Friday

December 27, 1991

Part II

Federal Election 

Commission

11 CFR Parts 100 and 104 

Loans From Lending Institutions to 

Candidates and Pofitical Committees; 

Transmittal to Congress; Final Rule
67118 Federal Register / Vol. 56, No. 249 / Friday, D ecem ber 27, 1991 / Rules and Regulations

FEDERAL ELECTION COMMISSION

11 CFR Parts 100 and 104

[Notice 1991-24]

Loans From Lending Institutions to 

Candidates and Political Committees

A G E N C Y : Federal Election Commission. 

a c t i o n : Final rule; transmittal of 

regulations to Congress.

S U M M A R Y: The Commission has revised 

its regulations at 11 CFR 100.7(b)(ll), 

100.8(b)(12), and 104.3(d), concerning 

loans from lending institutions of 

candidates and political committees. 

These regulations implement 2 U.S.C. 

431(8)(B)(vii), a provision of the Federal 

Election Campaign Act of 1971, as 

amended (“the Act” or “FECA”), 2 

U.S.C. 431 et seq. In particular, they 

provide guidance on when a loan is 

“made on a basis which assures 

repayment,” as required at 2 U.S.C. 

431(8)(B)(vii)(II). They also clarify that 

lines of credit are subject to the same 

requirements as other bank loans; 

emphasize restructuring, rather than 

settlement, of bank loans; and specify 

new information that is to be reported to 

the Commission concerning bank loans. 

Further information is provided in the 

supplementary information which 

follows.

D A T E S : Further action, including the 

announcement of an effective date, will 

be taken after these regulations have 

been before Congress for 30 legislative 

days pursuant to 2 U.S.C. 438(d).

FO R FU R TH E R IN FO R M A TIO N C O N T A C T :

Ms. Susan E. Propper, Assistant General 

Counsel, 999 E Street, NW., Washington, 

DC 20463, (202) 219-3690 or (800) 424- 

9530.

S U P P LE M E N TA R Y IN FO R M A TIO N : The 

Commission is publishing today the final 

text of revisions to its regulations at 11 

CFR parts 100 and 104. These 

regulations concern loans from lending 

institutions to candidates and political 

committees.

Under 2 U.S.C. 431 (8) (B)(vii), a bank 

loan "made in accordance with 

applicable law and in the ordinary 

course of business” is not considered a 

contribution under the Federal Election 

Campaign Act (“FECA” or “the Act”), if 

certain conditions are met. One of these 

conditions is that the loan be “made on 

a basis which assures repayment.” 2 

U.S.C. 431 (8) (B) (vii) (II).

On August 5,1986, the Commission 

published a notice of proposed 

rulemaking on Public Financing, in 

connection with the 1988 presidential 

election cycle. 51 FR 28154. In that 

notice, the Commission raised its

concerns about loans from lending 

institutions and sought comment on 

several alternative applications of this 

statutory phrase in the context of 

publicly funded campaigns, as well as 

loans made to congressional candidates 

and other political committees. The 

Commission received fifteen comments 

that responded to the loan aspect of this 

notice. In addition, the Commission’s 

public financing regulations hearing of 

December 3,1986, addressed some 

aspects of the bank loan question.

On January 22,1987, the Commission 

published an announcement of a hearing 

and the extension of the comment 

period, in a notice that focused solely on 

the bank loan issue. 52 FR 2416. This 

notice analyzed the comments received 

to date; announced a hearing date; and 

sought further comment on the 

alternatives presented in the August 

1986 notice, as well as on other 

alternatives. Although the Commission 

received two additional comments in 

response to the second notice, it did not 

receive any requests to testify and 

therefore canceled the public hearing.

Both the 1986 and the 1987 notices 

contained narrative proposals dealing 

with various aspects of the bank loan 

question, but did not contain specific 

regulatory language. On July 27,1989, 

the Commission published a notice of 

proposed rulemaking which contained 

the text of a proposed regulation, and 

also included draft forms designed to 

obtain more information about the 

circumstances under which loans were 

made. 54 FR 31286. This notice’s primary 

focus was on clarifying when loans are 

“made on a basis which assures 

repayment,” but related topics were also 

presented. The Commission received 

eleven comments in response to this 

notice.

Throughout the course of this 

rulemaking, the Commission has had 

numerous, ongoing contacts with the 

banking regulatory agencies, in addition 

to receiving comments from banking 

trade associations and lending 

institutions themselves, regarding the 

drafting of these regulations. Each of 

these sources provided valuable 

information which serves as the basis 

for the revised rules published today.

Section 438(d) of title 2, United States 

Code, requires that any rules or 

regulations prescribed by the 

Commission to carry out the provisions 

of title 2 of the United States Code be 

transmitted to the Speaker of the House 

of Representatives and the President of 

the Senate 30 legislative days before 

they are finally promulgated. These 

regulations were transmitted to 

Congress on December 20,1991.

Explanation and Justification

The notice of proposed rulemaking 

requested comments on a number of 

suggestions on how to best implement 

the statutory requirement that bank 

loans be “made on a basis which 

assures repayment.” In addition to 

responses on the specific questions 

raised by the notice, commenters raised 

the following general concerns.

Several noted that there is no 

definitive standard in the banking 

industry for the term, “assurance of 

repayment,” and argued that the 

Commission should not attempt to draft 

one. However, the Act expressly 

requires that loans, to avoid being 

construed as campaign contributions, be 

“made on a basis which assures 

repayment.” Even though there is no 

clear definition for the phrase in the 

banking industry, the Commission is 

responsible for implementing the 

statutory requirement that includes this 

phrase. The Commission’s regulatory 

approach should not be limited by 

banking rules that were developed for 

other purposes.

Some comments also argued that 

“assurance of repayment” depends on 

each lending institution’s case-by-case 

analysis of the circumstances of each 

loan, and suggested that all loans made 

“in the ordinary course of business” be 

found to comply with the “assurance of 

repayment" requirement. However, the 

statutory requirement that these loans 

be made “in the ordinary course of 

business” was enacted in 1971, while 

the phrase “made on a basis which 

assures repayment” was added in 1979. 

Under ordinary rules of statutory 

construction, it is presumed that 

Congress, by amending its original 

enactment, intended to make a 

substantive change in the law. Thus, as 

of the effective date of the 1979 

amendment, the fact that a loan is made 

“in the ordinary course of business” is 

no longer in and of itself sufficient to 

guarantee that the loan does not 

constitute an illegal campaign 

contribution: In addition, it must meet 

the further qualifications, including the 

“assurance of repayment" requirement, 

now included at 2 U.S.C. 431(8)(B)(vii).

Commenters responding to the earlier 

notices noted that, while lending 

institutions cannot always predict when 

debtors* circumstances may change so 

as to make repayment of loan 

problematic, their ultimate focus is on 

whether the loan is repaid. In contrast, 

the concern of the FECA focuses not 

only on repayment but also on the initial 

making of the loan—whether, at the time
Federal Register / Vol. 56, No. 249 / Friday, D ecem ber 27, 1991 / Rules and Regulations 67119

it was made, it was made on a basis 

which assured repayment.

Several banking associations 

expressed the view that only a lending 

institution, not the Commission, is 

qualified to determine what constitutes 

assurance of repayment. Some 

regulatory agencies similarly stated that 

lending institutions should not be made 

answerable to the Commission, but only 

to those entities specifically charged 

with overseeing banking activities. One 

questioned the appropriateness of the 

Commission’s imposing affirmative 

compliance burdens on persons or 

entities other than candidates or 

political committees.

The Act, however, contemplates that 

lending institutions, when making loans 

to candidates and political committees, 

be subject to Commission oversight of 

the bank loan provisions, since failure to 

make a loan under conditions which 

assure repayment could result in a 

prohibited contribution. In fact, the Act 

imposes numerous obligations on 

persons and entities other than 

candidates and political committees in a 

number of other contexts. For these 

reasons, the Commission feels that the 

Act imposes on banks some portion of 

the requirement that bank loans be 

made on a basis which assures 

repayment.

The revised rules specify two sources 

of repayment that the Commission will 

consider to have met the “assurance of 

repayment” standard: Traditional 

collateral, with a perfected security 

interest in that collateral; and other 

sources of repayment, including 

anticipated future income (e.g., the 

anticipated receipt of public financing 

funds, fundraising, and interest income). 

Loans which do not meet these criteria 

will be considered on a case-by-case 

basis, based on the totality of their 

circumstances.

The notice solicited comments on how 

the rules should address lines of credit, 

given the concern that political 

candidates could draw on a line of 

credit after dissipating the collateral 

that originally supported it. The 

comments were unanimous in stating 

that lines of credit could be regulated in 

the same way as bank loans. The 

revised rules follow this approach: Lines 

of credit are considered bank loans, to 

be treated in the same manner as other 

loans from lending institutions.

The revised rules also follow 

Commission precedent by focusing on 

restructuring, rather than settlement, of 

bank loans. Each restructuring of a loan 

is considered a new loan for FECA 

purposes.

A number of other issues that were 

raised for comment in the notice of

proposed rulemaking did not result in 

new regulations.

The notice sought comments on 

whether the Commission should 

analogize political loans to “insider 

loans,” i.e., loans that a bank makes to 

its officers and board of directors. The 

intent of these insider loan provisions is 

to prevent favoritism in loans to 

“insiders,” while the intent of an 

analogous Commission provision would 

be to guard against preferential 

treatment for political loans, and to 

subject political loans to a high level of 

scrutiny.

However, the fact that a lending 

institution complies with standard 

lending policies and procedures, 

including use of “insider” procedures, 

does not necessarily mean that the loan 

is “made on a basis which assures 

repayment.” Moreover, this approach 

would not give lending institutions, 

candidates and political committees any 

guidelines on what is “assurance of 

repayment.” The rules thus do not take 

this approach.

The notice also requested comments 

on whether the rules should include any 

limit on the amount of loans that a 

candidate or political committee could 

have outstanding at any given time. Four 

commenters opposed setting any such 

limits, since borrowing capacity may 

vary substantially between candidates. 

Several argued that the Commission 

does not have the statutory authority to 

impose such limits.

No commenters responded in favor of 

this proposal. The rules do not include 

any limitation on the amount of loans a 

candidate or committee can have 

outstanding.

The notice invited comments on 

whether the regulations should require 

the borrower to set aside a certain 

percentage of pledged future funds when 

the borrower receives the funds. This 

requirement is unnecessary because of 

the final rules’ requirement that a 

separate depository account be 

established, under certain 

circumstances. Also, establishing a 

mandatory set aside percentage would 

unnecessarily infringe on the ability of 

the bank and the borrower to structure 

each loan to reflect the particular 

circumstances of that loan.

The notice asked whether the 

Commission should require reporting of 

bank loans that are made close to a 

federal election. The FECA currently 

requires reporting of contributions of 

$1000 or more if they occur less than 20 

days but more than 48 hours before an 

election. 2 U.S.C. 434(a)(6)(A); 11 CFR 

104.5(f).

The Act clearly states at 2 U.S.C. 

434(a)(6)(A) that any contribution

received close to an election shall be 

reported within 48 hours. This 

requirement encompasses all loans 

except bank loans, since a bank loan 

which meets the statutory requirements 

is not a contribution. However, the 

proceeds of a bank loan obtained by a 

candidate, as well as any guarantees or 

endorsements of a bank loan, are 

subject to the 48 hour reporting 

requirement. The Commission sees no 

reason to add any additional 

requirements at this time.

Finally, the notice asked whether the 

rules should require loans made to 

political committees and candidates to 

include a due date for the loan that is at 

or near the election for which the loan is 

obtained. This approach would reflect a 

common banking practice, in which the 

timing of repayment is tied to the event 

for which the funds are used. For 

example, agricultural loans frequently 

fall due shortly after harvest.

All comments which addressed this 

issue responded negatively to this 

suggestion. These commenters said that 

due dates should be flexible, open to 

negotiation between lenders and 

borrowers. Also, while it may be 

difficult for a candidate to raise money 

after an unsuccessful campaign, it is 

also true that the kinds of collateral 

used by candidates and political 

committees are not necessarily received 

at the time of the election. The rules thus 

do not require loans to be subject to a 

due date at or near an election.

Part 100—Scope and Definitions

Section 100.7 Contribution

The rule specifies at paragraph 

(b)(ll)(i) two general sources of 

repayment that the Commission will, by 

definition, find to have met the 

“assurance of repayment” standard: 

Traditional collateral, or a pledge of 

future receipts deposited in a separate 

account. A combination of these two 

methods is also acceptable.

The proposed rules would have 

required either traditional collateral or a 

pledge of future receipts deposited in a 

separate account to demonstrate that a 

loan is “made on a basis which assures 

repayment." This was presented as an 

either/or situation, so that a lending 

institution that wanted to make a loan 

backed in part by traditional collateral 

and in part by a pledge of future receipts 

might have felt obliged to make two 

separate loans to accomplish this 

purpose. Paragraph (b)(ll)(i) has 

therefore been revised to specifically 

state that a loan may be obtained under 

either authorized method, or by using 

any combination of the two methods.
67120 Federal Register / VoL 56, No. 249 / Friday, D ecem ber 27, 1991 / Rules and Regulations

The Commission believes that this 

approach will give candidates and 

committees the greatest possible 

flexibility in obtaining bank loans, while 

still assuring that they are made on a 

basis which assures repayment

Paragraph (b)(ll)(i)(A) sets forth the 

requirements for loans obtained on the 

basis of traditional types of collateral 

and possible secondary sources of 

repayment It includes at paragraph 

(b)(ll)(i)(A)(l) a non-exhaustive list of 

collateral sources. This list is similar to, 

although not as specific as, the list of 

acceptable collateral in the Federal 

Reserve Act’s section on an insured 

institution’s dealings with an affiliate, 

found at 12 U.S.C. 371c(c)(l). In the 

Commission’s view, the description of 

traditional collateral set forth in this 

paragraph is sufficiently precise to 

provide adequate guidelines without 

running the risk of inadvertently 

excluding some acceptable sources due 

to over-specificity. However, the 

Commission notes that the cited section 

of the Federal Reserve Act may also be 

consulted for guidance regarding 

specific collateral that would satisfy this 

rule.

Paragraph (b)(ll)(i)(A)(7) also 

includes a requirement that, if a 

financial institution relies on traditional 

collateral, the institution must perfect a 

security interest in that collateral. The 

banking regulatory agencies supported 

this requirement, because it protects 

lenders.

Moreover, the rule states that, if a 

security interest is not senior enough to 

cover the amount of the loan and any 

senior liens in existence on the date of 

the loan, the candidate or political 

committee must pledge additional 

collateral for this purpose. It also 

requires that sufficient collateral be 

maintained at all times to cover the full 

amount of the loan.

The Federal Deposit Insurance 

Corporation noted that secured loans 

are normally made on the fair market 

value of the security plus a margin of 

safety, so that there is some allowance 

for liquidation costs and interest. That 

agency said that it would regard a 

secured loan as not made on a basis 

which assures repayment if there was 

no safety allowance for costs associated 

with liquidation. The Comptroller of the 

Currency noted that the Commission 

could require lending institutions to 

have a security interest sufficiently 

senior to cover the loan amount, and 

require that the sufficiency be 

maintained when there is a decrease in 

value of the collateral securing the loan.

The Commission has not added 

specific language regarding a margin of 

safety, but believes this can be a

relevant consideration in certain cases. 

For example, if a bank normally requires 

sufficient collateral to cover a margin of 

safety, but fails to do so in making a 

loan to a candidate or political 

committee, this may be seen as an 

indication that the loan was not made in 

the ordinary course of business.

Two commenters suggested that the 

Commission amend the proposed 

language to include a “good faith” 

standard which would cover those times 

when a security interest is not perfected 

because of a filing error. However, there 

is no codification of a “good faith” 

standard in the Federal Reserve Act or 

its regulations with regard to perfecting 

a security interest. Rather, if a security 

interest is not perfected because of a 

filing error, the Board takes that factor 

into consideration should any action 

subsequently be required. The 

Commission intends to take a similar 

approach in dealing with situations 

where a security interest is not 

perfected due to a filing error.

Paragraph (b)(ll)(i)(B) permits loans 

to be made on the basis of a committee’s 

anticipated future receipts, including but 

not limited to public financing 

payments, contributions, or interest 

income, if certain requirements are met. 

These requirements include that (1) the 

loan be evidenced by a written 

agreement; (2) the loan amount not 

exceed the amount of pledged funds; (3) 

the loan be made in an amount no 

higher than a reasonable expectation of 

the receipt of future funds, based on 

documentation provided by the 

candidate or political committee to the 

lending institution; (4) the borrower 

establish a separate account; (5) the 

borrower deposit the pledged funds in 

this sepárate account, to be used to 

retire the debt in accordance with the 

loan agreement; and (6] if the borrower 

pledges public financing payments, the 

borrower authorize the Secretary of the 

Treasury to directly deposit such 

payments into the separate account.

Various commenters stated 

throughout this rulemaking that the 

Commission’s regulatory scheme should 

be flexible enough to better 

accommodate borrowers, while not 

imposing unnecessary constraints on the 

regular business of lending institutions. 

Paragraph (b)(ll)(i)(B) allows this 

flexibility by providing that loans not 

based on traditional collateral may still 

be considered' “made on a basis which 

assures repayment.” The requirements 

set forth in this paragraph act as 

safeguards, since these loans are 

generally regarded by the banking 

agencies as “unsecured.”

The FDIC indicated that, to the extent 

a loan is not backed by traditional

security, banks rely primarily on the 

borrower’s income, and that of any 

cosigners or guarantors to the loan, as 

security for the loan. Similarly, the 

Office of Thrift Supervision stated that, 

while it had no problem with the idea of 

using future receipts, it felt that the loan 

determinations should be based on the 

sound credit background of the 

borrower and adéquate safeguards as 

evaluated by the lending institution. 

These approaches, however, could result 

in impermissible contributions and 

expenditures. For example, if the lender 

considers the income of a presidential 

candidate who receives public financing 

payments as the only source of 

repayment for a $100,000 loan, the 

candidate will have exceeded the 

$50,000 limitation on expenditures from 

personal funds. 26 U.S.C. 9004(d), 9035. 

Similarly, if the lender considers the 

guarantee of one other person for a 

$100,000 loan, that person will have 

made an excessive contribution. 2 U.S.C. 

441a(a)(l)(A).

The recommendation to allow loans 

that are based on future receipts derives 

from prior Commission actions. In 

enforcement matters and advisory 

opinions involving future receipts, the 

Commission has looked to whether 

adequate safeguards exist, such as a 

separate depository account or an 

assignment of funds. If these safeguards 

exist, the Commission has determined 

that the loan was made on a basis 

which assures repayment. See, e.g.,

Matter Under Review (“MUR”) 1195 and 

Advisory Opinion 1980-108, for 

examples of safeguards the Commission 

has found sufficient to assure repayment 

of bank loans under particular 

circumstances.

Paragraph (b){ll)(i)(B) is consistent 

with these actions. Even though loans 

based on future receipts may be 

technically “unsecured,” the 

Commission believes that the 

safeguards included in the rule are 

sufficient to ensure that such loans are 

made on a basis which assures 

repayment, in compliance with the 

statutory requirement.

Paragraph (b)(ll)(i)(B)(2), as set forth 

in the notice, stated that loans were to 

be "based on a reasonable expectation 

of the receipt of pledged funds.” This 

paragraph has been revised to clarify 

that it is the responsibility of the 

candidate or political committee to 

furnish the lending institution with 

documentation, such as cash flow charts 

or other financial plans, that reasonably 

establish that such future funds will be 

available.

The Commission notes that this factor 

alone is not enough to satisfy the
Federal Register / Vol. 56,

"assurance of repayment" requirement. 

In addition, it does not absolve a lending 

institution from possible responsibility 

should a loan not otherwise be made on 

a basis which assures repayment. 

However, it provides another safeguard 

towards assuring that loans are made on 

that basis.

Paragraph (b)(ll)(i)(B)(3) requires the 

candidate or political committee to set 

up a separate depository account for the 

receipt of any pledged future funds to be 

used to repay the debt. The Notice 

asked whether the regulations should 

allow a depository account that is not at 

the lending institution to be considered 

a valid source of repayment for loans 

obtained on the basis of future receipts. 

Commenters agreed that an assignment 

of contributions or other funds deposited 

with another financial institution would 

create as valid a security interest as a 

separate account at the lending 

institution. Also, courts have determined 

that, under the Uniform Commercial 

Code, assignments can be a valid 

security agreement. See Mid-Eastern

Electronics, Inc. v. First National Bank

of Southern Maryland, 455 F.2d 141,146 

(4th Cir. 1970) (assignment of proceeds 

which is signed by the maker and 

contains a description of collateral 

constitutes a security agreement); 

Security Finance Group, Inc. v. United

States, 706 F.Supp. 83 (D.D.C. 1989) 

(debtor’s assignment of proceeds of 

creditor gave creditor a security interest 

in the proceeds).

There are other reasons for allowing 

the assignment of funds at different 

depository institutions. Candidates may 

obtain loans from several institutions, 

and it may not be feasible to establish a 

separate account at each one. Also, the 

Department of the Treasury will only 

deposit matching fund payments into a 

single campaign depository. See, 11 CFR 

9033.1(b)(7).

The final rule has thus been 

broadened to authorize the use of an 

account which is not at the lending 

institution where the loan is obtained as 

a depository for future receipts, if the 

candidate or political committee 

executes an assignment from that 

account to the lending institution, and 

notifies the depository institution of this 

assignment. A depository institution 

may seek to attach deposited funds if 

depositors do not meet their 

commitments to that institution; or it 

may fail to take action to freeze an 

account, if it does not know of the 

assignment. This notification 

requirement ensures that the depository 

institution is aware that some portion of 

the funds in a particular account has 

been pledged for other purposes.

No. 249 / Friday, D ecem ber 27, 1991

The Commission notes that a separate 

depository account must be set up 

pursuant to paragraph (b)(ll)(i)(B)(3) 

only if a committee has pledged future 

receipts as a source of repayment for all, 

or some portion, of a particular loan. If 

such an account is established, it can be 

structured in a variety of ways, as long 

as it complies with the requirement at 

paragraph (b)(ll)(i)(B)(4) that the 

account be used for the purpose of 

retiring the debt according to the 

repayment requirements of the loan 

agreement. The borrower and the 

lending institution are thus free to 

structure the account, and the flow of 

funds in that account, in any manner 

consistent with the loan agreement.

For example, if the lender and 

borrower agree that $50,000 of a $100,000 

loan is to be repaid using future receipts, 

at a rate of $10,000 a month for 5 

months, the borrower must demonstrate 

that $10,000 will be available in the 

depository account at the time each 

such payment falls due. Additional 

amounts deposited in the account for 

any reason (e.g., public financing funds) 

may be withdrawn from the account, 

and used for other purposes. If all or 

part of the loan is repaid from other 

sources, any amount(s) so paid can also 

be withdrawn from the account, since 

they are no longer necessary "to assure 

repayment" of (that portion of) the loan.

Paragraphs (b)(ll)(ii) of the proposed 

rules contained a presumption that a 

loan not obtained under either of the 

methods set forth in paragraph (b)(ll)(i), 

or some combination of these methods, 

would not be considered made on a 

basis which assures repayment, unless 

the candidate or political committee 

could show otherwise. However, the 

Commission has now decided to 

consider the totality of circumstances on 

a case-by-case basis in determining 

whether loans that do not meet the 

criteria set forth at paragraph (b)(ll)(i) 

were made on a basis which assures 

repayment.

Paragraphs (b)(ll)(i)(A) and (B) 

provide avenues that, if followed, would 

clearly meet -the "assurance of 

repayment" standard. Paragraph 

(b)(ll)(ii) leaves open the possibility 

that other approaches, such as loans 

guaranteed in whole or in part by the 

borrower’s signature, which are not 

specified in the rules, will also be found 

to have met this standard in specific 

cases.

Restructuring of Bank Loans

In issuing its final debt settlement 

rules last year, the Commission deferred 

until this rulemaking the question of 

how bank loans should be treated in the 

debt settlement process. The

/ Rules and Regulations 67121

Explanation and Justification to those 

rules stated, "The Commission does not 

generally consider bank loans in the 

debt settlement process and does not 

intend to change its approach(,)” but 

noted that “(f)urther guidance on this 

may be provided in a separate 

rulemaking regarding the bank loan 

rules.” 55 FR 26377, 26384 (June 27,1990).

In response to the bank loan Notice, 

representatives from the Federal 

Reserve Board and the Office of Thrift 

Supervision stated that banks place 

primary emphasis on restructuring the 

terms of a loan if the borrower cannot 

repay it. Only if this proves impossible 

will a bank attempt to settle a particular 

loan or, as a last resort, write it off.

The final rules omit any reference to 

the settlement of loans from lending 

institutions. Rather, they provide at new 

§ 104.3(d)(3), discussed below, that each 

time a loan is restructured to change its 

terms, the candidate or political 

committee must report it as a new loan. 

The terms of the restructured loan must 

again meet the "assurance of 

repayment” standard, as did the original 

loan.

This approach is consistent with 

Commission statements made over the 

course of the debt settlement 

rulemaking. While it is in the ordinary 

course of business for lending 

institutions to settle or write off certain 

loans, the Commission prefers not to 

encourage such actions, because this 

could result in prohibited contributions 

from lending institutions.

However, the Commission recognizes 

that, in certain cases, such as where a 

. candidate declares bankruptcy or dies 

before anticipated funding can be 

raised, the settlement of a campaign 

loan may be the only realistic 

alternative. These extraordinary 

situations will be addressed by the 

Commission on a case-by-case basis.

Section 100.8 Expenditure

Revised paragraph 100.8(b)(12) is 

identical to revised § 10Q.7(b)(ll), 

discussed above.

Section 104.3 Contents of Reports

The Notice requested comments on a 

proposal to require more detailed 

reporting of bank loans, and included 

draft supplements to Schedules C and 

G-P for candidates and political 

committees to report the required 

information. Revised section 104.3(d) 

implements these requirements through 

new reporting regulations.

A Schedule C -l or C -P -l must be 

filed with the next due report, for each 

bank loan obtained during the reporting 

period. Except as provided in paragraph
67122 Federal Register / Vol. 56,

(d)(3), a Schedule C -l or C -P -l need 

only be filed once for each loan, at the 

time the loan is first reported.

New paragraph (d)(1) specifies the 

information required by the 

supplemental forms, while paragraph 

(d)(2) requires the candidate or political 

committee to submit a copy of the loan 

agreement to the Commission at the 

time the loan is first reported. Paragraph 

(d)(3) requires committees to file with 

their next due report a Schedule C -l or 

C -P -l, if any draw was made on a line 

of credit or any loan was restructured to 

change the terms of repayment during 

the reporting period.

In drafting these requirements, the 

Commission sought to strike a balance, 

by requiring the minimum amount of 

information necessary to provide 

adequate disclosure for monitoring 

purposes, while avoiding requirements 

that would have unduly burdened 

borrowers and lenders. It also sought to 

respect privacy concerns of candidates 

and committees, by requiring that only a 

copy of the loan agreement be submitted 

to the Commission with the committee’s 

reports. The Commission notes, 

however, that if questions later arise 

regarding the loan, in the course of a 

compliance or other action, it may 

request additional documentation.

The rules require information from the 

borrower and certification from the 

lender. Under paragraph (d)(1), the 

borrower must provide information 

about the loan at the time it is obtained, 

including the types and value of 

collateral pledged, whether a security 

interest was perfected in any traditional 

collateral, and when and where 

depository accounts for pledged funds 

were established. If no traditional 

collateral or other source of repayment 

was pledged, the borrower must show 

that the loan was made on another basis 

which assures repayment.

Paragraph (d)(l)(v) requires the lender 

to certify that, to the best of its 

knowledge, the information provided by 

the borrower is accurate; the interest 

rate is usual and customary; the loan 

was made in accordance with the 

financial institution's usual policies and 

practices; and the lending institution is 

aware of the requirement that the loan 

must be made on a basis which assures 

repayment, and has complied with the 

revised Commission regulations at 

§§ 100.7(b)(ll) and 100.8(b)(12).

While most commenters supported the 

proposed requirement that the borrower 

provide information about the loan, 

some raised the concern that lenders 

will be held responsible if they sign the 

supplemental forms. These commenters 

urged that the rules require the

No. 249 / Friday, D ecem ber 27, 1991

borrower. but not the lender, to sign the 

forms.

However, the requirement that the 

lender certify that the information 

provided by the borrower is correct is 

justified on several grounds. Only the 

bank has access to some of the 

information that either served as the 

basis for making the loan, or relates to 

the satisfaction of certain requirements 

in the rules—such as whether the 

interest rate is usual and customary, or 

whether a security interest has been 

perfected. Also, lending institutions 

clearly have obligations and 

responsibilities under the FECA. Should 

a violation occur, they may be held 

liable regardless of which party is 

required to sign the supplemental forms. 

Finally, requiring a bank to certify that 

the borrower’s information is accurate 

ensures that the bank is aware of the 

requirements of § § 100.7(b)(ll) and 

100.8(b)(12).

A banking association suggested that, 

instead of this requirement, the 

Commission require the loan note to be 

attached to the disclosure form to assist 

the Commission in determining the basis 

on which the loan was made. The new 

rules already require political 

committees that obtain loans from 

lending institutions to submit the loan 

agreement, which contains the terms 

and conditions of the loan. However, 

knowing the terms of the loan is not 

sufficient for Commission purposes. It is 

also nesessary to know, inter alia, if the 

terms are consistent with the bank’s 

usual practices.

The FDIC suggested that, instead of 

requiring the lender to sign the 

conclusory statements as the 

Commission proposed, the rules should 

require the lender to state that “the loan 

was made on terms and conditions 

including interest no more favorable at 

the time than those imposed for similar 

extensions of credit to other borrowers 

of comparable credit worthiness.” This 

is basically a definition of the ordinary 

course of business test. However, as 

already discussed, the “assurance of 

repayment’’ requirement may at times 

exceed the “ordinary course of 

business” standard. Thus, a statement 

that a loan meets the latter standard 

does not necessarily mean that it meets 

the former.

Paragraph (d)(2) requires the borrower 

to supply a copy of the loan agreement 

to the Commission at the time the loan 

is initially reported. The Commission 

expects the loan agreement to include 

such information as the interest rate at 

which the loan was made, the total of 

each payment (principal and interest), 

and any applicable later charges.

/ Rules and Regulations

The draft Schedules C -l and C -P-l 

contained in the Notice would have 

required filers to include not only a 

signed copy of the loan agreement, but 

also any related security agreement(s), 

promissory note(s), and other related 

documents. The Commission has not 

determined that no other documentation 

is required when the report is filed. It 

again notes, however, that further 

documentation may be needed if 

questions arise with regard to a 

particular loan, or the original 

agreement does not contain all the 

required information.

Several commenters raised concerns 

about potential confidentiality problems 

of both the lending institution and the 

borrower if information in addition to 

that contained in the loan agreement 

was required. They argued that banks 

should be required to submit only those 

documents used in the ordinary course 

of making loans, and that to require 

anything further could conflict with 

certain state laws, in particular state 

privacy laws.

The FEC has authority to require the 

reporting of loan documentation. Under 

the Right to Financial Privacy Act, 12 

U.S.C. 3401-3422, information involving 

financial transactions that is required by 

federal statute or regulation is exempt 

from the prohibitions and limitations of 

that Act. 12 U.S.C. 3413(d). This 

exemption encompasses information 

required to be reported under the FECA. 

The Right to Financial Privacy Act 

further exempts “the disclosure of 

financial records in accordance with 

procedures authorized by title 26.” 12 

U.S.C. 3413(c). Also, it has been held to 

supersede conflicting state laws. See, 

e.g., In re Letter of Request for Judicial

Assistance from the Tribunal Civil de

Port-au-Prince, Republic of Haiti, 669 F. 

Supp. 403 (S.D.Fla. 1987); In re Grand

fury Subpoena ( Connecticut Sa vings

Bank), 481 F.Supp. 833 (D.Conn. 1979).

However, the Commission recognizes 

that practical problems may develop if it 

requires candidates and political 

committees to submit the documentation 

provided to lending institutions to the 

Commission at the time the loan is first 

reported. This documentation may 

include fundraising plans, cash flow 

charts, and other information which the 

borrower for tactical reasons my not 

want on the public record during a 

campaign. The rules thus require the 

candidate or political committee to 

submit documentation other than the 

loan agreement only to the lender. 

Should a loan later be questioned, the 

documentation could then be provided 

to the Commission.
Federal Register / V ol. 50, No. 249 / Friday, D ecem ber 27, 1991 / Rules and Regulations 67123

As discussed above with regard to 

§ 100.7(b)(ll), the Commission has 

traditionally treated lines of credit the 

same as any other loan from a lending 

institution. However, there are currently 

no explicit rules on how political 

committees should report lines of credit.

The Commission’s experience has 

been that some committees—typically 

presidential candidate committees that 

obtain large lines of credit—voluntarily 

report such information as when draws 

can be made and the maximum amount 

of each draw. However, they usually 

report lines of credit when the first draw 

is made, not when the line is first 

established.

Political committees are required to 

report the total amount of all "receipts” 

including loans, under 2 U.S.C. 434(b)(2) 

and 11 CFR 104.3(a)(2). Paragraphs 

(d)(1) and (d)(3) require candidates and 

political committees to include a 

Schedule C -l or C -P -l with their next 

report to the Commission whenever a 

line of credit is established, as well as 

each time a draw is made. In addition, 

the regulations specifically state at 

§ § 100.7(b)(ll)(i), 100.8(b)(12)(i), and 

104.3(d)(1) that the bank loan rules 

apply to draws on lines of credit. Thus 

lines of credit are treated the same as 

other bank loans for purposes of these 

rules, except for the additional reporting 

requirement each time a draw i3 made.

The Commission notes that, if a loan 

is reported on schedule C, ordinarily 

there will be corresponding entries in 

Schedule A, both in the summary and in 

the itemized reports. This will not be so 

if the establishment of a line of credit is 

reported—since there is in fact no loan 

until such time as a draw is made, there 

is nothing to report on Schedule A until 

that time.

Nevertheless, the Commission 

believes it is important that lines of 

credit be reported at the time they are 

established. This approach minimizes 

the possibility that the same collateral 

was used for more than one loan or line 

of credit. It also provides a more 

accurate picture of a candidate’s 

financial status for the public record.

As discussed above, the revised rules 

omit any reference to the settlement of 

loans from lending institutions. Rather, 

they provide at paragraph (d)(3) that 

each time a loan is restructured to 

change its terms, the candidate or 

political committee must report it as a 

new loan.

List of Subjects

11 CFR Part 100

Elections.

11 CFR Part 104

Campaign funds, Political candidates, 

Political committees and parties, 

Reporting requirements.

Certification of no effect pursuant to 5 

U.S.C. 605(b) (Regulatory Flexibility 

Act)

The attached final rules will not, if 

promulgated, have a significant 

economic impact on a substantial 

number of small entities. The basis for 

this certification is that the primary 

purpose of the amendments is to clarify 

the Commission’s rules on the making of 

bank loans to candidates and political 

committees. This does not impose a 

significant economic burden because 

any entities affected are already 

required to comply with the Act’s 

requirements in this area.

For the reasons set out in the 

preamble, subchapter A, chapter I, part 

100 of title 11 of the Code of Federal 

Regulations is amended as follows:

PART 100— SCOPE AND DEFINITIONS

1. The authority citation for part 100 

continues to read as follows:

Authority: 2 U.S.C. 431,438(a)(8).

2. Section 100 is amended by adding 

paragraph (b)(ll) (i) and (ii) to read as 

follows:

§ 100.7 Contribution (2 U.S.C. 431(8)).

* * * it it

(b) * * *

(11) * * *

(1) A loan, including a line of credit, 

shall be considered made on a basis 

which assures repayment if it is 

obtained using either of the sources of 

repayment described in paragraphs 

(b)(ll)(i) (A) or (B) of this section, or a 

combination of paragraphs (b)(ll)(i) (A) 

and (B) of this section:

(A)(7) The lending institution making 

the loan has perfected a security interest 

in collateral owned by the candidate or 

political committee receiving the loan, 

the fair market value of the collateral is 

equal to or greater than the loan amount 

and any senior liens as determined on 

the date of the loan, and the candidate 

or political committee provides 

documentation to show that the lending 

institution has a perfected security 

interest in the collateral. Sources of 

collateral include, but are not limited to, 

ownership in real estate, personal 

property, goods, negotiable instruments, 

certificates of deposit, chattel papers, 

stocks, accounts receivable and cash on 

deposit.

[2) Amounts guaranteed by secondary 

sources of repayment, such as 

guarantors and cosigners, shall not

exceed the contribution limits of 11 CFR 

part 110 or contravene the prohibitions 

of 11 CFR 110.4, part 114 and part 115; or

(B) The lending institution making the 

loan has obtained a written agreement 

whereby the candidate or political 

committee receiving the loan has 

pledged future receipts, such as public 

financing payments under 11 CFR part 

9001 et seq. or part 9031 et seq.,

contributions, or interest income, 

provided that:

(7) The amount of the loan or loans 

obtained on the basis of such funds does 

not exceed the amount of pledged funds;

(2) Loan amounts are based on a 

reasonable expectation of the receipt of 

pledged funds. To that end, the 

candidate or political committee must 

furnish the lending institution 

documentation, i.e., cash flow charts or 

other financial plans, that reasonably 

establish that such future funds will be 

available;

(3) A separate depository account is 

established at the lending institution or 

the lender obtains an assignment from 

the candidate or political committee to 

access funds in a committee account at 

another depository institution that meets 

the requirements of 11 CFR 103.2, and 

the committee has notified the other 

institution of this assignment;

(4) The loan agreement requires the 

deposit of the public financing 

payments, contributions and interest 

income pledged as collateral into the 

separate depository account for the 

purpose of retiring the debt according to 

the repayment requirements of the loan 

agreement; and

(5) In the case of public financing 

payments, the borrower authorizes the 

Secretary of the Treasury to directly 

deposit die payments into the depository 

account for the purpose of retiring the 

debt.

(11) If the requirements set forth in 

paragraph (b)(ll)(i) of this section are 

not met, the Commission will consider 

the totality of the circumstances on a 

case-by-case basis in determining 

whether a loan was made on a basis 

which assures repayment.

* * * * *

3. Section 100.8 is amended by adding 

paragraph (b)(12) (i) and (ii) to read as 

follows:

§ 100.3 Expenditure (2 U.S.C. 431(3)). 

*****

(b)* * *

(12) * * *

(i) A loan, including a line of credit, 

shall be considered made on a basis 

which assures repayment if it is 

obtained using either of the sources of 

repayment described in paragraphs
67124 Federal Register / Vol. 56, No. 249 / Friday, D ecem ber 27, 1991 / Rules and Regulations

(b)(12)(i) (A) or (B) of this section, or a 

combination of paragraphs (b)(12)(i) (A) 

and (B) of this section:

(A) (i) The lending institution making 

the loan has perfected a security interest 

in collateral owned by the candidate or 

political committee receiving the loan; 

the fair market value of the collateral is 

equal to or greater than the loan amount 

and any senior liens as determined on 

the date of the loan; and the candidate 

or political committee provides 

documentation to show that the lending 

institution has a perfected security 

interest in the collateral. Sources of 

collateral include, but are not limited to, 

ownership in real estate, personal 

property, goods, negotiable instruments, 

certificates of deposit, chattel papers, 

stocks, accounts receivable and cash on 

deposit

(2) Amounts guaranteed by secondary 

sources of repayment, such as 

guarantors and cosigners, shall not 

exceed the contribution limits of 11 CFR 

part 110 or contravene the prohibitions 

of 11 CFR 110.4, part 114 and part 115; or

(B) The lending institution making the 

loan has obtained a written agreement 

whereby the candidate or political 

committee receiving the loan has 

pledged future receipts, such as public 

financing payments under 11 CFR part 

9001 et seq. or part 9031 et seq.,

contributions, or interest income, 

provided that:

(1) The amount of the loan(s) obtained 

the basis of such funds does not exceed 

the amount of pledged funds;

(2) Loan amounts are based on a 

reasonable expectation of the receipt of 

pledged funds. To that end, the 

candidate or political committee must 

furnish the lending institution 

documentation, i.e., cash flow charts or 

other financial plans, that reasonably 

establish that such future funds will be 

available;

(3) A separate depository account is 

established at the lending institution or 

the lender obtains an assignment from 

the candidate or political committee to 

access funds in a committee account at

another depository institution that meets 

the requirements of 11 CFR 103.2, and 

the committee has notified the other 

institution of this assignment;

(4) The loan agreement requires the 

deposit of the public financing 

payments, contributions, interest or 

other income pledged as collateral into 

the separate depository account for the 

purpose of retiring the debt according to 

the repayment requirements of the loan; 

and

(5) In the case of public financing 

payments, the borrower authorizes the 

Secretary of the Treasury to directly 

deposit the payments into the depository 

account for the purpose of retiring the 

debt.

(ii) If the requirements set forth in 

paragraph (b)(12)(i) of this section are 

not met, the Commission will consider 

the totality of circumstances on a caseby-case basis in determining whether a 

loan was made on a basis which assures 

repayment.

PART 104— REPORTS BY POLITICAL 

COMMITTEES

4. The authority citation for part 104 

continues to read as follows:

Authority: 2 U.S.C. 431(1), 431(8), 431(9), 

432(i), 434, 438(a)(8), 438(b).

5. Section 104.3 is amended by adding 

paragraph (d) (1), (2) and (3) to read as 

follows:

§ 104.3 Contents of reports (2 U.S.C. 

434(b)).

*****

(d) * * *

(1) In addition, when a candidate or 

political committee obtains a loan from, 

or establishes a line of credit at, a 

lending institution as described in 11 

CFR 100.7(b)(ll) and 100.8(b)(12), it shall 

disclose in the next due report the 

following information on schedule C -l 

or C -P -l:

(i) The date and amount of the loan or 

line of credit;

(ii) The interest rate and repayment 

schedule of the loan, or of each draw on 

the line of credit;

(iii) The types and value of traditional 

collateral or other sources of repayment 

that secure the loan or the line of credit, 

and whether that security interest is 

perfected;

(iv) An explanation of the basis upon 

which the loan was made or the line of 

credit established, if not made on the 

basis of either traditional collateral or 

the other sources of repayment 

described in 11 CFR 100.7(b)(ll)(i)(A) 

and (B) and 100.8(b)(12)(i)(A) and (B); 

and

(v) a certification from the lending 

institution that the borrower’s responses 

to paragraphs (d)(l)(i)-(iv) of this 

section are accurate, to the best of the 

lending institution’s knowledge; that the 

loan was made or the line of credit 

established on terms and conditions 

(including interest rate) no more 

favorable at the time than those 

imposed for similar extensions of credit 

to other borrowers of comparable credit 

worthiness; and that the lending 

institution is aware of the requirement 

that a loan or a line of credit must be 

made on a basis which assures 

repayment and that the lending 

institution has complied with 

Commission regulations at 11 CFR 

100.7(b)(ll) and 100.8(b)(12).

(2) The political committee shall 

submit a copy of the loan or line of 

credit agreement which describes the 

terms and conditions of the loan or line 

of credit when it files Schedule C -l or 

C -P -l.

(3) The political committee shall file in 

the next due report a Schedule C -l or C - 

P -l each time a draw is made on a line 

of credit, and each time a loan or line of 

credit is restructured to change the 

terms of repayment.

* * * * *

Dated: December 20,1991.

John Warren McGarry,

Chairman, F ederal Election Commission.

[FR Doc. 91-30776 Filed 12-26-91; 8:45 am] 

BILLING CODE 6715-01-M