[Federal Register Volume 60, Number 31 (Wednesday, February 15, 1995)]
[Rules and Regulations]
[Pages 8526-8538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3363]



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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 95-03]
RIN 1557-AA72


Lending Limits

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

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
comprehensively revising its rules governing national bank lending 
limits as part of its Regulation Review Program. The final rule amends, 
clarifies, and reorganizes the OCC's lending limit rules.
    The final rule eliminates inefficient and unduly burdensome 
regulatory requirements and refocuses the lending limit rules on the 
areas of greatest safety and soundness concern. The new rule enhances 
the ability of national banks to lend while protecting against 
situations where excessive loans to a borrower or related borrowers 
present safety and soundness concerns.

EFFECTIVE DATE: March 17, 1995.

FOR FURTHER INFORMATION CONTACT: William C. Kerr, National Bank 
Examiner, or Frank R. Carbone, National Bank Examiner, Credit and 
Management Policy, (202) 874-5170; P. Moni SenGupta, Attorney 
Legislative and Regulatory Activities Division, (202) 874-5090; Aline 
J. Henderson, Senior Attorney, or Laura G. Goldman, Attorney, Bank 
Activities and Structure Division, (202) 874-5300; Office of the 
Comptroller of the Currency, 250 E St. SW, Washington, D.C. 20219. 
[[Page 8527]] 

SUPPLEMENTARY INFORMATION:

Background

    Although the limitations on a national bank lending to one borrower 
can be traced to the Currency Act of 1863,<SUP>1 the Garn-St Germain 
Depository Institutions Act (Act), Pub. L. 97-320 (1982), represents 
the most recent major revision of the statutory lending limits. Section 
401(a) of that Act amended 12 U.S.C. 84 to raise the amount that a 
national bank may lend to a single borrower from 10 to 15 percent of 
the bank's unimpaired capital and unimpaired surplus. It also added new 
exceptions, defined key terms, and provided express authority for the 
OCC to issue regulations to implement the statute, including 
regulations to define or further define terms and to establish limits 
or requirements other than those contained in the statute for 
particular classes or categories of loans.

    \1\Act of Feb. 25, 1863, 12 Stat. 665 et seq., R.S. Sec. 5200.
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    The OCC implemented the amended 12 U.S.C. 84 with a final rule 
published on April 12, 1983 (48 FR 15844). The final rule created a new 
part 32 in title 12 of the Code of Federal Regulations which replaced 
and restructured existing interpretive rulings previously found at 12 
CFR part 7. The OCC proposed another major regulatory revision of the 
lending limits for national banks on October 24, 1989 (54 FR 43398). A 
final rule in response to this proposal was never adopted, however.

The Proposal

    On February 11, 1994 the OCC published its proposal to revise the 
lending limit regulation found at 12 CFR part 32 (proposal), 59 FR 
6593, as part of the OCC's Regulation Review Program. The proposal 
sought to modernize the regulation and incorporate into the rule 
significant interpretive positions of the OCC. The proposal sought to 
comprehensively revise, reorganize, update, and simplify the 
regulation, and to reduce unnecessary regulatory burdens, without 
compromising the important safety and soundness objectives of the 
lending limits rule.

Comments Received and Changes Made

    The final rule implements most of the initiatives contained in the 
proposal. However, several additional changes are made in response to 
the comments received. Most of these changes clarify the original 
intent of the proposal. Other changes alter the proposed regulation in 
a manner that provides additional flexibility to banks. The final rule 
also includes a number of technical changes to the proposal.
    The OCC received 28 comment letters on the proposal. The comments 
received generally were very favorable. Comment letters included 16 
from banks and bank holding companies, three from law firms, and eight 
from trade associations and the representatives of banks, thrifts, home 
builders, and clearing houses. The commenters welcomed the OCC's effort 
to reorganize part 32 and several stated that the changes made in the 
proposal represented a significant improvement over the old rule. 
Commenters generally praised the new format and the additional clarity 
provided by the revisions. Some predicted that the simplified 
regulation would reduce regulatory burden and compliance costs.

Overview of the Final Rule

    The OCC reviewed the lending limit rule with the goals of reducing 
unnecessary regulatory burdens and providing banks with increased 
flexibility in their lending operations, consistent with safe and sound 
banking practices.
    As part of this new approach, the final rule alters the definition 
of ``capital and surplus'' upon which lending limits are based. The new 
lending limit calculation draws upon risk-based capital components that 
a bank must already calculate for Call Report purposes. By relying on 
quarterly Call Report information, most national banks generally will 
be required to calculate their lending limit only once every quarter, 
rather than every time they propose to make a loan.
    The final rule also adds a few new definitions and removes or 
consolidates old ones to enhance the regulation's clarity. Several 
modifications provide banks with greater flexibility in certain lending 
situations, subject to safety and soundness parameters. For example, 
the rule includes a new exception to the lending limits to allow a bank 
to advance funds to renew and complete the funding of a qualifying loan 
commitment under circumstances where the additional advance will 
protect the position of the bank. The final rule also allows a bank to 
advance funds to pay for taxes, insurance and other necessary expenses 
to protect its interest in the collateral securing a loan, and 
clarifies when a loan is considered ``nonconforming,'' rather than a 
violation, when it exceeds a bank's lending limit, but was within the 
bank's lending limit when made.

Section-by-Section Discussion

    The commenters focused on provisions of the proposal needing 
modification or further amendment. The OCC carefully considered each of 
the comment letters and has made a number of changes in response. Those 
comments and any changes are identified and explained in the section-
by-section discussion that follows. A table summarizing the sections of 
the former part 32 that are amended by the final rule is included at 
the end of this preamble.

Authority, Purpose and Scope (Sec. 32.1)

    The proposal amended the ``Purpose'' paragraph to expressly 
incorporate the objectives of safety and soundness, loan 
diversification, and equitable access to banking services. The final 
rule adds to the ``Scope'' paragraph new language cautioning bank 
management that the lending limit rule is not a ``safe harbor'' for 
lending.
    The ``Scope'' paragraph emphasizes that the lending limit rules are 
only one component of a prudent lending program. National banks must 
always underwrite loans in accordance with prudent banking practices, 
in addition to adhering to specific quantitative limitations such as 
the lending limits. Several commenters remarked that the OCC should 
amend the lending limits provisions to recognize the existence of 
limited liability companies as bank subsidiaries, comparable to 
operating subsidiaries. Treatment of limited liability companies as 
operating subsidiaries is an issue raised in the OCC's proposed changes 
to Part 5 of its regulations, and the OCC believes the question is 
better resolved in that context. (59 FR 61034, November 29, 1994.) In 
the interim, however, when a bank seeks permission to invest in a 
limited liability company as a subsidiary, and the bank's voting 
interest satisfies the operating subsidiary percentage control 
requirements, the bank may also seek confirmation that loans by the 
bank to the limited liability company subsidiary will be treated in the 
same way as loans to an ``operating subsidiary'' for purposes of 
lending limits.

Definitions (Sec. 32.2)

    The proposal consolidated all the definitions located throughout 
the existing rule into a single section. Commenters raised questions 
about some of the revisions and additions made to the definitions. Of 
particular note are the following revisions. [[Page 8528]] 

Capital and Surplus (Sec. 32.2(b))

    Under the former rule, the statutory lending limit of 15% of 
capital was applied to a definition of capital found in 12 CFR 
Sec. 3.100. The Sec. 3.100 definition serves as the capital base for 
certain other regulatory limitations, such as limits on purchasing 
investment securities, holding property and OREO, and investing in 
community development corporations. The Sec. 3.100 capital definition 
is separate and different from the leverage and risk-based capital 
formulae used to determine banks' capital adequacy.
    In order to reduce regulatory burden associated with calculating 
lending limits and to begin the process of reducing the multiple 
definitions of capital currently in use, the proposal changed the 
definition of capital and surplus used for lending limits purposes by 
employing a capital calculation that all banks already make. Under the 
proposal, a bank's basic lending limit would be an amount equal to 15% 
of the sum of its allowed Tier 1 and Tier 2 capital, plus the balance 
of its allowance for loan and lease losses (ALLL) not included in Tier 
2 capital for the bank's risk-based capital calculation. For 
simplicity, the proposal used the terminology ``capital and surplus'' 
rather than the statutory terms ``unimpaired capital and unimpaired 
surplus.''
    The commenters generally favored this approach to the capital 
definition, however, some expressed concern that the approach needed to 
be clarified. The new capital base for calculation of the limit in the 
proposal appeared to some commenters to be the sum of all Tier 1 
elements and all Tier 2 elements, whether or not they exceeded the 
amounts that could be included in a bank's risk-based capital. The 
final rule adopts the proposed capital and surplus definition but with 
an amendment to clarify that only the amount of Tier 1 and Tier 2 
capital that is actually included in a bank's risk-based capital (plus 
the excess ALLL) is allowed in the bank's lending limit capital base.

Loans and Extensions of Credit (Sec. 32.2(j))

    The commenters generally favored the proposed amendments to the 
definition of loans and extensions of credit, now found at 
Sec. 32.2(j), which incorporates significant OCC interpretive positions 
clarifying the term. Section 32.2(j)(1)(iii) adds the requirement that 
in order to exclude a bank's purchase of Type I securities subject to a 
repurchase agreement, a bank must have assured control over or 
established rights to the securities.
    Some commenters requested additional clarification of the meaning 
of ``assured control.'' Assured control means that the bank has 
recognized and exercisable authority over the asset. For example, a 
bank can assure control of property subject to a repurchase agreement 
by taking physical possession of the security or by requiring a proper 
recordation of ownership of book-entry securities.
    Section 32.2(j)(1)(v) excludes all intra-day or daylight overdrafts 
from the definition of an extension of credit. Several commenters 
questioned whether the terms ``intra-day'' or ``daylight'' were 
sufficiently adaptable for an increasingly complex and international 
payments system. As the commenters point out, more and more banks 
operate across several time zones. The financial payments systems are 
now global systems spanning many time zones. With this in mind, several 
commenters suggested that the final rule adapt the meaning of a 
``daylight'' overdraft to contemporary conventions. The OCC believes 
these concerns have merit and the final rule drops the reference to 
``daylight'' and simplifies the definition. Intra-day overdrafts 
excluded from the final rule are those overdrafts for which payment is 
received before the bank closes its books for the calendar day. This 
change recognizes the reality of a rapidly expanding payments system 
that may eventually run 24 hours a day and looks to each bank's 
practice for closing its books for the calendar day.
Loans Legally Unenforceable
    Section 32.2(j)(1)(vii) of the proposal was intended to incorporate 
OCC interpretive letters that elaborated on former Sec. 32.106, that 
certain loans that become legally unenforceable would not be counted in 
calculating a bank's lending limit. One commenter observed that in 
attempting to incorporate the OCC interpretive letters, the proposal 
effectively narrowed the effect of the interpretive ruling by excluding 
from lending limit calculations only loans that are discharged in 
bankruptcy, or by judicial decision or statute, and not excluding loans 
that are legally unenforceable ``for any other reason.''
    The final rule returns to the scope of the original OCC 
interpretive ruling. Under the final rule, a loan (or a portion 
thereof) that becomes legally unenforceable for any reason and has been 
charged off on a bank's books, is not considered a loan or extension of 
credit. As a matter of prudent banking practice, the OCC expects that 
banks will keep sufficient documentation to show why loans are legally 
unenforceable. These records may include letters, memoranda, or written 
agreements that evidence the bank's legally enforceable forgiveness of 
a loan. The financial records of the bank also should reflect that the 
loan has been charged off.
Advances for the Benefit of the Borrower
    As proposed, Sec. 32.2(j)(2)(i) exempts from the definition of 
``loans and extensions of credit'' additional funds advanced to a 
borrower by a bank for taxes or insurance if the advance is made for 
the protection of the bank. The purpose of this exemption was to allow 
banks to preserve the value of the collateral securing a loan. The 
proposal requested that commenters address whether advances made for 
other purposes should be similarly exempted from the definition of 
loans and extensions of credit. Commenters responded that the purpose 
of the exemption is served by allowing an advance for any purpose that 
protects the collateral.
    The OCC carefully considered the comments received on this issue. 
The OCC recognizes that there may be situations when an advance on 
behalf of a troubled borrower could help the lending bank avoid greater 
expenses after foreclosure. For example, an advance for the purpose of 
repairing a leaking roof is more cost effective than waiting until 
after foreclosure which leads to spending more money to restore the 
value of water-damaged OREO. However, using the exemption to advance 
funds for building new property would not be consistent with the 
purpose of the exemption. The OCC also has concerns that banks 
reasonably anticipate a borrower's need to fund various expenses in 
determining the appropriate size of the loan that a bank is able to 
extend and that the exemption not create incentives for borrowers to 
divert or reclassify spending in order to qualify larger portions of 
their credit needs for the exemption.
    Nevertheless, the OCC believes that a moderate extension of the 
exemption to allow advances to pay for more than taxes and insurance is 
appropriate, provided that the expenses have not been structured to 
avoid a bank's lending limits. The final rule therefore exempts from 
the lending limit reasonable advances made on behalf of the borrower to 
pay for necessary maintenance and certain other expenditures when an 
advance is consistent with safe and sound banking practices and 
designed to protect the lending bank's interest in the collateral. 
[[Page 8529]] As before, these advances will be treated as an extension 
of credit and taken into account in calculating the bank's lending 
limit if the bank seeks to make an additional loan to the same 
borrower.
Accrued and Discounted Interest
    Section 32.2(j)(2)(ii) of the proposal clarified the type of 
accrued and discounted interest that would qualify for an exclusion 
from the definition of ``loans and extensions of credit''. The proposal 
also provided, however, that accrued and discounted interest would be 
treated as an extension of credit if a bank sought to make another loan 
to the borrower.
    Several commenters, particularly large banks with loans to foreign 
governments, objected to this provision of the paragraph. One commenter 
stated that this provision would be a major problem for banks seeking 
to restructure loans to foreign governments with substantial accrued 
interest. The proposed provision could severely impair a bank's ability 
to participate in any new extensions of credit in connection with that 
type of sovereign debt restructuring. Other commenters pointed to the 
1982 Garn-St Germain amendments, Pub. L. 97-320 (1982), which changed 
the language of 12 U.S.C. 84 from ``total obligations'' of a borrower 
to ``loans and extensions of credit''. These commenters argued that the 
1982 amendment reflects a shift in the focus of the statute. They 
argued that the 1982 amendment confirms that Sec. 84 is not directed to 
interest that is contractually due but is intended to limit only the 
funds that actually leave the bank in the form of principal. In short, 
these commenters believe that the lending limits apply to money loaned, 
not money owed.
    The OCC believes these comments have merit. In order to provide 
greater flexibility to banks seeking to improve their recoveries 
through loan work-outs and restructured loans with troubled debtors, 
the final rule modifies the OCC's previous approach. Under the final 
rule, a bank need not attribute past-due or accrued interest to a 
borrower for purposes of the lending limit. However, as already noted, 
all loans made by a national bank must be underwritten in accordance 
with prudent banking practices, in addition to adhering to specific 
quantitative limitations such as the lending limits. National banks 
therefore should consider the possibility of unscheduled interest 
accruals in determining the amount of the bank's original extension of 
credit, and also must bear the prudent banking practices standard in 
mind when extending additional credit to a borrower with past-due or 
accrued interest.
Renewals
    The proposal incorporated an OCC interpretive position that 
excludes from the definition of ``loans and extensions of credit'' 
certain loan renewals or restructurings if the bank first exercised 
``best efforts'' to bring the loan into conformity with its lending 
limit. Several commenters questioned whether the use of the term ``best 
efforts'' sets a standard that is too high to provide any practical 
application. The OCC agrees and the final rule uses the term 
``reasonable'' efforts, which better reflects the OCC expectation and 
the original intent of the proposed amendment.
Items in the Process of Collection
    The OCC has generally taken the interpretive position that giving 
credit for uncollected items is a loan or an extension of credit. 
However, under the proposal, the OCC also created an exception for 
instances where payment is required by Regulation CC of the Federal 
Reserve Board, 12 CFR part 229. Regulation CC specifies certain time 
frames within which funds must be made available. Several commenters 
correctly pointed out that although the intent of the proposal was to 
provide additional flexibility, the effect of the change did not 
achieve that result. In fact, the proposal may have prevented a bank 
from giving credit for an uncollected item prior to the day stated in 
the mandatory availability schedule in Regulation CC, by requiring the 
bank to treat that advance as an extension of credit.
    The final rule amends this paragraph by providing that amounts paid 
on items in the normal process of collection do not constitute a loan 
or extension of credit. However, once an item is returned or dishonored 
by the paying bank, it no longer is in the normal process of 
collection. Payment by a bank against a dishonored item would be an 
extension of credit.
Participation Loans
    Section 32.2(j)(2)(vi) of the final rule revises the proposal's 
treatment of participation loans. The proposal incorporated 
interpretive positions previously found at Sec. 32.107 and included a 
new provision requiring a bank that originates a loan to receive 
funding from the participants on the same day. If the bank did not 
receive participant funding on the same day, the proposal required the 
bank to treat unfunded portions as a loan from the originating bank to 
the borrower. Many commenters suggested that the OCC eliminate the 
same-day funding requirement because it is impractical. The OCC 
disagrees with that contention and believes the participant funding 
provision is an important protection to the originating bank that will 
help ensure prompt funding by participants.
    The commenters, however, correctly point out that delays in the 
timing and delivery in funding a participation are not infrequent. The 
OCC does not intend for inadvertent funding delays to cause lending 
limit violations. The final rule therefore extends the funding period 
to provide a more realistic timeframe to address temporary or 
inadvertent funding errors. The final rule provides that a 
participation loan is not attributed to the originating bank if it 
receives funding from the participants before the close of business on 
the day after it makes funds available to the borrower. The final rule 
also sets forth standards for an originating bank that, if followed, 
shield the bank from a lending limit violation in the event that a 
participant fails to fund.

Special Lending Limits (Sec. 32.3(b))

    Section 32.3(b)(3)(ii) of the proposal required an inspection and 
valuation of livestock that is ``current, taking into account the 
nature and frequency of turnover of the livestock'' in order to qualify 
for the special lending limit for loans secured by documents covering 
livestock. Former part 32 required that an ``inspection and appraisal 
report'' be performed at least every 12 months or more frequently as 
deemed prudent. The proposal recognized the differences in turnover 
between different kinds of livestock that secure a loan. It removed the 
presumption that an inspection and appraisal report performed every 12 
months is adequate.
    Several commenters questioned this change. The commenters read the 
former rule to require an inspection report only once every 12 months. 
Although some commenters characterized the proposal as more burdensome 
than the old requirement, the OCC believes it is not. In fact, the 
former rule required an inspection and appraisal report more frequently 
than once a year, if it was prudent to do so. The proposal actually 
reduced burden by allowing the use of valuations, rather than 
appraisals, when appropriate. Recognizing the need for clarity, 
however, the final rule includes the requirement that an inspection or 
valuation be made no less frequently than every 12 months.
    Section 32.3(b)(5) of the proposal also provided a new exception to 
the lending limits to enable a bank to renew a [[Page 8530]] qualifying 
commitment to lend in order to complete the financing of a project in 
process. Under the proposal, the advance had to be to protect the 
position of the bank, and the amount of additional advances could not 
exceed the lesser of the unfunded portion of the original commitment or 
5 percent of the bank's capital and surplus. Commenters generally 
supported this position. Several suggested, however, that for the 
exception to accomplish its intended purpose, the OCC should allow the 
bank to fund the full amount of the commitment even if it was in excess 
of the five percent cap.
    The OCC believes that this suggestion has merit, but is also 
concerned that full funding of the original commitment must not 
compromise a bank's safety and soundness. Accordingly, the final rule 
modifies the approach contained in the proposal to allow funding up to 
the amount of the original commitment, provided the renewal and 
additional funding thereunder is consistent with safe and sound banking 
practices, is made to protect the bank's position, and will enable the 
borrower to complete the project for which the original commitment was 
made.
    Section 32.3(b)(6) of the proposal was not included in the final 
rule. This paragraph set forth a special lending limit that expired on 
January 1, 1995. Since the section serves no purpose after that date it 
is not incorporated into the final rule.

Loans Exempt From the Lending Limit (Sec. 32.3(c))

    Section 32.3(c)(3) is revised in the final rule. This paragraph 
provides that loans collateralized by U.S. government obligations are 
exempt from the lending limits to the extent of the current market 
value of the collateral. This exemption includes loans that are secured 
by bonds, notes, Treasury bills, or similar obligations fully 
guaranteed as to principal and interest by the full faith and credit of 
the United States Government. This exemption was the subject of several 
commenter suggestions that it be expanded to include loans that are 
secured by instruments with comparable government backing. The OCC 
agrees with these comments that certain other forms of collateral that 
carry the full faith and credit of the U.S. government pose no greater 
risk of loss. Accordingly, the final rule relies on the OCC's authority 
under 12 U.S.C. 84(d)(1) to establish limits or requirements other than 
those specified in the statute, for particular classes or categories of 
loans, to include an additional class of loans in the exempt category--
loans guaranteed as to repayment of principal by the full faith and 
credit of the U.S. Government. This exemption includes qualifying Small 
Business Administration, Federal Housing Administration, and Veterans 
Administration guaranteed loans, but only to the extent of the 
government guarantee.
    Some commenters suggested that the final rule also extend this 
exemption to loans that are secured by other types of instruments. The 
OCC has carefully considered these suggestions, but does not agree 
that, as a general matter, the principal and liquidity risks presented 
by the suggested types of instruments are sufficiently comparable to 
the risks of directly holding the U.S. Government securities, or 
government-backed loans. Accordingly, the OCC declines to add an 
additional category of collateral that could qualify a loan for an 
exemption from lending limits.
    The final rule also modifies Sec. 32.3(c)(10) of the proposal. As 
proposed, this paragraph was intended to incorporate OCC interpretive 
positions on loans to leasing companies. This paragraph allows banks to 
attribute loans made to leasing companies to the lessees when certain 
conditions are met. The final rule includes minor changes to ensure 
that the conditions for this treatment are no more burdensome than if 
the bank were to act as a lessor itself subject to 12 CFR part 23. 
These changes better convey the current OCC interpretive position.

Frequency of the Lending Limit Calculation (Sec. 32.4)

    The former rule required a bank to determine its lending limit for 
each loan on the date that it made a loan. The proposal simplified this 
requirement by allowing a bank to rely on its quarterly calculation of 
capital found in its Call Report. Rather than calculate daily, under 
the proposal the bank generally could calculate the lending limit once 
for the entire quarter. However, the OCC was concerned that a 
significant decline in capital between quarterly calculations could 
result in a bank lending at a level above its actual limit for the 
duration of the quarter.
    To prevent a bank from lending in excess of a shrinking capital 
base, the proposal required a bank to recalculate its lending limit 
between quarters if there were a change in its capital category for 
purposes of prompt corrective action, or if a ``material event'' 
occurred that caused its capital to increase or decrease by 10 percent 
or more. However, it was recognized that what constitutes a ``material 
event'' for this trigger may not be readily defined. Anticipating 
criticism of the material event component, the proposal suggested an 
alternative: a simple increase or decrease of 10 percent in a bank's 
capital between quarters would trigger the recalculation obligation.
    Comment was mixed on both approaches to the recalculation trigger. 
Generally, commenters characterized the ``material event'' element as 
too vague to be useful. Many suggested that a simple percentage test 
would be more reliable and useful. Others questioned whether a 
percentage test was needed given the OCC's general ability to require 
more frequent calculations in individual cases. The OCC finds these 
arguments persuasive. The OCC has concluded that the material event 
element is too vague to give a reliable indication of the need to 
recalculate. As a result, the OCC has not included this requirement in 
the final rule.
    Imposing the requirement that a bank recalculate whenever its 
capital declined by 10 percent between quarters is also problematic. 
Several commenters observed that the obligation to monitor the changes 
in capital between quarters would give a bank little comfort that its 
quarterly lending limit is valid for the entire quarter. In effect the 
obligation to monitor 10 percent swings in capital could force a bank 
to make a daily calculation of capital, not quarterly as proposed. This 
result would be contrary to the purpose of the proposed quarterly 
calculation.
    On the other hand, the OCC also considered whether a quarterly 
calculation would be inappropriate for any identifiable subset of 
national banks, such as banks that are undercapitalized. The OCC 
determined not to include a different lending limit calculation 
frequency requirement for undercapitalized banks as a class, however, 
because the OCC anticipates that such banks will be subject to enhanced 
supervisory oversight and directives that will address the frequency of 
the bank's lending limit calculations in those cases where lending 
limit excesses are a potential problem. (For example, a bank could be 
undercapitalized for reasons unrelated to its lending activities, or 
could have poor underwriting practices and losses on loans and raise no 
lending limits issues). The OCC closely monitors undercapitalized 
banks, however, and will make appropriate adjustments to the frequency 
of required lending limit calculations for such banks if experience 
indicates that a general standard for undercapitalized banks is needed.
    The final rule, therefore, deletes the 10 percent recalculation 
requirement [[Page 8531]] but retains the explicit authority for the 
OCC to require a national bank to calculate its lending limits more 
frequently than every quarter when the OCC believes it is necessary. 
The OCC therefore may address unsafe or unsound lending practices or 
other supervisory concerns by directing any bank to calculate its 
lending limit more frequently than quarterly. This authority is set 
forth in Sec. 32.4(b).

Direct Benefit Test (Sec. 32.5(b))

    Section 32.5(b) requires a loan to be attributed to a third party 
if the third party gains the direct benefit of the loan proceeds. The 
proposal narrowed the direct benefits tests to clarify that loans are 
not attributable to a third party when the loan proceeds are 
transferred to the third party to acquire property, goods, or services 
in a bona-fide arms-length transaction.
    The proposal requested comment on the question of whether the 
direct benefits test was necessary. Several commenters argued that it 
was not. Some commenters suggested that the common enterprise test 
addresses most, and possibly all, circumstances that involve the less 
than a bona fide arms-length transactions that is the focus of the 
direct benefits test. The OCC has carefully considered these comments 
but has concluded that the direct benefits test uniquely addresses an 
area of concern in the lending limits area. The final rule therefore 
retains the test but with one change, designed to improve certainty 
regarding the application of the test. The ``facts and circumstances'' 
provision of the direct benefits test is removed. The OCC believes this 
part of the test was redundant and potentially confusing.

Common Enterprise Test (Sec. 32.5(c))

    The final rule adopts the common enterprise test largely as stated 
in the proposal. The common enterprise test requires the aggregation of 
loans made to persons who are related through common control and 
financial interdependence or share a common source of income for 
repayment of the loan, or whenever the OCC determines the ``facts and 
circumstances'' requires aggregation. Most commenters characterized the 
proposed language as a much improved restatement of the test that was 
easier to understand. Some commenters requested further amendments, 
alterations, and extension of the rule.
    The OCC has not adopted most of the suggestions. Many of the 
commenters' suggestions for change would have undermined the 
effectiveness of this combination rule. Most of the suggested changes 
would not have provided much additional clarity. Others risked 
diminishing the effectiveness of the rule. Although the common 
enterprise test may be somewhat complex to apply to certain corporate 
structures, the OCC has concluded that, on balance, it is an effective 
description of the varied circumstances when loans to separate 
borrowers should be combined because they present a common source of 
credit exposure for a bank.
    The final rule makes changes to Sec. 32.5(c)(3), to clarify that 
the rule requires combination of only those loans that the borrowers 
use for the acquisition of a controlling interest in a business. The 
final rule also specifically clarifies that limited liability companies 
will be treated in the same manner as corporations, rather than as 
partnerships, in applying the common enterprise test.

Nonconforming Loans (Sec. 32.6)

    The proposal incorporated OCC policy that a bank will not be deemed 
to violate the lending limits when a loan that was legal when made 
becomes nonconforming as a result of several specifically defined 
events, provided the bank exercises ``best efforts'' to bring the loan 
into conformity with the lending limit. A number of commenters objected 
that the ``best efforts'' standard was too high. Some commenters 
pointed out that using best efforts to reduce a nonconforming loan 
could pose certain safety and soundness risks to a bank. For example, 
if a bank holds a loan that was legal when made and subsequently the 
bank's capital declines, the best efforts standard might require that 
the bank sell the loan off at any price. This forced sale only causes 
the bank to lose an asset during a period that its capital is in 
decline. The OCC did not intend this result of the proposed 
nonconforming loan provisions.
    In response to commenter concerns, the final rule replaces the term 
``best efforts'' with the term ``reasonable efforts''. The OCC believes 
this standard more accurately reflects the level of effort appropriate 
to bring a loan into conformance with a bank's current lending limits. 
The final rule also makes clear that the section does not require a 
bank to make efforts to bring the loan into conformity if to do so 
would be inconsistent with safe and sound banking practices. In 
addition, the final rule adds that loans that exceed a bank's lending 
limit as a result of changes in the capital rules or because borrowers 
subsequently become a common enterprise will be treated as 
nonconforming.
    Finally, in response to commenters, the final rule changes the 
treatment of loans that qualify for a lending limit exemption because 
they are secured by certain collateral, such as U.S. government 
obligations. Under the former rule, as well as the proposal, a national 
bank was required to bring a loan into conformity through restoration 
of the market value of the collateral or by reducing the amount of the 
bank's loan by the amount that exceeds the lending limit within five 
business days. Several commenters characterized the five day correction 
period as arbitrary and unrealistic.
    The OCC recognizes that there are circumstances beyond the bank's 
control which might cause a loan of this type to violate the lending 
limit, because of a decline in collateral value. Instead of the five 
day period, the final rule requires that a bank bring these loans into 
conformity within 30 calendar days. During that 30 day period, the loan 
will be treated as non-conforming. The OCC believes this change will 
provide a more realistic period to enable a bank to address restoration 
of proper collateral for a loan without forcing a precipitous 
divestiture of all or part of the loan that would not be in the best 
interests of the bank.

Effective Date

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, 12 U.S.C. 4802, requires that a regulation 
that imposes new requirements take effect on the first day of the 
quarter following publication of the final rule. That section provides, 
however, that an agency may determine that the rule should take effect 
earlier.
    The OCC believes that this regulation relieves burden by 
eliminating inefficient and unduly costly regulatory requirements and 
better focusing the lending limit rules on areas of greatest safety and 
soundness concern. These revisions to part 32 should not be further 
delayed. Accordingly, the final rule is effective 30 days after 
publication.

Derivation Table

    Only substantive modifications, additions and changes are 
indicated.

[[Page 8532]]
----------------------------------------------------------------------------------------------------------------
                 Revised provision                         Existing provision                  Comments         
----------------------------------------------------------------------------------------------------------------
Sec. 32.1.........................................  Sec. 32.1, Sec. 32.111..........  Modified.                 
Sec. 32.2(a)......................................  Sec. 32.101.....................  Added and modified.       
    (b)...........................................  Sec. 32.2(c)....................  Significant change.       
    (c)...........................................  ................................  Added.                    
    (d)...........................................  Sec. 32.6(h)(3).................  ..........................
    (e)...........................................  Sec. 32.6(h)(4).................  ..........................
    (f)...........................................  Sec. 32.2(d)....................  ..........................
    (g)...........................................  Sec. 32.5(a)(2)(v)..............  Modified.                 
    (h)...........................................  Sec. 32.4(b)....................  ..........................
    (i)...........................................  Sec. 32.4(c) and (e)............  ..........................
    (j)(1)(i).....................................  Sec. 32.2(a)....................  ..........................
    (j)(1)(ii)....................................  Sec. 32.2(a)....................  ..........................
    (j)(1)(iii)...................................  Sec. 32.103.....................  Modified.                 
    (j)(1)(iv)....................................  Sec. 32.104.....................  Modified.                 
    (j)(1)(v).....................................  Sec. 32.105.....................  ..........................
    (j)(1)(vi)....................................  Sec. 32.102(b)..................  ..........................
    (j)(1)(vii)...................................  Sec. 32.106.....................  Modified.                 
     (j)(2)(i)....................................  ................................  Added.                    
    (j)(2)(ii)....................................  Sec. 32.108.....................  Modified.                 
    (j)(2)(iii)...................................  ................................  Added.                    
    (j)(2)(iv)....................................  ................................  Added.                    
    (j)(2)(v).....................................  ................................  Added.                    
    (j)(2)(vi)....................................  Sec. 32.107.....................  Significant change.       
    (k)...........................................  Sec. 32.2(b)....................  Modified.                 
    (l)...........................................  Sec. 32.2(f)....................  ..........................
    (m)...........................................  Sec. 32.4(c)....................  ..........................
    (n)...........................................  Sec. 32.6(c)(3).................  ..........................
    (o)...........................................  Sec. 32.102(a)..................  ..........................
    (p)...........................................  Sec. 32.2(e)....................  ..........................
Sec. 32.3(a)......................................  Sec. 32.3, Sec. 32.4............  Modified.                 
    (b)(1)........................................  Sec. 32.6(c)....................  ..........................
    (b)(2)........................................  Sec. 32.6(h)....................  Modified.                 
    (b)(3)........................................  Sec. 32.6(i)(1).................  Modified.                 
    (b)(4)........................................  Sec. 32.6(i)(2).................  ..........................
    (b)(5)........................................  ................................  Significant addition.     
    (c)(1)........................................  Sec. 32.6(a)....................  ..........................
    (c)(2)........................................  Sec. 32.6(b)....................  ..........................
    (c)(3)........................................  Sec. 32.6(d)....................  Significant change.       
     (c)(4).......................................  Sec. 32.6(e)....................  ..........................
    (c)(5)........................................  Sec. 32.109.....................  ..........................
    (c)(6)........................................  Sec. 32.6(f)....................  Modified.                 
    (c)(7)........................................  Sec. 32.6(g)....................  ..........................
    (c)(8)........................................  Sec. 32.6(j)....................  ..........................
    (c)(9)........................................  Sec. 32.110.....................  ..........................
    (c)(10).......................................  ................................  Added.                    
Sec. 32.4.........................................  ................................  Significant addition.     
Sec. 32.5(a)......................................  Sec. 32.5(a)(1).................  ..........................
    (b)...........................................  ................................  Significant change.       
    (c)...........................................  Sec. 32.5(a)(2).................  Modified.                 
    (d)...........................................  Sec. 32.5(b)....................  Modified.                 
    (e)...........................................  Sec. 32.5(c)....................  ..........................
    (f)...........................................  Sec. 32.5(d)....................  ..........................
Sec. 32.6.........................................  Sec. 32.7.......................  Modified.                 
----------------------------------------------------------------------------------------------------------------

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Comptroller of the Currency certifies that the 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 regulation will reduce the regulatory burden on national 
banks, regardless of size, by simplifying and clarifying existing 
regulatory requirements.

Executive Order 12866

    The OCC has determined that this document is not a significant 
regulatory action as defined in Executive Order 12866.

List of Subjects in 12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

Authority and Issuance

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

PART 32--LENDING LIMITS

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

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


Sec. 32.1  Authority, purpose and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 84, and 12 U.S.C. 93a.
    (b) Purpose. The purpose of this part is to protect the safety and 
soundness of [[Page 8533]] national banks by preventing excessive loans 
to one person, or to related persons that are financially dependent, 
and to promote diversification of loans and equitable access to banking 
services.
    (c) Scope. (1) This part applies to all loans and extensions of 
credit made by national banks and their domestic operating 
subsidiaries. This part does not apply to loans made by a national bank 
and its domestic operating subsidiaries to the bank's ``affiliates,'' 
as that term is defined in 12 U.S.C. 371c(b)(1), to the bank's 
operating subsidiaries, or to Edge Act or Agreement Corporation 
subsidiaries.
    (2) The lending limits in this part are separate and independent 
from the investment limits prescribed by 12 U.S.C. 24 (Seventh), and a 
national bank may make loans or extensions of credit to one borrower up 
to the full amount permitted by this part and also hold eligible 
securities of the same obligor up to the full amount permitted under 12 
U.S.C. 24 (Seventh) and 12 CFR part 1.
    (3) Extensions of credit to executive officers, directors and 
principal shareholders of national banks, and their related interests 
are subject to limits prescribed by 12 U.S.C. 375a and 375b in addition 
to the lending limits established by 12 U.S.C. 84 and this part.
    (4) In addition to the foregoing, loans and extensions of credit 
made by national banks and their domestic operating subsidiaries must 
be consistent with safe and sound banking practices.


Sec. 32.2  Definitions.

    (a) Borrower means a person who is named as a borrower or debtor in 
a loan or extension of credit, or any other person, including a drawer, 
endorser, or guarantor, who is deemed to be a borrower under the 
``direct benefit'' or the ``common enterprise'' tests set forth in 
Sec. 32.5.
    (b) Capital and surplus means--
    (1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-
based capital under the OCC's Minimum Capital Ratios in Appendix A of 
part 3 of this chapter; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital under part 3 of this chapter.
    (c) Close of business means the time at which a bank closes its 
accounting records for the business day.
    (d) Consumer means the user of any products, commodities, goods, or 
services, whether leased or purchased, but does not include any person 
who purchases products or commodities for resale or fabrication into 
goods for sale.
    (e) Consumer paper means paper relating to automobiles, mobile 
homes, residences, office equipment, household items, tuition fees, 
insurance premium fees, and similar consumer items. Consumer paper also 
includes paper covering the lease (where the bank is not the owner or 
lessor) or purchase of equipment for use in manufacturing, farming, 
construction, or excavation.
    (f) Contractual commitment to advance funds. (1) The term includes 
a bank's obligation to--
    (i) Make payment (directly or indirectly) to a third person 
contingent upon default by a customer of the bank in performing an 
obligation and to make such payment in keeping with the agreed upon 
terms of the customer's contract with the third person, or to make 
payments upon some other stated condition;
    (ii) Guarantee or act as surety for the benefit of a person;
    (iii) Advance funds under a qualifying commitment to lend, as 
defined in paragraph (l) of this section; and
    (iv) Advance funds under a standby letter of credit as defined in 
paragraph (p) of this section, a put, or other similar arrangement.
    (2) The term does not include commercial letters of credit and 
similar instruments where the issuing bank expects the beneficiary to 
draw on the issuer, that do not guarantee payment, and that do not 
provide for payment in the event of a default by a third party.
    (g) Control is presumed to exist when a person directly or 
indirectly, or acting through or together with one or more persons--
    (1) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of another person;
    (2) Controls, in any manner, the election of a majority of the 
directors, trustees, or other persons exercising similar functions of 
another person; or
    (3) Has the power to exercise a controlling influence over the 
management or policies of another person.
    (h) Current market value means the bid or closing price listed for 
an item in a regularly published listing or an electronic reporting 
service.
    (i) Financial instrument means stocks, notes, bonds, and debentures 
traded on a national securities exchange, OTC margin stocks as defined 
in Regulation U, 12 CFR part 221, commercial paper, negotiable 
certificates of deposit, bankers' acceptances, and shares in money 
market and mutual funds of the type that issue shares in which banks 
may perfect a security interest. Financial instruments may be 
denominated in foreign currencies that are freely convertible to U.S. 
dollars. The term ``financial instrument'' does not include mortgages.
    (j) Loans and extensions of credit means a bank's direct or 
indirect advance of funds to or on behalf of a borrower based on an 
obligation of the borrower to repay the funds or repayable from 
specific property pledged by or on behalf of the borrower.
    (1) Loans or extensions of credit for purposes of 12 U.S.C. 84 and 
this part include--
    (i) A contractual commitment to advance funds, as defined in 
paragraph (f) of this section;
    (ii) A maker or endorser's obligation arising from a bank's 
discount of commercial paper;
    (iii) A bank's purchase of securities subject to an agreement that 
the seller will repurchase the securities at the end of a stated 
period, but not including a bank's purchase of Type I securities, as 
defined in part 1 of this chapter, subject to a repurchase agreement, 
where the purchasing bank has assured control over or has established 
its rights to the Type I securities as collateral;
    (iv) A bank's purchase of third-party paper subject to an agreement 
that the seller will repurchase the paper upon default or at the end of 
a stated period. The amount of the bank's loan is the total unpaid 
balance of the paper owned by the bank less any applicable dealer 
reserves retained by the bank and held by the bank as collateral 
security. Where the seller's obligation to repurchase is limited, the 
bank's loan is measured by the total amount of the paper the seller may 
ultimately be obligated to repurchase. A bank's purchase of third party 
paper without direct or indirect recourse to the seller is not a loan 
or extension of credit to the seller;
    (v) An overdraft, whether or not prearranged, but not an intra-day 
overdraft for which payment is received before the close of business of 
the bank that makes the funds available;
    (vi) The sale of Federal funds with a maturity of more than one 
business day, but not Federal funds with a maturity of one day or less 
or Federal funds sold under a continuing contract; and
    (vii) Loans or extensions of credit that have been charged off on 
the books of the bank in whole or in part, unless the loan or extension 
of credit--
    (A) Is unenforceable by reason of discharge in bankruptcy;
    (B) Is no longer legally enforceable because of expiration of the 
statute of limitations or a judicial decision; or
    (C) Is no longer legally enforceable for other reasons, provided 
that the bank [[Page 8534]] maintains sufficient records to demonstrate 
that the loan is unenforceable.
    (2) The following items do not constitute loans or extensions of 
credit for purposes of 12 U.S.C. 84 and this part--
    (i) Additional funds advanced for the benefit of a borrower by a 
bank for payment of taxes, insurance, utilities, security, and 
maintenance and operating expenses necessary to preserve the value of 
real property securing the loan, consistent with safe and sound banking 
practices, but only if the advance is for the protection of the bank's 
interest in the collateral, and provided that such amounts must be 
treated as an extension of credit if a new loan or extension of credit 
is made to the borrower;
    (ii) Accrued and discounted interest on an existing loan or 
extension of credit, including interest that has been capitalized from 
prior notes and interest that has been advanced under terms and 
conditions of a loan agreement;
    (iii) Financed sales of a bank's own assets, including Other Real 
Estate Owned, if the financing does not put the bank in a worse 
position than when the bank held title to the assets;
    (iv) A renewal or restructuring of a loan as a new ``loan or 
extension of credit,'' following the exercise by a bank of reasonable 
efforts, consistent with safe and sound banking practices, to bring the 
loan into conformance with the lending limit, unless new funds are 
advanced by the bank to the borrower (except as permitted by 
Sec. 32.3(b)(5)), or a new borrower replaces the original borrower, or 
unless the OCC determines that a renewal or restructuring was 
undertaken as a means to evade the bank's lending limit;
    (v) Amounts paid against uncollected funds in the normal process of 
collection; and
    (vi)(A) That portion of a loan or extension of credit sold as a 
participation by a bank on a nonrecourse basis, provided that the 
participation results in a pro rata sharing of credit risk 
proportionate to the respective interests of the originating and 
participating lenders. Where a participation agreement provides that 
repayment must be applied first to the portions sold, a pro rata 
sharing will be deemed to exist only if the agreement also provides 
that, in the event of a default or comparable event defined in the 
agreement, participants must share in all subsequent repayments and 
collections in proportion to their percentage participation at the time 
of the occurrence of the event.
    (B) When an originating bank funds the entire loan, it must receive 
funding from the participants before the close of business of its next 
business day. If the participating portions are not received within 
that period, then the portions funded will be treated as a loan by the 
originating bank to the borrower. If the portions so attributed to the 
borrower exceed the originating bank's lending limit, the loan may be 
treated as nonconforming subject to Sec. 32.6, rather than a violation, 
if:
    (1) The originating bank had a valid and unconditional 
participation agreement with a participating bank or banks that was 
sufficient to reduce the loan to within the originating bank's lending 
limit;
    (2) The participating bank reconfirmed its participation and the 
originating bank had no knowledge of any information that would permit 
the participant to withhold its participation; and
    (3) The participation was to be funded by close of business of the 
originating bank's next business day.
    (k) Person means an individual; sole proprietorship; partnership; 
joint venture; association; trust; estate; business trust; corporation; 
limited liability company; not-for-profit corporation; sovereign 
government or agency, instrumentality, or political subdivision 
thereof; or any similar entity or organization.
    (l) Qualifying commitment to lend means a legally binding written 
commitment to lend that, when combined with all other outstanding loans 
and qualifying commitments to a borrower, was within the bank's lending 
limit when entered into, and has not been disqualified.
    (1) In determining whether a commitment is within the bank's 
lending limit when made, the bank may deduct from the amount of the 
commitment the amount of any legally binding loan participation 
commitments that are issued concurrent with the bank's commitment and 
that would be excluded from the definition of ``loan or extension of 
credit'' under paragraph (j)(2)(vi) of this section.
    (2) If the bank subsequently chooses to make an additional loan and 
that subsequent loan, together with all outstanding loans and 
qualifying commitments to a borrower, exceeds the bank's applicable 
lending limit at that time, the bank's qualifying commitments to the 
borrower that exceed the bank's lending limit at that time are deemed 
to be permanently disqualified, beginning with the most recent 
qualifying commitment and proceeding in reverse chronological order. 
When a commitment is disqualified, the entire commitment is 
disqualified and the disqualified commitment is no longer considered a 
``loan or extension of credit.'' Advances of funds under a disqualified 
or non-qualifying commitment may only be made to the extent that the 
advance, together with all other outstanding loans to the borrower, do 
not exceed the bank's lending limit at the time of the advance, 
calculated pursuant to Sec. 32.4.
    (m) Readily marketable collateral means financial instruments and 
bullion that are salable under ordinary market conditions with 
reasonable promptness at a fair market value determined by quotations 
based upon actual transactions on an auction or similarly available 
daily bid and ask price market.
    (n) Readily marketable staple means an article of commerce, 
agriculture, or industry, such as wheat and other grains, cotton, wool, 
and basic metals such as tin, copper and lead, in the form of 
standardized interchangeable units, that is easy to sell in a market 
with sufficiently frequent price quotations.
    (1) An article comes within this definition if--
    (i) The exact price is easy to determine; and
    (ii) The staple itself is easy to sell at any time at a price that 
would not be considerably less than the amount at which it is valued as 
collateral.
    (2) Whether an article qualifies as a readily marketable staple is 
determined on the basis of the conditions existing at the time the loan 
or extension of credit that is secured by the staples is made.
    (o) Sale of Federal funds means any transaction between depository 
institutions involving the transfer of immediately available funds 
resulting from credits to deposit balances at Federal Reserve Banks, or 
from credits to new or existing deposit balances due from a 
correspondent depository institution.
    (p) Standby letter of credit means any letter of credit, or similar 
arrangement, that represents an obligation to the beneficiary on the 
part of the issuer:
    (1) To repay money borrowed by or advanced to or for the account of 
the account party;
    (2) To make payment on account of any indebtedness undertaken by 
the account party; or
    (3) To make payment on account of any default by the account party 
in the performance of an obligation.


Sec. 32.3  Lending limits.

    (a) Combined general limit. A national bank's total outstanding 
loans and extensions of credit to one borrower [[Page 8535]] may not 
exceed 15 percent of the bank's capital and surplus, plus an additional 
10 percent of the bank's capital and surplus, if the amount that 
exceeds the bank's 15 percent general limit is fully secured by readily 
marketable collateral, as defined in Sec. 32.2(m). To qualify for the 
additional 10 percent limit, the bank must perfect a security interest 
in the collateral under applicable law and the collateral must have a 
current market value at all times of at least 100 percent of the amount 
of the loan or extension of credit that exceeds the bank's 15 percent 
general limit.
    (b) Loans subject to special lending limits. The following loans or 
extensions of credit are subject to the lending limits set forth below. 
When loans and extensions of credit qualify for more than one special 
lending limit, the special limits are cumulative.
    (1) Loans secured by bills of lading or warehouse receipts covering 
readily marketable staples. (i) A national bank's loans or extensions 
of credit to one borrower secured by bills of lading, warehouse 
receipts, or similar documents transferring or securing title to 
readily marketable staples, as defined in Sec. 32.2(n), may not exceed 
35 percent of the bank's capital and surplus in addition to the amount 
allowed under the bank's combined general limit. The market value of 
the staples securing the loan must at all times equal at least 115 
percent of the amount of the outstanding loan that exceeds the bank's 
combined general limit.
    (ii) Staples that qualify for this special limit must be 
nonperishable, may be refrigerated or frozen, and must be fully covered 
by insurance if such insurance is customary. Whether a staple is non-
perishable must be determined on a case-by-case basis because of 
differences in handling and storing commodities.
    (iii) This special limit applies to a loan or extension of credit 
arising from a single transaction or secured by the same staples, 
provided that the duration of the loan or extension of credit is:
    (A) Not more than ten months if secured by nonperishable staples; 
or
    (B) Not more than six months if secured by refrigerated or frozen 
staples.
    (iv) The holder of the warehouse receipts, order bills of lading, 
documents qualifying as documents of title under the Uniform Commercial 
Code, or other similar documents, must have control and be able to 
obtain immediate possession of the staple so that the bank is able to 
sell the underlying staples and promptly transfer title and possession 
to a purchaser if default should occur on a loan secured by such 
documents. The existence of a brief notice period, or similar 
procedural requirements under applicable law, for the disposal of the 
collateral will not affect the eligibility of the instruments for this 
special limit.
    (A) Field warehouse receipts are an acceptable form of collateral 
when issued by a duly bonded and licensed grain elevator or warehouse 
having exclusive possession and control of the staples even though the 
grain elevator or warehouse is maintained on the premises of the owner 
of the staples.
    (B) Warehouse receipts issued by the borrower-owner that is a grain 
elevator or warehouse company, duly-bonded and licensed and regularly 
inspected by state or Federal authorities, may be considered eligible 
collateral under this provision only when the receipts are registered 
with an independent registrar whose consent is required before the 
staples may be withdrawn from the warehouse.
    (2) Discount of installment consumer paper. (i) A national bank's 
loans and extensions of credit to one borrower that arise from the 
discount of negotiable or nonnegotiable installment consumer paper, as 
defined at Sec. 32.2(e), that carries a full recourse endorsement or 
unconditional guarantee by the person selling the paper, may not exceed 
10 percent of the bank's capital and surplus in addition to the amount 
allowed under the bank's combined general limit. An unconditional 
guarantee may be in the form of a repurchase agreement or separate 
guarantee agreement. A condition reasonably within the power of the 
bank to perform, such as the repossession of collateral, will not make 
conditional an otherwise unconditional guarantee.
    (ii) Where the seller of the paper offers only partial recourse to 
the bank, the lending limits of this section apply to the obligation of 
the seller to the bank, which is measured by the total amount of paper 
the seller may be obligated to repurchase or has guaranteed.
    (iii) Where the bank is relying primarily upon the maker of the 
paper for payment of the loans or extensions of credit and not upon any 
full or partial recourse endorsement or guarantee by the seller of the 
paper, the lending limits of this section apply only to the maker. The 
bank must substantiate its reliance on the maker with--
    (A) Records supporting the bank's independent credit analysis of 
the maker's ability to repay the loan or extension of credit, 
maintained by the bank or by a third party that is contractually 
obligated to make those records available for examination purposes; and
    (B) A written certification by an officer of the bank authorized by 
the bank's board of directors or any designee of that officer, that the 
bank is relying primarily upon the maker to repay the loan or extension 
of credit.
    (iv) Where paper is purchased in substantial quantities, the 
records, evaluation, and certification must be in a form appropriate 
for the class and quantity of paper involved. The bank may use sampling 
techniques, or other appropriate methods, to independently verify the 
reliability of the credit information supplied by the seller.
    (3) Loans secured by documents covering livestock. (i) A national 
bank's loans or extensions of credit to one borrower secured by 
shipping documents or instruments that transfer or secure title to or 
give a first lien on livestock may not exceed 10 percent of the bank's 
capital and surplus in addition to the amount allowed under the bank's 
combined general limit. The market value of the livestock securing the 
loan must at all times equal at least 115 percent of the amount of the 
outstanding loan that exceeds the bank's combined general limit. For 
purposes of this subsection, the term ``livestock'' includes dairy and 
beef cattle, hogs, sheep, goats, horses, mules, poultry and fish, 
whether or not held for resale.
    (ii) The bank must maintain in its files an inspection and 
valuation for the livestock pledged that is reasonably current, taking 
into account the nature and frequency of turnover of the livestock to 
which the documents relate, but in any case not more than 12 months 
old.
    (iii) Under the laws of certain states, persons furnishing 
pasturage under a grazing contract may have a lien on the livestock for 
the amount due for pasturage. If a lien that is based on pasturage 
furnished by the lienor prior to the bank's loan or extension of credit 
is assigned to the bank by a recordable instrument and protected 
against being defeated by some other lien or claim, by payment to a 
person other than the bank, or otherwise, it will qualify under this 
exception provided the amount of the perfected lien is at least equal 
to the amount of the loan and the value of the livestock is at no time 
less than 115 percent of the portion of the loan or extension of credit 
that exceeds the bank's combined general limit. When the amount due 
under the grazing contract is dependent upon future performance, the 
resulting lien does not meet the requirements of the exception.
    (4) Loans secured by dairy cattle. A national bank's loans and 
extensions of credit to one borrower that arise from the discount by 
dealers in dairy cattle of [[Page 8536]] paper given in payment for the 
cattle may not exceed 10 percent of the bank's capital and surplus in 
addition to the amount allowed under the bank's combined general limit. 
To qualify, the paper--
    (i) Must carry the full recourse endorsement or unconditional 
guarantee of the seller; and
    (ii) Must be secured by the cattle being sold, pursuant to liens 
that allow the bank to maintain a perfected security interest in the 
cattle under applicable law.
    (5) Additional advances to complete project financing pursuant to 
renewal of a qualifying commitment to lend. A national bank may renew a 
qualifying commitment to lend, as defined by Sec. 32.2(l), and complete 
funding under that commitment if all of the following criteria are 
met--
    (i) The completion of funding is consistent with safe and sound 
banking practices and is made to protect the position of the bank;
    (ii) The completion of funding will enable the borrower to complete 
the project for which the qualifying commitment to lend was made; and
    (iii) The amount of the additional funding does not exceed the 
unfunded portion of the bank's qualifying commitment to lend.
    (c) Loans not subject to the lending limits. The following loans or 
extensions of credit are not subject to the lending limits of 12 U.S.C. 
84 or this part.
    (1) Loans arising from the discount of commercial or business 
paper. (i) Loans or extensions of credit arising from the discount of 
negotiable commercial or business paper that evidences an obligation to 
the person negotiating the paper. The paper--
    (A) Must be given in payment of the purchase price of commodities 
purchased for resale, fabrication of a product, or any other business 
purpose that may reasonably be expected to provide funds for payment of 
the paper; and
    (B) Must bear the full recourse endorsement of the owner of the 
paper, except that paper discounted in connection with export 
transactions, that is transferred without recourse, or with limited 
recourse, must be supported by an assignment of appropriate insurance 
covering the political, credit, and transfer risks applicable to the 
paper, such as insurance provided by the Export-Import Bank.
    (ii) A failure to pay principal or interest on commercial or 
business paper when due does not result in a loan or extension of 
credit to the maker or endorser of the paper; however, the amount of 
such paper thereafter must be counted in determining whether additional 
loans or extensions of credit to the same borrower may be made within 
the limits of 12 U.S.C. 84 and this part.
    (2) Bankers' acceptances. A bank's acceptance of drafts eligible 
for rediscount under 12 U.S.C. 372 and 373, or a bank's purchase of 
acceptances created by other banks that are eligible for rediscount 
under those sections; but not including--
    (i) A bank's acceptance of drafts ineligible for rediscount (which 
constitutes a loan by the bank to the customer for whom the acceptance 
was made, in the amount of the draft);
    (ii) A bank's purchase of ineligible acceptances created by other 
banks (which constitutes a loan from the purchasing bank to the 
accepting bank, in the amount of the purchase price); and
    (iii) A bank's purchase of its own acceptances (which constitutes a 
loan to the bank's customer for whom the acceptance was made, in the 
amount of the purchase price).
    (3)(i) Loans secured by U.S. obligations. Loans or extensions of 
credit, or portions thereof, to the extent fully secured by the current 
market value of:
    (A) Bonds, notes, certificates of indebtedness, or Treasury bills 
of the United States or by similar obligations fully guaranteed as to 
principal and interest by the United States;
    (B) Loans to the extent guaranteed as to repayment of principal by 
the full faith and credit of the U.S. government, as set forth in 
paragraph (c)(4)(ii) of this section.
    (ii) To qualify under this paragraph, the bank must perfect a 
security interest in the collateral under applicable law.
    (4) Loans to or guaranteed by a Federal agency. (i) Loans or 
extensions of credit to any department, agency, bureau, board, 
commission, or establishment of the United States or any corporation 
wholly owned directly or indirectly by the United States.
    (ii) Loans or extensions of credit, including portions thereof, to 
the extent secured by unconditional takeout commitments or guarantees 
of any of the foregoing governmental entities. The commitment or 
guarantee--
    (A) Must be payable in cash or its equivalent within 60 days after 
demand for payment is made;
    (B) Is considered unconditional if the protection afforded the bank 
is not substantially diminished or impaired if loss should result from 
factors beyond the bank's control. Protection against loss is not 
materially diminished or impaired by procedural requirements, such as 
an agreement to take over only in the event of default, including 
default over a specific period of time, a requirement that notification 
of default be given within a specific period after its occurrence, or a 
requirement of good faith on the part of the bank.
    (5) Loans to or guaranteed by general obligations of a State or 
political subdivision. Loans or extensions of credit to a State or 
political subdivision that constitutes a general obligation of the 
State or political subdivision, as defined in Part 1 of this chapter, 
and for which the lending bank has obtained the opinion of counsel that 
the loan or extension of credit is a valid and enforceable general 
obligation of the borrower, and loans or extensions of credit, 
including portions thereof, to the extent guaranteed or secured by a 
general obligation of a State or political subdivision and for which 
the lending bank has obtained the opinion of counsel that the guarantee 
or collateral is a valid and enforceable general obligation of that 
public body.
    (6) Loans secured by segregated deposit accounts. Loans or 
extensions of credit, including portions thereof, to the extent secured 
by a segregated deposit account in the lending bank, provided a 
security interest in the deposit has been perfected under applicable 
law.
    (i) Where the deposit is eligible for withdrawal before the secured 
loan matures, the bank must establish internal procedures to prevent 
release of the security without the lending bank's prior consent.
    (ii) A deposit that is denominated and payable in a currency other 
than that of the loan or extension of credit that it secures may be 
eligible for this exception if the currency is freely convertible to 
U.S. dollars.
    (A) This exception applies to only that portion of the loan or 
extension of credit that is covered by the U.S. dollar value of the 
deposit.
    (B) The lending bank must establish procedures to revalue foreign 
currency deposits to ensure that the loan or extension of credit 
remains fully secured at all times.
    (7) Loans to financial institutions with the approval of the 
Comptroller. Loans or extensions of credit to any financial institution 
or to any receiver, conservator, superintendent of banks, or other 
agent in charge of the business and property of a financial institution 
when an emergency situation exists and a national bank is asked to 
provide assistance to another financial institution, and the loan is 
approved by the Comptroller. For purposes of this 
[[Page 8537]] paragraph, financial institution means a commercial bank, 
savings bank, trust company, savings association, or credit union.
    (8) Loans to the Student Loan Marketing Association. Loans or 
extensions of credit to the Student Loan Marketing Association.
    (9) Loans to industrial development authorities. A loan or 
extension of credit to an industrial development authority or similar 
public entity created to construct and lease a plant facility, 
including a health care facility, to an industrial occupant will be 
deemed a loan to the lessee, provided that--
    (i) The bank evaluates the creditworthiness of the industrial 
occupant before the loan is extended to the authority;
    (ii) The authority's liability on the loan is limited solely to 
whatever interest it has in the particular facility;
    (iii) The authority's interest is assigned to the bank as security 
for the loan or the industrial occupant issues a promissory note to the 
bank that provides a higher order of security than the assignment of a 
lease; and
    (iv) The industrial occupant's lease rentals are assigned and paid 
directly to the bank.
    (10) Loans to leasing companies. A loan or extension of credit to a 
leasing company for the purpose of purchasing equipment for lease will 
be deemed a loan to the lessee, provided that--
    (i) The bank evaluates the creditworthiness of the lessee before 
the loan is extended to the leasing corporation;
    (ii) The loan is without recourse to the leasing corporation;
    (iii) The bank is given a security interest in the equipment and in 
the event of default, may proceed directly against the equipment and 
the lessee for any deficiency resulting from the sale of the equipment;
    (iv) The leasing corporation assigns all of its rights under the 
lease to the bank;
    (v) The lessee's lease payments are assigned and paid to the bank; 
and
    (vi) The lease terms are subject to the same limitations that would 
apply to a national bank acting as a lessor.


Sec. 32.4  Calculation of lending limits.

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


Sec. 32.5  Combination rules.

    (a) General rule. Loans or extensions of credit to one borrower 
will be attributed to another person and each person will be deemed a 
borrower--
    (1) When proceeds of a loan or extension of credit are to be used 
for the direct benefit of the other person, to the extent of the 
proceeds so used; or
    (2) When a common enterprise is deemed to exist between the 
persons.
    (b) Direct benefit. The proceeds of a loan or extension of credit 
to a borrower will be deemed to be used for the direct benefit of 
another person and will be attributed to the other person when the 
proceeds, or assets purchased with the proceeds, are transferred to 
another person, other than in a bona fide arm's length transaction 
where the proceeds are used to acquire property, goods, or services.
    (c) Common enterprise. A common enterprise will be deemed to exist 
and loans to separate borrowers will be aggregated:
    (1) When the expected source of repayment for each loan or 
extension of credit is the same for each borrower and neither borrower 
has another source of income from which the loan (together with the 
borrower's other obligations) may be fully repaid. An employer will not 
be treated as a source of repayment under this paragraph because of 
wages and salaries paid to an employee, unless the standards of 
paragraph (c)(2) of this section are met;
    (2) When loans or extensions of credit are made--
    (i) To borrowers who are related directly or indirectly through 
common control, including where one borrower is directly or indirectly 
controlled by another borrower; and
    (ii) Substantial financial interdependence exists between or among 
the borrowers. Substantial financial interdependence is deemed to exist 
when 50 percent or more of one borrower's gross receipts or gross 
expenditures (on an annual basis) are derived from transactions with 
the other borrower. Gross receipts and expenditures include gross 
revenues/expenses, intercompany loans, dividends, capital 
contributions, and similar receipts or payments;
    (3) When separate persons borrow from a bank to acquire a business 
enterprise of which those borrowers will own more than 50 percent of 
the voting securities or voting interests, in which case a common 
enterprise is deemed to exist between the borrowers for purposes of 
combining the acquisition loans; or
    (4) When the OCC determines, based upon an evaluation of the facts 
and circumstances of particular transactions, that a common enterprise 
exists.
    (d) Special rule for loans to a corporate group. (1) Loans or 
extensions of credit by a bank to a corporate group may not exceed 50 
percent of the bank's capital and surplus. This limitation applies only 
to loans subject to the combined general limit. A corporate group 
includes a person and all of its subsidiaries. For purposes of this 
paragraph, a corporation or a limited liability company is a subsidiary 
of a person if the person owns or beneficially owns directly or 
indirectly more than 50 percent of the voting securities or voting 
interests of the corporation or company.
    (2) Except as provided in paragraph (d)(1) of this section, loans 
or extensions of credit to a person and its subsidiary, or to different 
subsidiaries of a person, are not combined unless either the direct 
benefit or the common enterprise test is met.
    (e) Special rules for loans to partnerships, joint ventures, and 
associations.--(1) Partnership loans. Loans or extensions of credit to 
a partnership, joint venture, or association are deemed to be loans or 
extensions of credit to each member of the partnership, joint venture, 
or association. This rule does not apply to limited partners in limited 
partnerships or to members of joint ventures or associations if the 
partners or members, by the terms of the partnership or membership 
agreement, are not held generally liable for the debts or actions of 
the partnership, joint venture, or association, and those provisions 
are valid under applicable law.
    (2) Loans to partners. (i) Loans or extensions of credit to members 
of a partnership, joint venture, or association are not attributed to 
the partnership, joint venture, or association unless either the direct 
benefit or the common enterprise tests are met. Both the direct benefit 
and common enterprise tests are met between a member of a partnership, 
joint venture or association and such partnership, joint venture or 
association, [[Page 8538]] when loans or extensions of credit are made 
to the member to purchase an interest in the partnership, joint venture 
or association.
    (ii) Loans or extensions of credit to members of a partnership, 
joint venture, or association are not attributed to other members of 
the partnership, joint venture, or association unless either the direct 
benefit or common enterprise test is met.
    (f) Loans to foreign governments, their agencies, and 
instrumentalities.--(1) Aggregation. Loans and extensions of credit to 
foreign governments, their agencies, and instrumentalities will be 
aggregated with one another only if the loans or extensions of credit 
fail to meet either the means test or the purpose test at the time the 
loan or extension of credit is made.
    (i) The means test is satisfied if the borrower has resources or 
revenue of its own sufficient to service its debt obligations. If the 
government's support (excluding guarantees by a central government of 
the borrower's debt) exceeds the borrower's annual revenues from other 
sources, it will be presumed that the means test has not been 
satisfied.
    (ii) The purpose test is satisfied if the purpose of the loan or 
extension of credit is consistent with the purposes of the borrower's 
general business.
    (2) Documentation. In order to show that the means and purpose 
tests have been satisfied, a bank must, at a minimum, retain in its 
files the following items:
    (i) A statement (accompanied by supporting documentation) 
describing the legal status and the degree of financial and operational 
autonomy of the borrowing entity;
    (ii) Financial statements for the borrowing entity for a minimum of 
three years prior to the date the loan or extension of credit was made 
or for each year that the borrowing entity has been in existence, if 
less than three;
    (iii) Financial statements for each year the loan or extension of 
credit is outstanding;
    (iv) The bank's assessment of the borrower's means of servicing the 
loan or extension of credit, including specific reasons in support of 
that assessment. The assessment shall include an analysis of the 
borrower's financial history, its present and projected economic and 
financial performance, and the significance of any financial support 
provided to the borrower by third parties, including the borrower's 
central government; and
    (v) A loan agreement or other written statement from the borrower 
which clearly describes the purpose of the loan or extension of credit. 
The written representation will ordinarily constitute sufficient 
evidence that the purpose test has been satisfied. However, when, at 
the time the funds are disbursed, the bank knows or has reason to know 
of other information suggesting that the borrower will use the proceeds 
in a manner inconsistent with the written representation, it may not, 
without further inquiry, accept the representation.
    (3) Restructured loans.--(i) Non-combination rule. Notwithstanding 
paragraphs (a) through (e) of this section, when previously outstanding 
loans and other extensions of credit to a foreign government, its 
agencies, and instrumentalities (i.e., public-sector obligors) that 
qualified for a separate lending limit under paragraph (f)(1) of this 
section are consolidated under a central obligor in a qualifying 
restructuring, such loans will not be aggregated and attributed to the 
central obligor. This includes any substitution in named obligors, 
solely because of the restructuring. Such loans (other than loans 
originally attributed to the central obligor in their own right) will 
not be considered obligations of the central obligor and will continue 
to be attributed to the original public-sector obligor for purposes of 
the lending limit.
    (ii) Qualifying restructuring. Loans and other extensions of credit 
to a foreign government, its agencies, and instrumentalities will 
qualify for the non-combination process under paragraph (f)(3)(i) of 
this section only if they are restructured in a sovereign debt 
restructuring approved by the OCC, upon request by a bank for 
application of the non combination rule. The factors that the OCC will 
use in making this determination include, but are not limited to, the 
following:
    (A) Whether the restructuring involves a substantial portion of the 
total commercial bank loans outstanding to the foreign government, its 
agencies, and instrumentalities;
    (B) Whether the restructuring involves a substantial number of the 
foreign country's external commercial bank creditors;
    (C) Whether the restructuring and consolidation under a central 
obligor is being done primarily to facilitate external debt management; 
and
    (D) Whether the restructuring includes features of debt or debt-
service reduction.
    (iii) 50 percent aggregate limit. With respect to any case in which 
the non-combination process under paragraph (f)(3)(i) of this section 
applies, a national bank's loans and other extensions of credit to a 
foreign government, its agencies and instrumentalities, (including 
restructured debt) shall not exceed, in the aggregate, 50 percent of 
the bank's capital and surplus.


Sec. 32.6  Nonconforming loans.

    (a) A loan, within a bank's legal lending limit when made, will not 
be deemed a violation but will be treated as nonconforming if the loan 
is no longer in conformity with the bank's lending limit because--
    (1) The bank's capital has declined, borrowers have subsequently 
merged or formed a common enterprise, lenders have merged, the lending 
limit or capital rules have changed; or
    (2) Collateral securing the loan to satisfy the requirements of a 
lending limit exception has declined in value.
    (b) A bank must use reasonable efforts to bring a loan that is 
nonconforming as a result of paragraph (a)(1) of this section into 
conformity with the bank's lending limit unless to do so would be 
inconsistent with safe and sound banking practices.
    (c) A bank must bring a loan that is nonconforming as a result of 
circumstances described in paragraph (a)(2) of this section into 
conformity with the bank's lending limit within 30 calendar days, 
except when judicial proceedings, regulatory actions or other 
extraordinary circumstances beyond the bank's control prevent the bank 
from taking action.

    Dated: February 6, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-3363 Filed 2-14-95; 8:45 am]
BILLING CODE 4810-33-P