33 Hoosier Banker October 2014 COMPLIANCE CONNECTION Question: What is the maximum amount that we may lend to any one borrower? If we inadvertently exceed that amount, can we cure the violation by selling a participation in the loan to another bank, or by collecting a portion of the loan so that the remaining balance is below the threshold amount? Answer: Indiana law limits the total amount of outstanding loans and extensions of credit to any person at one time that are not fully secured to no more than 15 percent of the unimpaired capital and unimpaired surplus of the bank.1 In addition, the total amount of outstanding loans and extensions of credit to any person outstanding at one time and fully secured by readily marketable collateral may not exceed 10 percent of the unimpaired capital and unimpaired surplus of the bank.2 (This limitation is separate from and in addition to the above limitation.) When evaluating a lending relationship for compliance with this requirement, keep in mind that, under certain circumstances, loans purportedly made to one person will be attributed to another person, and each person will be deemed a borrower for purposes of determining compliance with the limitation on loans to one borrower.3 The rules for determining when a loan should be attributed to another person are complicated in application. They provide, generally, that loans or extensions of credit to aBout compliance connection In order to address compliance inquiries from members, IBA provides Compliance Connection, an assistance program offering advice on Indiana-specific compliance questions. If the matter requires legal advice, IBA Compliance Connection will refer the bank to a law firm. The material in this issue was prepared by Larry C. Tomlin, partner with Krieg DeVault LLP, Indianapolis, and IBA compliance consultant. Submit Compliance Connection questions to IBA’s Amber R. Van Til at avantil@indianabankers.org. Carrier selection is one of the most critical decisions in a BOLI purchase. Not all BOLI providers offer carriers with the top AAA rating. Executive Benefits Network offers its clients the most highly rated BOLI carriers in the industry; delivering the long-term benefits and financial strength our clients expect. Now that is Knowledge You Can Bank On.™ We Peel Back the Layers So Our Clients Can Fully Uncover BOLI. ©2014 EBN BOLI & Deferred Compensation Experts 800.780.4EBN ebn-design.com one borrower will be attributed to another person, and each person will be deemed a borrower when (1) proceeds of a loan or extension of credit are to be used for the direct benefit of the other person, or (2) a common enterprise is deemed to exist between the persons.4 The regulations also contain special rules with respect to loans to a corporate group, partnership, joint venture or association. If the bank has exceeded the limitation on loans or extensions of credit to one borrower, it may not cure the violation by simply selling a participation in the loan to another bank, or by collecting or discharging a portion of the loan so that the remaining balance is below the statutory limit. The violation is the making of the loan itself. It occurs at the time that the loan is consummated and “has no relationship to the balance currently being carried on the bank’s books.”5 Note: “The only sure way to correct a violation of the bank’s legal lending limit is to collect payment of the loan in full.”6 Lending limit violations often prove difficult to cure in practice and may result in specific loans being identified in multiple reports of examination. Accordingly, if you are unsure of the application of these rules, it is recommended to seek guidance from qualified counsel. t This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation. 1 Ind. Code § 28-1-13-1.5(a). 2 Ind. Code § 28-1-13-1.5(b). 3 Ind. Code § 28-1-13-13 (providing that the Department of Financial Institutions may apply the provisions of 12 CFR 32 in the application of limiting loans made to one borrower). 4 See 12 CFR 32. 5 Memorandum from the Policy and Interpretation Comm. to the Members and Personnel of the Dept. of Fin. Insts. INT-001-88 (Feb. 8, 1988; rev. Aug. 8, 1996). 6 Id.
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