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Maine.gov > PFR Home > Bureau of Financial Institutions > Regulations > Regulation # 28

02-029
CHAPTER 128 (Reg. 28) LOANS TO ONE BORROWER LIMITATIONS

Section 1. PURPOSE

9-B MRSA §439-A establishes the basis for determining the legal lending limit for all financial institutions, including their subsidiaries, organized under the laws of this State. In addition, this statute authorizes the superintendent to adopt rules to define or further define terms used in the statute and to establish limits or requirements other than those specified in the statute. The purpose of this regulation is to establish guidelines for the administration of loan to one borrower limitations for state-chartered financial institutions and their subsidiaries.

Section 2. AUTHORITY

This regulation is promulgated pursuant to 9-B MRSA §439-A.

Section 3. DEFINITIONS

  1. "Capital" is the sum of common stock outstanding and unimpaired plus perpetual preferred stock outstanding and unimpaired.
  2. "Contractual commitment" means (i) an obligation on the part of the financial institution to make payments (directly or indirectly) to a designated third party contingent upon a default by the financial institution's customer in the performance of an obligation under the terms of that customer's contract with the third party; or, (ii) an obligation to guarantee or stand as surety for the benefit of a third party. The term includes, but is not limited to, standby letters of credit (as defined in paragraph H of this section), guarantees, puts, and other similar arrangements.

    The definition does not include commercial letters of credit and similar instruments where the issuing financial institution expects the beneficiary to draw upon the issuer, which do not "guarantee" payment of a money obligation, and which do not provide for payment in the event of default by the account party.
  3. "Financial institution" has the same meaning that is set forth in 9-B MRSA §131.17.
  4. "Loans or extensions of credit" has the same meaning that is set forth in 9-B MRSA §439-A.
  5. "Perpetual preferred stock" means preferred stock that does not have a stated maturity date and cannot be redeemed at the option of the holder.
  6. "Person" has the meaning as defined in 9-B MRSA §131(30).
  7. A "standby letter of credit" is any letter of credit, or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuer (i) to repay money borrowed by or advanced to or for the account of the account party, or (ii) to make payment on account of any indebtedness undertaken by the account party, or (iii) to make payment on account of any default by the account party in the performance of an obligation.
  8. "Subsidiary" has the meaning as defined in 9-B MRSA §131(39-A). A "service corporation," as defined in 9-B MRSA §131 (37), is a "subsidiary" for the purposes of this regulation.
  9. "Surplus" means the sum of the following:
    1. Capital surplus, undivided profits, reserves for contingencies and other capital reserves (excluding accrued dividends on perpetual and limited life preferred stock), minority interests in consolidated subsidiaries, and allowances for loan and lease losses, minus intangible assets;
    2. Purchased mortgage servicing rights;
    3. Mandatory convertible debt to the extent of 20% of the sum of paragraphs A and I(1) and I(2) of this section;
    4. Other mandatory convertible debt, limited life preferred stock and subordinated notes and debentures to the extent set forth below:
      1. The original weighted average maturity must be at least five years, except for mandatory convertible debt;
      2. All subordinated notes and debentures must:
        1. Be subordinated to the claims of depositors;
        2. State on the instrument that it is not a deposit and is not insured by the FDIC;
        3. Be approved as capital by the superintendent;
        4. Be unsecured;
        5. Be ineligible as collateral for a loan by the issuing financial institution;
        6. Provide that once any scheduled principal payments begin, all scheduled payments shall be made at least annually and the amount repaid in each shall be no less than in the prior year; and
        7. Provide that no accelerated payment by reason of default or otherwise may be made without the prior written approval of the superintendent.
      3. The total amount of mandatory convertible debt not included in paragraph I(3) of this section, limited life preferred stock, and subordinated notes and debentures considered as surplus is limited to 50% of the sum of paragraphs A and I(1), I(2) and I(3) of this section.
  10. "Total capital and surplus" is the sum of capital accounts as defined in paragraph A of this section and surplus accounts as defined in paragraph J of this section.

Section 4. PROVISIONS OF THE REGULATION

Except as provided in 9-B MRSA §439-A and this rule, a financial institution and/or its subsidiaries may not make loans or extensions of credit outstanding at one time to a person in excess of 20% of its total capital and surplus.

  1. Combining loans to separate borrowers. Loans or extensions of credit to one person will be attributed to other persons, for purposes of this regulation, when (i) the proceeds of the loans or extensions of credit are to be used for the direct benefit of the other person or persons or (ii) a "common enterprise" is deemed to exist between the persons.
    1. Whether or not two or more persons are engaged in a "common enterprise" will depend upon a realistic evaluation of the facts and circumstances of particular transactions. A "common enterprise" may exist:
      1. Where the expected source of repayment for each loan or extension of credit is the same for each person; or,
      2. Where persons are related through common control, including where one person is controlled by another person, if the persons are engaged in interdependent businesses or there is substantial financial interdependence among them; or,
      3. When separate persons borrow from a financial institution for the purpose of acquiring a business enterprise of which those persons will own more than 50% of the voting securities.
    2. For purposes of Section 4.A(1)(b), "control" shall be presumed to exist when:
      1. One or more persons acting in concert directly or indirectly own, control or have power to vote 25% or more of any class of voting securities of another person; or,
      2. One or more persons acting in concert control, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person; or,
      3. Any other circumstances exist which indicate that one or more persons acting in concert directly or indirectly exercise a controlling influence over the management or policies of another person.
  2. Loans to corporations. For purposes of this regulation and 9-B MRSA §439-A, a corporation is a "subsidiary" of any person who directly or indirectly owns or beneficially owns more than 50% of the voting stock of the corporation. Loans or extensions of credit to a person and its subsidiary or to subsidiaries of one person need not be combined where the bank has determined that the person and subsidiaries involved are not engaged in a "common enterprise" as that term is defined in Paragraph A of this section. Notwithstanding the foregoing sentence, loans or extensions of credit by a financial institution to a "corporate group" (defined as a person and all of its subsidiaries) may not exceed 50% of the institution's total capital and surplus.
  3. Loans to partnerships, joint ventures, and associations.
    1. Loans or extensions of credit to a partnership, joint venture, or association shall, for purposes of this regulation, be considered loans or extensions of credit to each member of such partnership, joint venture, or association.
      1. Paragraph C(1) of this section is not applicable to limited partners in limited partnerships or to members of joint ventures or associations if such partners or members, by the terms of the partnership or membership agreement are not to be held liable for the debts or actions of the partnership, joint venture, or association. However, the rules set forth in Paragraph A of this section are applicable to such partners or members.
    2. Loans or extensions of credit to members of a partnership, joint venture, or association shall, for purposes of this regulation, be attributed to the partnership, joint venture, or association where one or more of the tests set forth in Paragraph A of this section is satisfied with respect to one or more such members.However, loans to members of a partnership, joint venture, or association will not be attributed to other members of the partnership, joint venture, or association under this regulation unless one or more of the tests set forth in Paragraph A of this section is satisfied with respect to such members.
      1. The tests set forth in Paragraph A shall be deemed satisfied when loans or extensions of credit are made to members of a partnership, joint venture, or association for purposes of purchasing an interest in such partnership, joint venture, or association.
  4. Loans charged off in whole or in part. The legal lending limit shall apply to all existing loans or extensions of credit to a person by the financial institution or its subsidiaries, including loans or extensions of credit that have been charged off on the books of the financial institution or subsidiary corporation in whole or in part. Loans that have become unenforceable by reason of discharge in bankruptcy or are no longer legally enforceable for other reasons, such as debt forgiveness, are not "loans or extensions of credit" for purposes of this regulation.
  5. Advances to protect collateral. Advances by the financial institution to protect its collateral position are subject to the legal lending limit. Such advances result in additional obligations of the borrower to the financial institution.

Section 5. EXCEPTIONS TO THE LENDING LIMITS

  1. Sale of loan participations. When a financial institution or service corporation sells a participation in a loan or extension of credit, that portion of the loan that is sold on a nonrecourse basis need not be applied to the bank's lending limits provided that the participation results in a pro rata sharing of credit risk proportionate to the respective interests of the originating and participating lenders.
  2. Loans or commitments legal when made. Loans or binding commitments that were within the legal lending limit when made, but that subsequently exceed a financial institution's lending limit because of a decline in the capital base of the financial institution, are considered to be legal when made and in compliance with the loan to one borrower limitations established in the 9-B MRSA §439-A. Such loans, however, will be regarded as non-conforming loans that the institution should attempt to bring into conformance.
    1. Such loan or commitment must represent a legally binding obligation to fund, evidenced by either written agreement or file documentation. Nonbinding lines of credit, oral commitments, and verbal offers to lend continue to be subject to the lending limit when funds are advanced.
  3. Advances to finance the sale of real estate owned. Advances to finance the sale of property acquired through foreclosure or in lieu of foreclosure are not considered to be loans or extensions of credit subject to the legal lending limit, provided that such advances do not exceed the book value of the asset at the time of sale and the acquiror is a third party not previously involved with the defaulted loan.

Section 6. EFFECTIVE DATE: November 25, 1992

BASIS STATEMENT

This regulation results from legislative changes to the various "loans to one borrower" statutes applicable to trust companies, savings banks and savings and loan associations. Title 9-B MRSA §439-A established a uniform basis for determining the legal lending limit for all financial institutions, including their subsidiaries, organized under the laws of this State. The differences regarding combining loans and exceptions to the lending limit between savings banks, savings and loan associations and trust companies were eliminated. Section 439-A also authorized the superintendent to adopt rules to define or further define terms used in the statute and to establish limits or requirements other than those specified in the statute.

The proposed regulation closely followed federal (Office of the Comptroller of the Currency - "OCC") lending limit regulations, particularly in the area of combining loans to one borrower. While the changes represent a tightening of the combining rules, such a tightening is considered consistent with the purpose of the legal lending limit, which is to prevent one individual, or a relatively small group, from borrowing an unduly large amount of the institution's funds and to safeguard the institution's deposits by spreading the loans among a relatively large number of persons engaged in different lines of businesses.

The proposed regulation also closely followed the OCC's position regarding advances to protect the bank's collateral (such as taxes, insurance premiums, prior liens and other adverse claims). The OCC historically has been very rigid in its interpretation of the lending limit regulations, finding that such advances to protect the bank's collateral are subject to the lending limit. The Bureau has, in the past, recognized, but not condoned, that lending limit violations may occur as a result of the conscientious decision by an institution's directors that further advances to protect the institution's collateral position may be the more prudent course of action. Therefore, in light of these seemingly contradictory positions, the Bureau specifically solicited comments on how such advances and other collection expenditures by the institution should be treated for legal lending limit purposes. The Bureau also specifically requested comments on whether loans categorized as "In Substance Foreclosure" for accounting purposes (and therefore considered Other Real Estate Owned) should be exempted from the lending limit.

Notice of this proposed regulation was published on July 7, 1992 and comments were solicited through August 7, 1992. Comments were received from the Maine Bankers Association ("MBA") and the Maine Association of Community Banks ("MACB"). As expected, their comments focused on the combination of loans. However, there were no comments on the issues of "protective advances" or on loans categorized as In Substance Foreclosure. The specific comments are addressed below.

  1. The MBA expressed concern regarding the combining of loans to separate borrowers. The loan to one borrower limit is intended to (1) prevent one individual, or a relatively small group, from borrowing an unduly large amount of an institution's funds and (2) spread an institution's loans among a relatively large number of persons engaged in different lines of businesses. The loan combination rules developed because persons, as defined in Section 131.30, tend to borrow in various capacities. Loans to separate borrowers need not be combined unless they meet either the direct benefits test or the common enterprise test. Institutions, as a matter of policy, should have procedures in place to determine if borrowers are part of a common enterprise or otherwise should be combined.
  2. The MBA expressed concern regarding the application of common enterprise resulting from a regulatory determination that there is a common source of repayment for loans granted to separate borrowers. The MBA suggested incorporating language referring to the "particular transaction" to clarify the existence of a common enterprise. Section 4.A(1) has been expanded to incorporate the suggested language.
  3. Last, the MBA suggested that a determination that loans to separate borrowers should be combined may not be good public policy. Without getting into the merits of individual situations and recognizing that there may be instances when such combinations may not unduly threaten an institution's capital, the Bureau strongly supports the principle of diversification and that the public good will be better served by the uniform application and enforcement of the combination rules.
  4. The MACB commented that the proposed regulation appeared to be more onerous than the OCC's regulation in three specific areas: (1) common borrower and common enterprise; (2) advances to finance the sale of other real estate owned ("OREO"); and (3) loans to partnerships, joint ventures and associations. First, with the inclusion of the suggested language as discussed above under Comment (2), the proposed regulation essentially mirrors the OCC regulation. Comments (1) and (3) also address the combination of loans. Second, Section 5.C, which addresses advances to finance the sale of OREO, represents the Bureau's longstanding position on such transactions and is very similar, if not identical, to the OCC's position. No other change was deemed necessary.

Last Updated: February 14, 2012