal Register / Vol. 61, No. 204 / Monday, October 21, 1996 / 
Rules and Regulations  

[[Page 54533]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 31

[Docket No. 96-23]
RIN 1557-AB40


Extensions of Credit to Insiders and Transactions With Affiliates

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
revising its rules governing extensions of credit to national bank 
insiders. This rulemaking is another component of the OCC's Regulation 
Review Program to update and streamline OCC regulations and to reduce 
unnecessary regulatory costs and other burdens. The final rule 
modernizes and clarifies the insider lending rules and reduces 
unnecessary regulatory burdens where feasible, consistent with 
statutory requirements.

EFFECTIVE DATE: November 20, 1996.

FOR FURTHER INFORMATION CONTACT: Aline Henderson, Senior Attorney, Bank 
Activities and Structure (202) 874-5300; Emily McNaughton, National 
Bank Examiner, Credit & Management Policy (202) 874-5170; or Mark 
Tenhundfeld, Assistant Director, Legislative and Regulatory Activities 
(202) 874-5090, Office of the Comptroller of the Currency, 
Communications Division, 250 E Street, SW, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

Summary of Regulation Review Program

    The OCC is revising 12 CFR part 31 as another component of its 
Regulation Review Program (Program). The goal of the Program is to 
review all of the OCC's rules and to eliminate provisions that do not 
contribute significantly to maintaining the safety and soundness of 
national banks or to accomplishing the OCC's other statutory 
responsibilities. Another goal of the Program is to clarify regulations 
so that they more effectively convey the standards the OCC seeks to 
apply.
    The OCC intends for this final rule to reduce regulatory costs and 
other burdens on national banks by clarifying certain requirements and 
eliminating a separate statement of provisions that are similar to 
provisions found in the Federal Reserve Board's (the Board) Regulation 
O (12 CFR part 215) (Reg. O). The final rule also responds to 
commenters' requests for guidance on certain of the key differences 
between the requirements of part 31 (as amended by this final rule) and 
12 CFR part 32 (Lending Limits).

The Proposal

    Current part 31 contains two subparts. Subpart A implements 12 
U.S.C. 375a(4) and 375b(3) by setting a limit on the amount that a 
national bank may lend to any one of its executive officers other than 
for housing- and education-related loans and by establishing a 
threshold above which approval of the bank's board of directors is 
required for any loan to an insider. Subpart B implements 12 U.S.C. 
1817(k) and 1972(2)(G)(ii) by requiring a national bank to disclose, 
upon request, the names of its executive officers and principal 
shareholders who borrow more than specified amounts from the bank 
itself or from the bank's correspondent banks and to maintain records 
related to requests for this information. Subpart B also implements 12 
U.S.C. 1972(2)(G)(i), which requires a national bank's executive 
officers and principal shareholders to report on loans they or their 
related interests receive from the bank's correspondent banks.
    The OCC solicited comment in the proposal (60 FR 63461 (December 
11, 1995)) on whether the agency should adopt exceptions to the limit 
on loans that a national bank may make to its executive officers for 
loans that are secured by United States obligations, guaranteed by a 
Federal agency, or secured by a segregated deposit account, in order to 
be consistent with recent changes made by other agencies.1 The OCC 
also solicited comment on proposed changes intended to clarify and 
simplify the former rule by removing provisions that no longer are 
necessary. Finally, the OCC invited comments on whether guidance would 
be helpful on the differences between the insider lending limits and 
the loans-to-one-borrower limits.
---------------------------------------------------------------------------

    \1\ See 59 FR 66666 (December 28, 1994) (amending the Federal 
Deposit Insurance Corporation's rule) and 59 FR 8831 (February 24, 
1994) (amending the Board's rule). The Office of Thrift 
Supervision's regulation automatically applies the Board's rule to 
thrifts. See 12 CFR 563.43.
---------------------------------------------------------------------------

The Final Rule and Comments Received

    The OCC received eleven comments in response to the proposal, most 
of which supported the proposed changes. In many cases, a commenter 
expressed support for the proposed changes and then requested that the 
OCC reduce burden further. These comments fall for the most part into 
two broad categories: First, that the OCC either eliminate part 31 
altogether or remove those provisions that substantively are identical 
to provisions in Reg. O; and second, that the OCC relax or clarify 
various restrictions that currently apply to loans to insiders. These 
comments are addressed in greater detail in the text that follows.
    Adoption of proposed exceptions. Commenters addressing this issue 
uniformly supported adopting the three proposed exceptions to the 
limits that apply to loans to an executive officer. The OCC continues 
to believe that these exceptions are appropriate for two reasons. 
First, the OCC recognizes that a lending bank's position clearly is 
protected where a loan is secured by obligations of the United States, 
guaranteed by a Federal agency, or secured by a segregated deposit 
account. The strength of the security in these situations reduces the 
need for the additional protections against insider abuse that the 
lower limits on loans to executive officers provide. Second, conforming 
the OCC's regulation to those of the other Federal banking agencies is 
consistent with section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (CDRI Act) (12 U.S.C. 4803) (which 
requires each agency to work with the other Federal banking agencies to 
make uniform all regulations and guidelines implementing common 
statutory or

[[Page 54534]]

supervisory policies). Accordingly, the OCC adopts the exceptions as 
proposed.
    Elimination of part 31. One commenter suggested that the OCC 
eliminate part 31 in its entirety. This commenter stated that part 31 
is unnecessary because national banks, as member banks, must comply 
with Reg. O. Another commenter suggested that the OCC eliminate 
requirements in part 31 that duplicate requirements in Reg. O. In this 
commenter's view, national banks are put at a disadvantage by having to 
comply with the more restrictive set of rules if part 31 and Reg. O 
differ. Finally, a third commenter stated that, if the OCC retains a 
separate rule, the rule should be identical to comparable provisions in 
Reg. O because even stylistic differences raise the question of whether 
a substantive difference is intended.
    In light of these comments and the agency's further internal 
considerations, the OCC has decided simply to state in its rule that a 
national bank and its insiders shall comply with provisions contained 
in 12 CFR part 215. The final rule therefore eliminates from part 31 
those sections that are redundant in light of comparable provisions in 
Reg. O. The reference in the final rule to 12 CFR part 215 includes the 
exceptions to the limits on the amount of loans a bank may make to its 
insiders. The OCC agrees with the commenters that part 31 is 
substantively identical to comparable restrictions in Reg. O (with the 
addition of the exceptions that are being adopted as part of this final 
rule) and that compliance would be simplified by eliminating a 
restatement of the provisions in question.
    The OCC is not eliminating part 31 altogether because several 
provisions in the statutes that part 31 implements mandate that certain 
restrictions be set by the ``appropriate Federal banking agency.'' For 
instance, section 22(g) of the Federal Reserve Act (12 U.S.C. 375a(4)) 
states that a member bank may make extensions of credit not otherwise 
specifically authorized under that section in an amount ``prescribed by 
regulation of the member bank's appropriate Federal banking agency.'' 
Similarly, section 22(h) of the Federal Reserve Act (12 U.S.C. 375b(3)) 
states that a member bank must obtain the approval of the bank's board 
of directors before extending credit to an insider in an amount that 
would exceed a threshold established by regulation by the bank's 
``appropriate Federal banking agency (as defined in section 3 of the 
Federal Deposit Insurance Act)* * *.'' See also 12 U.S.C. 1817(k) 
(regarding reports on, and disclosure of, loans by a bank to its 
executive officers and principal shareholders) and 12 U.S.C. 
1972(2)(G)(ii) (regarding reports on, and disclosure of, loans by a 
correspondent bank to the reporting bank's executive officers and 
principal shareholders).
    The OCC believes that adopting a regulation that incorporates 
restrictions from another regulation satisfies its obligation to 
implement these statutes. Moreover, this eliminates any confusion that 
may exist concerning, for instance, whether the OCC intends for the 
rules to be identical to those adopted by the Board or whether national 
banks must comply with a different and/or more restrictive provision.
    Relaxation or clarification of restrictions. Several commenters, 
while supporting the proposed changes, asked that the OCC relax certain 
provisions governing insider lending. Others suggested amendments to 
clarify existing ambiguities.
    Two commenters seeking a relaxation of various standards objected 
to provisions that are mandated by statute. One of these commenters 
suggested that the OCC eliminate the requirement that an executive 
officer submit a detailed current financial statement as a condition of 
receiving credit from the officer's bank. However, this requirement 
comes from section 22(g)(1)(C) of the Federal Reserve Act (12 U.S.C. 
375a(1)(C)) and thus cannot be eliminated by a regulation. Another 
commenter suggested that the OCC eliminate the prior approval 
requirements and the requirement that a loan to an executive officer be 
payable on demand whenever the officer becomes indebted to other banks 
in an amount greater than the officer could borrow from his or her own 
bank. These, too, are mandated by statutes. See 12 U.S.C. 375b(3) and 
375a(1)(D), respectively. Accordingly, the OCC has not made the changes 
suggested by these commenters.
    In other cases, commenters requested that the OCC unilaterally 
adopt changes to certain insider lending restrictions that have been 
established by regulation. For instance, three commenters requested 
that the OCC raise the maximum amount that a national bank may lend to 
one of its executive officers. Another commenter suggested that the OCC 
exempt loans secured by readily marketable securities or cash value 
life insurance policies from the limits on loans to an executive 
officer. Two other commenters requested that the OCC clarify certain 
provisions that these commenters find ambiguous. The first of these 
commenters noted that bank holding companies are excluded from 
definition of ``principal shareholder'' in 12 CFR 215.2(m) but are 
included in the definition of the same term in 12 CFR 215.11(a)(1). The 
commenter stated that this difference requires the preparation of many 
unnecessary reports of loans made by correspondent banks to 
subsidiaries of a member bank's parent holding company. Another 
commenter requested that the OCC clarify which provisions of the 
insider lending restrictions apply to subsidiaries of a bank.
    The OCC believes these types of changes should be considered on an 
interagency basis, which also would be consistent with section 303 of 
the CDRI Act. For these reasons, the OCC has declined to make the 
changes suggested, but will discuss these suggestions with the other 
Federal banking agencies.
    The following discussion summarizes the amendments to part 31 and 
the remaining comments.

Title of Regulation

    The final rule changes the title of part 31 from ``Extensions of 
credit to national bank insiders'' to ``Extensions of credit to 
insiders and transactions with affiliates.'' This change reflects the 
relocation to part 31 of two interpretations regarding transactions 
with affiliates that formerly were set out in part 7.

Authority (Sec. 31.1)

    The final rule states that part 31 is issued by the Comptroller of 
the Currency pursuant to 12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and 
1972(2)(G), as amended. With the exception of 12 U.S.C. 93a (which 
provides general rulemaking authority to the OCC), each of these 
sections directs or authorizes the appropriate Federal banking agency 
to issue rules governing various aspects of loans to insiders.

Insider Lending Restrictions and Reporting Requirements (Sec. 31.2)

    The final rule implements the statutes identified in Sec. 31.1 by 
requiring national banks to comply with the provisions of Reg. O. These 
statutes are implemented as follows: 12 U.S.C. 375a(4) is implemented 
in Sec. 215.5 (b) and (c) of Reg. O; 12 U.S.C. 375b(3) is implemented 
in Sec. 215.4(b); 12 U.S.C. 1817(k) is implemented in Sec. 215.11; and 
12 U.S.C. 1972(2)(G) is implemented in subpart B of part 215. Because 
national banks are members of the Federal Reserve System, the remaining 
provisions in Reg. O implementing other provisions of the insider 
lending statutes also apply to national banks. Thus, rather than create 
the impression that national banks are to comply with

[[Page 54535]]

only some of Reg. O's provisions (namely, those provisions that 
implement the statutes identified in Sec. 31.1), the final rule simply 
states that national banks and their insiders shall comply with all of 
Reg. O.
    By stating the OCC's rule in this way, the final rule incorporates 
the definitions used in Reg. O. In order to promote uniformity between 
part 31 and Reg. O, the final rule does not distinguish between insured 
and uninsured national banks in the definition of ``bank'' as that term 
was used in former Sec. 31.5(a)(1). Finally, the rule clarifies that 
the OCC administers and enforces Reg. O as it applies to national 
banks.
    The OCC intends for the provisions of Reg. O that have been 
incorporated, as now or hereafter in effect, to govern insider lending 
by national banks. The OCC will review subsequent revisions to Reg. O 
and will publish further amendments to part 31 if necessary.

Interpretations (Appendix A)

    Earlier this year, the OCC relocated several interpretations 
pertaining to section 23A of the Federal Reserve Act (12 U.S.C. 371c) 
that formerly appeared in part 7. See 61 FR 4849 (February 9, 1996) 
(relocating 12 CFR 7.7360--loans secured by stock or obligations of an 
affiliate, 7.7365--Federal funds transactions between affiliates, and 
7.7370--deposits between affiliated banks). The OCC relocated these 
interpretations to part 31 because the section 23A interpretations and 
part 31 stem from similar concerns about persons or entities taking 
undue advantage of positions of influence and thereby adversely 
affecting the safety and soundness of a national bank.
    The final rule amends the interpretation concerning loans secured 
by stock or obligations of an affiliate (Section 1) to emphasize that a 
loan is a covered transaction for purposes of section 23A if the loan 
proceeds in the circumstances identified in the interpretation are used 
for the benefit of, or transferred to, an affiliate.
    The final rule removes the interpretation concerning Federal funds 
transactions between affiliates (proposed Sec. 31.101). This 
interpretation is substantively identical to a Board interpretation 
(see 12 CFR 250.160) that applies to all member banks. Accordingly, 
there is no need for the OCC to restate this provision.
    The remaining interpretation (Section 2) has been restated without 
amendment.

Guidance Regarding Differences Between Lending Limits and Insider 
Lending Standards (Appendix B)

    In the proposal, the OCC sought comment on whether it would be 
useful for the agency to issue guidance clarifying the differences 
between the insider lending limits (part 31) and the loans-to-one-
borrower limits (part 32).
    The four commenters addressing this issue uniformly favored having 
the OCC provide guidance. Of those who identified areas where 
additional guidance would be helpful, one requested guidance on the 
differences between the rules for combining loans to related interests 
with the insider and the rules for combining loans due to a common 
enterprise. Another asked for guidance on the differences between the 
tangible economic benefit rule in part 31 and the direct benefit rule 
in part 32. Two commenters expressed concern about the possibility of 
the guidance adding burden to national banks. One of these commenters 
stated that the OCC should proceed with caution so that guidance does 
not deviate from Reg. O.
    In light of these comments, the OCC has decided to issue guidance 
that focuses on areas of significant difference. Appendix B sets forth 
guidance on the differences in part 31 (as amended by this final rule) 
and part 32 between (a) the definitions of ``extension of credit,'' (b) 
exceptions to the definitions of ``extension of credit,'' and (c) the 
attribution rules. This guidance does not impose any new requirements 
on national banks. Rather, it simply provides an accessible reference 
for several important areas where parts 31 and 32 differ and highlights 
areas that will require additional care by banks when engaging in 
transactions that are subject to both sets of standards.

Effective Date

    Section 302(b) of the Riegle Community Development and Regulatory 
Improvement Act of 1994 requires that a Federal banking agency 
regulation that imposes ``additional reporting, disclosures, or other 
new requirements on insured depository institutions [to] * * * take 
effect on the first day of a calendar quarter which begins on or after 
the date on which the regulations are published in final form.* * *'' A 
regulation may become effective earlier than the first day of the next 
calendar quarter if the agency determines that good cause exists to 
make the effective date earlier and publishes this determination with 
the regulation.
    The OCC has determined that the part 31 final rule does not impose 
any additional requirements on national banks. Rather, it simplifies 
the former rule by removing provisions that are unnecessary in light of 
comparable provisions in Reg. O, provides national banks with 
additional flexibility in extending credit to executive officers, and 
highlights certain differences between the insider lending restrictions 
and the lending limits regulation. Accordingly, the requirement for a 
delayed effective date does not apply.

Regulatory Flexibility Act

    It is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
final rule will reduce somewhat the regulatory burden on national 
banks, regardless of size, by eliminating and clarifying current 
regulatory requirements. However, its impact will be minimal.

Executive Order 12866

    The OCC has determined that this final rule is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates 
Act) requires that an agency prepare a budgetary impact statement 
before promulgating a rule that includes a Federal mandate that may 
result in the annual expenditure of $100 million or more in any one 
year by State, local, and tribal governments, in the aggregate, or by 
the private sector. If a budgetary impact statement is required, 
section 205 of the Unfunded Mandates Act requires an agency to identify 
and consider a reasonable number of alternatives before promulgating a 
rule.
    The OCC has determined that the final rule will not result in 
expenditures by State, local, and tribal governments, or by the private 
sector, of more than $100 million in any one year. Accordingly, the OCC 
has not prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered.

List of Subjects in 12 CFR Part 31

    Credit, National banks, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set out in the preamble, part 31 of chapter I of 
title 12 of the Code of Federal Regulations is revised to read as 
follows:

[[Page 54536]]

PART 31--EXTENSIONS OF CREDIT TO INSIDERS AND TRANSACTIONS WITH 
AFFILIATES

Sec.
31.1  Authority.
31.2  Insider lending restrictions and reporting requirements.

Appendix A to Part 31--Interpretations

Appendix B to Part 31--Guidance Regarding Differences Between Lending 
Limits and Insider Lending Standards

    Authority: 12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and 
1972(2)(G).


Sec. 31.1 Authority.

    This part is issued by the Comptroller of the Currency pursuant to 
12 U.S.C. 93a, 375a(4), 375b(3), 1817(k), and 1972(2)(G), as amended.


Sec. 31.2  Insider lending restrictions and reporting requirements.

    (a) General rule. A national bank and its insiders shall comply 
with the provisions contained in 12 CFR part 215.
    (b) Enforcement. The Comptroller of the Currency administers and 
enforces insider lending standards and reporting requirements as they 
apply to national banks and their insiders.

Appendix A to Part 31--Interpretations

Section 1. Loans Secured by Stock or Obligations of an Affiliate

    A bank that makes a loan to an unaffiliated third party may take 
a security interest in securities of an affiliate as collateral for 
the loan without the loan being deemed a ``covered transaction'' 
under section 23A of the Federal Reserve Act (12 U.S.C. 371c) if:
    a. The borrower provides additional collateral that, taken 
alone, meets or exceeds the collateral requirements specified in 
section 23A(c) (12 U.S.C. 371c(c)); and
    b. The loan proceeds:
    1. Are not used to purchase the bank affiliate's securities that 
serve as collateral; and
    2. Are not otherwise used for the benefit of, or transferred to, 
any affiliate.

Section 2. Deposits Between Affiliated Banks

    a. General rule. The OCC considers a deposit made by a bank in 
an affiliated bank to be a loan or extension of credit to the 
affiliate under 12 U.S.C. 371c. These deposits must be secured in 
accordance with 12 U.S.C. 371c(c). However, a national bank may not 
pledge assets to secure private deposits unless otherwise permitted 
by law (see, e.g., 12 U.S.C. 90 (permitting collateralization of 
deposits of public funds); 12 U.S.C. 92a (trust funds); and 25 
U.S.C. 156 and 162a (Native American funds)). Thus, unless one of 
the exceptions to 12 U.S.C. 371c noted in paragraph b. of this 
interpretation applies or unless another exception applies that 
enables a bank to meet the collateral requirements of 12 U.S.C. 
371c(c), a national bank may not:
    1. Make a deposit in an affiliated national bank;
    2. Make a deposit in an affiliated State-chartered bank unless 
the affiliated State- chartered bank can legally offer collateral 
for the deposit in conformance with applicable State law and 12 
U.S.C. 371c; or
    3. Receive deposits from an affiliated bank.
    b. Exceptions. The restrictions of 12 U.S.C. 371c (other than 12 
U.S.C. 371c(a)(4), which requires affiliate transactions to be 
consistent with safe and sound banking practices) do not apply to 
deposits:
    1. Made in the ordinary course of correspondent business; or
    2. Made in an affiliate that qualifies as a ``sister bank'' 
under 12 U.S.C. 371c(d)(1).

Appendix B to Part 31--Comparison of Selected Provisions of Part 31 and 
Part 32 (as of October 1, 1996)

    Note: Even though part 31 now simply requires that national 
banks comply with the insider lending provisions contained in 
Regulation O (Reg. O) (12 CFR part 215), the chart in this appendix 
refers to part 31 because Reg. O is a Federal Reserve Board 
regulation and part 31 is the means by which several provisions of 
Reg. O are made applicable to national banks and their insiders.


                                  Definition of ``Loan or Extension of Credit''                                 
                                                                                                                
Renewals...............................  In most cases, the two definitions of ``loan or extension of credit''  
                                          will be applied in the same manner. A difference exists, however, in  
                                          the treatment of renewals. Under Part 31, 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 31. 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 
                                          31 and 32. However, indebtedness in amounts up to $5,000 is excluded  
                                          from the definition of ``extension of credit'' under Part 31 if the   
                                          indebtedness arises pursuant to a written, preauthorized, interest-   
                                          bearing plan or written, preauthorized transfer of funds from another 
                                          account. Under Part 31, 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 31 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 31 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).                      
                                                                                                                

[[Page 54537]]

                                                                                                                
                                            Exclusions to Definition                                            
                                                                                                                
Funds advanced for taxes, etc.,          Both rules exclude funds advanced for items such as taxes, insurance,  
 necessary to preserve collateral or      or other expenses related to existing indebtedness. However, Part 32  
 that are incidental to indebtedness.     includes these advances for the purpose of determining whether        
                                          subsequent loans meet the lending limit, whereas Part 31 excludes     
                                          these advances for all purposes. In addition, Part 32 requires that   
                                          the funds, which are advanced ``for the benefit of'' a borrower, be   
                                          advanced by the bank directly to the third party to whom the borrower 
                                          is indebted. Part 31 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    Under Part 31, a note or other evidence of indebtedness acquired       
 foreclosure.                             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 31. 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 31, 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 31 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 31 and the ``common enterprise'' test under Part 32 will lead 
                                          to different results in many instances. Under Part 31, a ``related    
                                          interest'' is a company or a political or campaign committee that is  
                                          ``controlled'' by an insider. Part 31 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.  
Loans to corporate groups..............  Both Parts 31 and 32 will consider a loan that was made to a           
                                          corporation to have been made to a third person if the tests          
                                          identified in the previous discussion of the ``General Rule'' are     
                                          satisfied. If these tests are not met, Parts 31 and 32 still may      
                                          require attribution, but the circumstances when this will occur and   
                                          the consequences of attribution under these circumstances differ under
                                          the two rules. Under Part 31, a loan to a corporation will be deemed  
                                          to have been made to an insider if the corporation is a ``related     
                                          interest'' of the insider (i.e., the insider owns at least 25% percent
                                          of a class of voting shares of the company, controls the election of a
                                          majority of the company's directors, or has the power to exercise a   
                                          controlling influence over the company). Under Part 32, a loan to an  
                                          individual or company will not be considered to have been made to a   
                                          corporate group until a ``person'' (which includes individuals and    
                                          companies) owns more than 50% of the voting shares of a company. If a 
                                          loan is found to have been made to a related interest of an insider   
                                          under Part 31, the loan must comply with all of the insider lending   
                                          restrictions of Part 31. If a loan is found to have been made to a    
                                          corporate group under Part 32, the loan, when aggregated with all     
                                          other loans to that corporate group, generally may not exceed 50% of  
                                          the bank's capital and surplus.                                       

[[Page 54538]]

                                                                                                                
Loans to partnerships, joint ventures,   Part 31 applies different rules to implement different restrictions    
 and associations.                        applicable to partnerships. For purposes of the limits on loans to    
                                          executive officers, a loan made to a partnership in which an executive
                                          officer of the lending bank holds a majority interest is deemed to    
                                          have been made to the executive officer. For all other purposes under 
                                          Part 31, a loan to a partnership will be attributed to an executive   
                                          officer or other insider only if the partnership is a ``related       
                                          interest'' of the insider or if the loan is transferred to, or used   
                                          for the tangible economic benefit of, the insider. Part 32 does not   
                                          make any similar distinction based on the restriction in question.    
                                          Under Part 32, a loan made to a partnership, joint venture, or        
                                          association will be attributed to all members of such an entity--     
                                          regardless of the percentage of ownership--unless a person's liability
                                          is limited by a valid agreement. Conversely, loans to members of a    
                                          partnership, joint venture, or association will not be attributed to  
                                          the entity under Part 32 unless either the ``common enterprise'' or   
                                          ``direct benefit'' test is met.                                       
                                                                                                                

    Dated: October 2, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-26849 Filed 10-18-96; 8:45 am]
BILLING CODE 4810-33-P