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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

##### Interpretive Letter #979

December 18, 2003 **January 2004**

##### 12 USC 84

Subject: Applicability of Lending Limit to Loans to **\[ \]** Indian
Community of **\[ *City, State* \]**and its members

Dear **\[ \]**:

I am writing in response to your request for our opinion as to the
application of the lending limit, 12 U.S.C. § 84, to loans **\[ *NB,
City, State* \]** (Bank) has made, and plans to make, to **\[ \]**
Indian Community of **\[ *City, State* \]** (Community) and to members
of the Community. Based on the information in your letter and in
subsequent telephone conversations, it is my opinion that for purposes
of the lending limit a loan to one member would generally not be
combined with a loan to another member, and that loans to members would
generally not be combined with loans made to the Community.

#### Facts

The Community is located on the south side of the **\[ \]** in **\[ \]**
County, two miles south of **\[ *City* \]** and ten miles from the Bank
in **\[ *City, State* \]**. The population resident on the **\[ \]**
acre reservation of the Community was approximately 300 in the year
2000.[^1] The population of **\[ *Bank's City* \]** is approximately
1,300 and is largely dependent on the tribal enterprises run by the
Community.

The Bank has made a loan to the Community, the purpose of which is to
finance several loans that the Community wishes to make to several
members of the Community and to augment a loan fund from which the
Community will make loans to other members. The loan to the Community is
secured by an assignment of the underlying loans made by the Community
to the members. The source of repayment for the loan to the Community is
ultimately the income from various tribal enterprises. This income
supports the Community's payment of monthly stipends to the members and
these stipends in turn are used by the members to repay their loans to
the Community. The principal tribal enterprise is the **\[ \]** casino.
A gas station and convenience store built in **\[ \]** are adjacent to
the casino. The Community also owns the nearby **\[ \]**Motel with 122
rooms and swimming pool, a recreational vehicle park, and a six-story
hotel with convention center that was built in **\[ \]**.

The Bank has also made general consumer loans to members of the
Community that are secured by an assignment of the members' monthly
stipends that they receive from the Community. The Bank may make further
such loans although it is expected that no member will borrow from both
the Bank and from the Community loan fund described above at the same
time. The source of repayment for the Bank's loans to the members is the
monthly stipends (currently \$5,200) that Community members are allotted
by the Community. Tribal enterprises, such as the casino, and not the
Bank's loan to the Community, support payment of these stipends by the
Community. It is a requirement for receipt of the monthly stipend that
the members live within a ten-mile radius of the Community's trust
lands. Some members also receive wages from Community enterprises,
though the Bank has never asked for an assignment of wages to secure
loans to members of the Community, and it is assumed for the purposes of
this analysis that the members do not receive sufficient wages from
which their loans and other obligations may be fully repaid.

#### Legal Analysis

The purpose of the lending limit is to protect the safety and soundness
of national banks by preventing excessive loans to one person and to
promote diversification of loans and equitable access to banking
services. Generally, a national bank's total outstanding loans to one
borrower may not exceed 15 percent of the bank's capital and surplus,
plus an additional 10 percent of capital and surplus if the amount over
the 15 percent general limit is fully secured by readily marketable
collateral.[^2] Also, loans to one borrower will be attributed to
another person and both will be considered a borrower when, among other
things, (1) the proceeds are used for the direct benefit of the other
person, or (2) a common enterprise is deemed to exist between the
persons.

The proceeds of a loan to a borrower will be deemed to be used for the
direct benefit of another person and will be attributed to that other
person when the proceeds, or assets purchased with such proceeds, are
transferred to that other person, other than in a bona fide arm's length
transaction where the proceeds are used to acquire property, goods, or
services.[^3]

A common enterprise is deemed to exist, inter alia, "\[w\]hen the
expected source of repayment for each loan ... 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 \[the common control and substantial financial
interdependence test\][^4] are met."[^5]

1\. Direct Benefit

The proceeds of the loan to the Community are used by the Community to
make loans to members of the Community.[^6] However, such members do not
also borrow from the Bank. Thus, while the direct benefit test requires
that the loan to the Community be *attributed* to the members to whom
the Community makes loans, those attributed loans are not *combined*
with any other loans under the direct benefit test.[^7]

There is no information in your letter regarding the transfer of
proceeds of the loans to the members (or of assets purchased with such
proceeds) from one member to another member or from the members to the
Community. Accordingly, without further facts, there is nothing to
support attribution of the loans to members to other members or to the
Community.[^8]

2\. Common Enterprise

The expected source of repayment for the loan to the Community is the
repayment of the Community's loans to the members that is dependent on
the monthly stipends that are supported by income from tribal
enterprises, principally the **\[ \]** casino. The expected source of
repayment for the current and future loans to the members of the
Community is the monthly stipends that each member receives from the
Community and that are derived from the same tribal enterprises. The
expected source of repayment for the loan to the Community and the loans
to the members is thus the same. Further, no borrower -- neither the
Community nor any member \-- has another source of income from which the
borrower's loan, and the borrower's other obligations, can be fully
repaid. Accordingly, absent an exception, the loans would be combinable
under the common source of repayment test -- the members' loans with
other members' loans[^9] and the members' loans with the loan to the
Community.

As noted above, an employer will not be treated as a common source of
repayment because of wages and salaries paid to its employees, unless
the employees control[^10] the employer and there is substantial
financial interdependence between them. This position is sometimes
referred to as the "company town" exception since it was originally
intended to facilitate the granting of credit to employees in such a
town. A "company town" is a town in which residents are dependent on the
economic support of a single firm for maintenance of retail stores,
schools, hospitals, and housing.[^11] Without the exception, it would be
difficult for a local bank to serve effectively the credit needs of the
town's residents. As noted above, one of the purposes of the lending
limit is to promote equitable access to banking services.

The current case is very similar to the company town scenario in that
all the members of the Community live in a single, small geographic
location and are uniquely associated with, and dependent on, a single
entity that is the community hub from a commercial and socioeconomic
perspective. Thus, the need for equitable access to banking services is
as important in the current factual circumstances as it is in the
company town scenario. Further, there is a strong public interest in
making available to Indian tribes and their members access to banking
services, including credit products.[^12] Although in the current case,
payments received by the members are principally stipends rather than
wages and salaries, the so-called company town exception is available in
this case because of the unique and compelling similarities between the
employer-employee relationship in a company town and the relationship
between the Community and its members here. Accordingly, the loans to
the members need not be combined under the common source of repayment
test with loans to other members or with the loan to the Community.

Please note that this letter responds only to the common enterprise
lending limit issue raised in your letter. It does not address safety
and soundness risks that may be posed by the loan to the Community or by
loans to the Community members, individually or in the aggregate. Under
12 C.F.R. § 32.1(c)(4), the lending limit requires that loans made by
national banks must be consistent with safe and sound banking practices.

Please also note that in reaching the foregoing conclusion, I have
relied on the factual representations contained in your letter and in
telephone conversations with OCC staff. The position set forth in this
letter depends upon the accuracy and completeness of those
representations and the facts set forth in this letter. Any change in
circumstances could result in a different conclusion.

I trust the foregoing is responsive to your inquiry.

Sincerely,

/s/ Jonathan Fink

Jonathan Fink

Senior Attorney

Bank Activities & Structure

[^1]: **\[ \]**.

[^2]: 12 U.S.C. § 84(a) and 12 C.F.R. § 32.3(a).

[^3]: 12 C.F.R. § 32.5(b).

[^4]: That test provides that a common enterprise is deemed to exist
    when borrowers are related through common control and there is
    substantial financial interdependence between or among the
    borrowers.

[^5]: 12 C.F.R. § 32.5(c)(1).

[^6]: Since the proceeds of the loan to the Community do not fund the
    stipends that the Community pays to members, the payment of stipends
    does not cause the direct benefit test to require that the loan to
    the Community be attributed to members.

[^7]: If a member borrowed from both the Bank and from the Community,
    the direct benefit test would require that the part of the Bank's
    loan to the Community that the Community re-loaned to the member be
    combined with the Bank's loan to the member. The transfer of
    proceeds by the Community to such members would not be excepted by
    the exception for bona fide arm's length transactions where proceeds
    are used to acquire property, goods, or services. It is an
    established OCC position that "borrowed funds that are re-loaned to
    a third party would be attributed to the third party under this
    test." 59 Fed. Reg. 6593, 6596 (Feb. 11, 1994).

[^8]: I assume that the members may acquire property, goods or services
    from the Community or its enterprises and that the Bank's loans to
    the members may support such transactions. Provided such
    transactions are bona fide arm's length transactions, they would not
    cause the direct benefit test to require the loans to the members to
    be attributed to the Community.

[^9]: Some OCC precedent, beginning with interpretations of prior
    versions of the lending limit regulation, has taken the position
    that the common source of repayment test hinges on whether the
    repayment capacity of one borrower is dependent upon the financial
    health of another borrower rather than whether repayment will be
    made from the same expected source. Under this view, absent an
    exception a loan to a member of the Community would only be combined
    under the common source of repayment test with the loan to the
    Community on which the member is dependent, not with a loan to
    another member, since no member is dependent on another member.
    However, other OCC precedent has held loans to be combinable under
    the common source of repayment test in circumstances in which one
    borrower was not financially dependent on another borrower, based on
    the commonality of the source of repayment. The current regulation
    on its face does not require dependence on another borrower but
    rather requires neither borrower to have another source of income to
    fully repay its loan and other obligations. In light of this
    regulatory clarity, the correct position under 12 C.F.R. part 32 is
    that dependence on another borrower is not required under the common
    source of repayment test.

[^10]: I note that the Community is comprised only of its members and
    those members elect a governing council to run the affairs of the
    Community. Such a democratic system does not involve concerted
    action by the members and does not constitute "control" for the
    purposes of this provision.

[^11]: *See* The American Heritage Dictionary of the English Language
    (4^th^ ed., 2000).

[^12]: An entire Federal agency program -- the Bureau of Indian Affairs'
    Loan Guaranty, Insurance, and Interest Subsidy Program, 25 C.F.R.
    part 103 -- exists to encourage eligible borrowers to develop viable
    Indian businesses through conventional lender financing. The program
    helps borrowers secure conventional financing that might otherwise
    be unavailable. The OCC has long regarded access to banking services
    by Indian tribes and their members as an important public policy
    objective. For example, among other initiatives, the OCC hosts the
    Native American Banking Resource Directory at
    http://www.occ.treas.gov/cdd/nativeam.htm and has published "A Guide
    to Mortgage Lending in Indian Country" (Jul. 1997) and "Providing
    Financial Services to Native Americans in Indian Country (Jul.
    1997). In addition, the OCC hosted a Native American Banking Forum
    in 2002 at which the OCC"s First Senior Deputy Comptroller and Chief
    Counsel noted "that the presence of banks is crucial for any
    community's economic strength" and that "banks are developing a
    greater understanding that exploring and serving the financial needs
    of underserved populations fits in with their long-term
    self-interest." *See* <http://www.occ.treas.gov/cdd/>
    [Williams101602.pdf]{.underline}.