22 Hoosier Banker June 2016 COMPLIANCE CONNECTION Question No. 1: Does Indiana law limit how much a bank can lend to one borrower, or to a group of associated borrowers, at a time? Answer: Yes, although the calculation of these limits will vary, based on the nature of the credit and collateral involved. As a general rule, Indiana law provides that the total loans and extensions of credit by a bank to a person outstanding at one time not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit may not exceed 15 percent of the unimpaired capital and unimpaired surplus of the bank.1 Loans and extensions of credit fully secured by readily marketable collateral with a market value at least equal to the amount of the funds outstanding may account for an additional 10 percent of the unimpaired capital and unimpaired surplus of the bank.2 Question No. 2: How do I calculate loan limits under Indiana law when a borrower has personal loans in his or her name, and then business loans with other individuals? Answer: Calculation of loan limits with multiple parties involved can be complex, and is not addressed directly in the Indiana code. Rather, Indiana law provides that the Department of Financial Institutions (DFI) may apply the provisions of 12 CFR § 32 (“Part 32”) in the application and administration of the chapter governing loan limits.3 Indiana Code § 28-1-13-13 provides the DFI with general authority to apply the provisions of 12 CFR § 32 in the application and administration of loan limit restrictions under Indiana law, and provides the DFI flexibility to implement the provisions of Part 32 to the fullest extent, including in the event of changes to the federal law. This section of federal law includes the “Combination Rule” regulating the calculation of loan limits when dealing with multiple loans for the same borrower that may also involve other related parties.4 In general terms, the Combination Rule provides that loans or extensions of credit to one borrower will be attributed to another person, and each person will be deemed a borrower for purposes of the loan limit calculation, based on two independent standards referred to as the direct benefits test and the common enterprise test. The direct benefits test provides that 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.5 The common enterprise test provides that a common enterprise exists, and loans to separate borrowers will be aggregated when either the expected source of repayment for each loan or extension of credit is the same for each borrower, and nei- © 2016 Krieg DeVault LLP THINKING BEYOND TRADITIONAL SOLUTIONS FOR FINANCIAL INSTITUTIONS FOR OVER 130 YEARS w Corporate Representation w Mergers and Acquisitions w Capital Offerings w Regulatory w Compliance w Supervision and Enforcement w New Product Development w Litigation w Commercial / Consumer Loan w Creditors’ Rights w Trust w Tax w Securities w Employment w Intellectual Property One Indiana Square Suite 2800 Indianapolis, Indiana 46204 p: 317.636.4341 INDIANA ILLINOIS GEORGIA FLORIDA MINNESOTA www.kriegdevault.com This may constitute advertising material in some jurisdictions. The content provided herein is for information purposes only.
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