Okla. Admin. Code § 85:10-11-10

Current through Vol. 42, No. 4, November 1, 2024

Section 85:10-11-10 - Lending limits

(a)Definitions. The following words and terms, when used in this Section shall have the following meaning, unless the text clearly indicates otherwise:

(1)"Commercial or business paper" means negotiable paper given in payment of the purchase price of commodities in domestic or export transactions purchased for resale or to be used in connection with the fabrication of a product, or to be used for any other business purpose which may reasonably be expected to provide funds for payment of the paper. Loans or extensions of credit arising from the discount of paper of the kind described in this paragraph must bear full recourse endorsement of the owner. However, loans or extensions of credit arising from the discount of such paper in export transactions may be endorsed by such owner without recourse or with limited recourse, or may be accompanied by a separate agreement for limited recourse; provided, that if transferred without full recourse, the paper must be supported by an assignment of appropriate insurance covering the political, credit, and transfer risks applicable to the paper.

(2)"Contractual commitment to advance funds" means:

(A) an obligation on the part of the bank or trust company to make payments (directly or indirectly) to a designated third party contingent upon a default by the customer of the bank or trust company in the performance of an obligation under the terms of the customer's contract with the third party;

(B) 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 this Section), guarantees, puts, and other similar arrangements;

(C) undisbursed loan funds and lines of credit and loan commitments not yet drawn upon; and

(D) commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer.

(E) However, not within the meaning of "contractual commitment to advance funds" is the guaranteeing or insuring by trust companies of title to real and personal property to persons interested in such property or in mortgages thereon, against loss, by reason of defective title or other encumbrances of or upon such property and bonds authorized to be issued by banks or trust companies under Sections 1001 and 1015 of the Banking Code.

(3)"Loans and extensions of credit" means

(A) any direct or indirect advance of funds (including obligations of makers and endorsers arising from the discounting of commercial paper) to a person or for the direct benefit of a person made on the basis of any obligation of that person to repay the funds, or repayable from specific property pledged by or on behalf of a person;

(B) any contractual commitment to advance funds; and

(C) overdrafts, whether or not prearranged, except for "intra-day" or "daylight" overdrafts.

(4)"Person" shall have the same meaning as defined in Section 102 of the Code.

(5)"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:

(A) to repay money borrowed by or advanced to or for the account of the account party; or

(B) to make payment on account of any indebtedness undertaken by the account party; or to make payment on account of any default by the account party in the performance of an obligation.

(b)Combining loans to separate borrowers.

(1)General rule. Loans or extensions of credit to one person will be attributed to other persons, for purposes of Section 802 of the Code and this Section, when

(A) the proceeds of the loans or extensions of credit are to be used for the direct benefit of the other person or persons; or

(B) a "common enterprise" is deemed to exist between the persons.

(2)Common enterprise.

(A) Whether two or more persons are engaged in a "common enterprise" will depend upon a realistic evaluation of the facts and circumstances of particular transactions.

(B) Where the expected source of repayment for each loan or extension of credit is the same for each person, a "common enterprise" will be deemed to exist and the loans or extensions of credit must be combined.

(C) Where loans or extensions of credit are made to persons who are related through common control, including where one person is controlled by another person, a "common enterprise" will be deemed to exist if the persons are engaged in interdependent businesses or there is substantial financial interdependence among them. The businesses will be considered interdependent or substantial financial interdependence will be deemed to exist when 50 percent or more of one person's gross receipts or gross expenditures (on an annual basis) are derived from transactions with one or more persons related through common control. Gross receipts and expenditures include gross revenues/expenses, intercompany loans, compensation, dividends, capital contributions, and similar receipts or repayments. For the purposes of this paragraph, "control" shall be presumed to exist when:

(i) one or more persons acting in concert directly or indirectly own, control, or have power to vote 25 percent or more of any class of voting securities of another person;

(ii) 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

(iii) 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.

(D) A "common enterprise" will also be deemed to exist between separate persons when those separate persons borrow from a bank or trust company for the purpose of acquiring a business enterprise of which those persons will collectively own 50 percent or more of the voting interest of such business or enterprise.

(3)Loans to companies and subsidiaries.

(A) For purposes of section 802 of the Code and this Section, a company is a "subsidiary" of any person which owns or beneficially owns 50 percent or more of the voting interest of the company. Such ownership need not be direct. Thus, if A owns 50 percent or more of the voting interest in Company X which, in turn, owns 50 percent or more of the voting interest in Company Y, Company Y would be considered a subsidiary of both A and of Company X.

(B) Loans or extensions of credit to a person and its subsidiary or to subsidiaries of one person need not be combined where the bank or trust company has determined that the person and subsidiaries involved are not engaged in a "common enterprise" as that term is defined in paragraph (2) of this subsection.

(C) Notwithstanding (b)(3)(B) of this Section, loans or extensions of credit to a "corporate group" may not exceed 50 percent of the capital of a bank or trust company. This aggregate limitation applies only to loans made pursuant to Section 802 of the Banking Code. A "corporate group" includes a person and all of its subsidiaries.

(4)Loans to partnerships, joint ventures, and associations.

(A) Loans or extensions of credit to a partnership, joint venture, or association shall, for purposes of section 802 of the Code and this Section, be considered loans or extensions of credit to each member of such partnership, joint venture, or association except as otherwise provided below.

(B) Loans or extensions of credit to members of a partnership, joint venture, or association shall, for purposes of section 802 of the Code and this Section, be attributed to the partnership, joint venture, or association where one or more of the tests set forth in (b)(1) 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 unless one or more of the tests set forth in (b)(1) of this Section is satisfied with respect to such other members. The tests set forth in (b)(1) of this section shall be deemed to be satisfied so that loans or extensions of credit to one person will be attributed to other persons when loans or extensions of credit are made to members of a partnership, joint venture, or association for the purpose of purchasing an interest in such a partnership, joint venture, or association, in which case, such loans or extensions of credit made to members shall be attributed both to such members and the applicable partnership, joint venture, or association.

(C) The rule set forth in (b)(4)(A) of this Section is not applicable to limited partners in limited partnerships, participants in joint ventures, or to members of associations, where the terms of the partnership, joint venture, or membership agreement and applicable law state they are not to be held liable for the debts or actions of the partnership, joint venture, or association. However, the rule set forth in (b)(1) of this Section is applicable to such partners or members.

(c)Provisos to exceptions to lending limits.

(1) A bank or trust company must ensure that a security interest has been perfected in any segregated deposit account in the lending bank that serves as security pursuant to Section 802(B)(3) of the Code.

(2) Each bank or trust company must institute adequate procedures to ensure that any collateral value fully supports the outstanding loan at all times.

(d)Interpretations.

(1)Obligations of accommodation parties. The liability of a drawer, endorser, or guarantor who does not receive any of the proceeds, or the direct benefit of the proceeds, of the loan or extension of credit is not a loan or extension of credit to such person for purposes of one of the tests set forth in (b) of this Section unless such loan or extension of credit is considered in default.

(2)Federal Funds. "Sale of Federal funds" means, for purposes of this Section, any transaction among 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.

(A) Sales of Federal funds with a maturity of one business day or under a continuing contract are not "loans and extensions of credit" for purposes of Section 802 of the Banking Code. However, sales of Federal funds with a maturity of more than one business day are subject to the lending limits.

(B) A "continuing contract" refers to an agreement that remains in effect for more than one business day but has no specified maturity and requires no advance notice for termination.

(3)Contractual commitments to advance funds. Only those funds that have been advanced under the terms of a contractual commitment to advance funds will be considered a loan or extension of credit for purposes of section 802 of the Code and this section.

(4)Loans charged off in whole or in part. The lending limits apply to all existing loans or extensions of credit to a person by the bank, including loans or extensions of credit which have been charged off on the books of the bank in whole or in part. Loans or extensions of credit which have become unenforceable by reason of discharge in bankruptcy, court order, or are no longer legally enforceable for other reasons are not loans and extensions of credit for purposes of this part.

(5)Sale of loan participations.

(A) When a bank or trust company sells a participation in a loan or extension of credit, including the discount of the institution's own acceptance, that portion of the loan that is sold on a nonrecourse basis will not be applied to the institution's lending limits. In order to remove a loan or extension of credit from an institution's lending limit, a participation must result in a pro rata sharing of credit risk proportionate to the respective interests of the originating and participating lenders regardless of whether the participation agreement provides that repayment must be applied first to the shares sold. In that case, the pro rata sharing may only be accomplished if the agreement also provides that, in case of a default or comparable event defined in the agreement, participants shall share in all subsequent repayments and collections in proportion to the percentage of participation at the time of the occurrence of the event.

(B) The provisions of (d)(5) (A) of this Section apply to all loans and extensions of credit,including contractual commitment(s) to advance funds.

(6)Nonconforming Loans. Notwithstanding anything in this Section to the contrary:

(A) A loan, within a bank's legal lending limit when made, will not be deemed a violation of this section or section 802 of the Code but will be treated as nonconforming if the loan is no longer in conformity with the bank's lending limit because -

(i) the bank's capital has declined, borrowers have subsequently merged or formed a common enterprise, lenders have merged, or the lending limit or capital rules have changed;

(ii) a default by the borrower or other event resulting in primary liability of an accommodation party under subsection (d)(1) of this Section; or

(iii) 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)(i) or (ii) 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 (d)(6)(A)(iii) of this Section into conformity with the bank's lending limit within 30 calendar days, except when judicial proceedings, regulatory actions including a Commissioner's exception under section 802 of the Code, or other extraordinary circumstances determined by the Commissioner to be beyond the bank's control prevent the bank from taking action.

(7) In the event a bank has violated any provision of this section or section 802 of the Banking Code, the bank may request permission from the Commissioner to cure the violation by divesting itself of so much of the debt as will bring the offending loan back within the bank's lending limit, or by other methods acceptable to the Commissioner. Provided, the Commissioner may permit the violation to be cured only if the Commissioner finds that the violation was inadvertent. A violation of section 802 of the Code or this section cured pursuant to the approval of the Commissioner shall absolve the bank's board members from exposure to the cured violation with respect to the offending loan or extension of credit.

(8) Loans to a company shall not be considered to be a direct benefit to any owner of the company unless the proceeds of the loan are used for purposes other than company business. However, the limitation for a "corporate group" will still apply to a person and all of the person's subsidiaries.

Okla. Admin. Code § 85:10-11-10

Amended at 14 Ok Reg 3559, eff 8-1-97 (emergency); Amended at 15 Ok Reg 2952, eff 7-15-98; Amended at 18 Ok Reg 1853, eff 6-11-01; Amended at 25 Ok Reg 1064, eff 5-25-08