PART 32—LENDING LIMITS Authority: 12 U.S.C. 1 et seq., Source: 60 FR 8532, Feb. 15, 1995, unless otherwise noted. § 32.1 Authority, purpose and scope. (a) Authority. et seq., (b) Purpose. (c) Scope. (2) This part does not apply to loans or extensions of credit made to the bank's or savings association's: (i) Affiliates, as that term is defined in 12 U.S.C. 371c(b)(1) and (e), as implemented by 12 CFR 223.2(a) (Regulation W); (ii) Operating subsidiaries; (iii) Edge Act or Agreement Corporation subsidiaries; or (iv) Any other subsidiary consolidated with the bank or savings association under GAAP. (3) The lending limits in this part are separate and independent from the investment limits prescribed by 12 U.S.C. 24 (Seventh) or 12 U.S.C. 1464(c), as applicable, and 12 CFR Part 1 and 12 CFR 160.30, and a national bank or savings association 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) or 12 U.S.C. 1464(c), as applicable, and 12 CFR part 1 and 12 CFR 160.30. (4) Loans and extensions of credit to executive officers, directors and principal shareholders of national banks, savings associations, 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 or 12 U.S.C. 1464(u) as applicable, and this part. (5) In addition to the foregoing, loans and extensions of credit must be consistent with safe and sound banking practices. (d) Temporary exception. [60 FR 8532, Feb. 15, 1995, as amended at 73 FR 22251, Apr. 24, 2008; 77 FR 37275, June 21, 2012; 77 FR 76842, Dec. 31, 2012; 78 FR 37943, June 25, 2013] § 32.2 Definitions. (a) Appropriate Federal banking agency (b) Borrower (c) Capital and surplus (1) For qualifying community banking organizations that have elected to use the community bank leverage ratio framework, as set forth under the OCC's Capital Adequacy Standards at part 3 of this chapter: (i) A qualifying community banking organization's tier 1 capital, as used under § 3.12 of this chapter; plus (ii) A qualifying community banking organization's allowance for loan and lease losses or adjusted allowances for credit losses, as applicable, as reported in the Consolidated Reports of Condition and Income (Call Report); or (2) For all other national banks and Federal savings associations: (i) A national bank's or savings association's tier 1 and tier 2 capital calculated under the risk-based capital standards applicable to the institution as reported in the Call Report; plus (ii) The balance of a national bank's or Federal savings association's allowance for loan and lease losses or adjusted allowances for credit losses, as applicable, not included in the bank's or savings association's tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (c)(2)(i) of this section, as reported in the national bank's or savings association's Call Report. (d) Close of business (e) Consumer (f) Consumer paper (g) Contractual commitment to advance funds. (i) Make payment (directly or indirectly) to a third person contingent upon default by a customer of the bank or savings association 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 (t) of this section, and (iv) Advance funds under a standby letter of credit as defined in paragraph (ee) 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 or savings association 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. (h) Control (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. (i) Credit derivative (j) Current market value (k) Derivative transaction (l) Effective margining arrangement (m) Eligible credit derivative (1) The derivative contract meets the requirements of an eligible guarantee, as defined in 12 CFR 3.2, and has been confirmed by the protection purchaser and the protection provider; (2) Any assignment of the derivative contract has been confirmed by all relevant parties; (3) If the credit derivative is a credit default swap, the derivative contract includes the following credit events: (i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and (ii) Bankruptcy, insolvency, restructuring (for obligors not subject to bankruptcy or insolvency), or inability of the obligor on the reference exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events; (4) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract; (5) If the derivative contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss with respect to the derivative reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure; (6) If the derivative contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provides that any required consent to transfer may not be unreasonably withheld; and (7) If the credit derivative is a credit default swap, the derivative contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event. (n) Eligible national bank or eligible savings association (1) Is well capitalized as defined in the prompt corrective action rules applicable to the institution; and (2) Has a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System in connection with the national bank's or savings association's most recent examination or subsequent review, with at least a rating of 2 for asset quality and for management. (o) Eligible protection provider (1) A sovereign entity (a central government, including the U.S. government; an agency; department; ministry; or central bank); (2) The Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or a multilateral development bank; (3) A Federal Home Loan Bank; (4) The Federal Agricultural Mortgage Corporation; (5) A depository institution, as defined in section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c); (6) A bank holding company, as defined in section 2 of the Bank Holding Company Act, as amended, 12 U.S.C. 1841; (7) A savings and loan holding company, as defined in section 10 of the Home Owners' Loan Act, 12 U.S.C. 1467a; (8) A securities broker or dealer registered with the SEC under the Securities Exchange Act of 1934, 15 U.S.C. 78o et seq; (9) An insurance company that is subject to the supervision of a State insurance regulator; (10) A foreign banking organization; (11) A non-U.S.-based securities firm or a non-U.S.-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies; and (12) A qualifying central counterparty; (p) Financial instrument (q) Loans and extensions of credit (1) Loans or extensions of credit for purposes of 12 U.S.C. 84 or 12 U.S.C. 1464(u), as applicable, and this part include— (i) A contractual commitment to advance funds, as defined in paragraph (g) of this section; (ii) A maker or endorser's obligation arising from a national bank's or savings association's discount of commercial paper; (iii) A national bank's or savings association'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 or savings association's loan is the total unpaid balance of the paper owned by the bank or savings association less any applicable dealer reserves retained by the bank or savings association and held by the bank or savings association as collateral security. Where the seller's obligation to repurchase is limited, the bank's or savings association's loan is measured by the total amount of the paper the seller may ultimately be obligated to repurchase. A national bank's or savings association'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; (iv) An overdraft, whether or not prearranged, but not an intra-day overdraft for which payment is received before the close of business of the national bank or savings association that makes the funds available; (v) 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 (vi) Loans or extensions of credit that have been charged off on the books of the national bank or savings association 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; (C) Is no longer legally enforceable for other reasons, provided that the bank or savings association 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 or 12 U.S.C. 1464(u), as applicable, and this part— (i) Additional funds advanced for the benefit of a borrower by a national bank or savings association 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 or savings association'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 national bank's or savings association's own assets, including Other Real Estate Owned, if the financing does not put the bank or savings association in a worse position than when the bank or savings association 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 national bank or savings association 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 national bank or savings association to the borrower (except as permitted by § 32.3(b)(5)), or a new borrower replaces the original borrower, or unless the appropriate Federal banking agency determines that a renewal or restructuring was undertaken as a means to evade the bank's or savings association's lending limit; (v) Amounts paid against uncollected funds in the normal process of collection; (vi)(A) That portion of a loan or extension of credit sold as a participation by a national bank or savings association 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 national bank or savings association 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 or savings association to the borrower. If the portions so attributed to the borrower exceed the originating bank's or savings association's lending limit, the loan may be treated as nonconforming subject to § 32.6, rather than a violation, if: ( 1 ( 2 ( 3 (vii) That portion of one or more loans or extensions of credit, not to exceed 10 percent of capital and surplus, with respect to which the national bank or savings association has purchased protection in the form of a single-name credit derivative that meets the requirements of § 32.2(m)(1) through (7) from an eligible protection provider if the reference obligor is the same legal entity as the borrower in the loan or extension of credit and the maturity of the protection purchased equals or exceeds the maturity of the loan or extension of credit. (r) Person (s) Qualifying central counterparty (t) Qualifying commitment to lend (1) In determining whether a commitment is within the national bank's or savings association's lending limit when made, the bank or savings association 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 or savings association's commitment and that would be excluded from the definition of “loan or extension of credit” under paragraph (q)(2)(vi) of this section. (2) If the national bank or savings association 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 or savings association's applicable lending limit at that time, the bank's or savings association's qualifying commitments to the borrower that exceed the bank's or savings association'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 or savings association's lending limit at the time of the advance, calculated pursuant to § 32.4. (u) Qualifying master netting agreement (v) Readily marketable collateral (w) Readily marketable staple (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. (x) Residential housing units (1) Homes (including a dwelling unit in a multi-family residential property such as a condominium or a cooperative); (2) Combinations of homes and business property ( i.e., (3) Other real estate used for primarily residential purposes other than a home (but which may include homes); (4) Combinations of such real estate and business property involving only minor business use ( i.e., (5) Farm residences and combinations of farm residences and commercial farm real estate; (6) Property to be improved by the construction of such structures; or (7) Leasehold interests in the above real estate. (y) Residential real estate loan (z) Sale of Federal funds (aa) Securities financing transaction means (bb) Security (cc) Loans to small businesses (dd) Loans or extensions of credit to small farms (ee) Standby letter of credit (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. [60 FR 8532, Feb. 15, 1995, as amended at 63 FR 15746, Apr. 1, 1998; 66 FR 31120, June 11, 2001; 66 FR 55072, Nov. 1, 2001; 69 FR 51357, Aug. 19, 2004; 77 FR 37275, June 21, 2012; 77 FR 37277, June 21, 2012; 78 FR 37944, June 25, 2013; 79 FR 11312, Feb. 28, 2014; 80 FR 28479, May 18, 2015; 84 FR 4240, Feb. 14, 2019; 84 FR 61795, Nov. 13, 2019; 84 FR 69298, Dec. 18, 2019; 85 FR 42642, July 14, 2020] § 32.3 Lending limits. (a) Combined general limit. (b) Loans subject to special lending limits. (1) Loans secured by bills of lading or warehouse receipts covering readily marketable staples. (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 or savings association 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. (ii) Where the seller of the paper offers only partial recourse to the bank or savings association, the lending limits of this section apply to the obligation of the seller to the bank or savings association, which is measured by the total amount of paper the seller may be obligated to repurchase or has guaranteed. (iii) Where the bank or savings association 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 or savings association must substantiate its reliance on the maker with— (A) Records supporting the bank's or savings association's independent credit analysis of the maker's ability to repay the loan or extension of credit, maintained by the bank or savings association 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 or savings association authorized by the bank's or savings association's board of directors or any designee of that officer, that the bank or savings association 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 or savings association 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. (ii) The bank or savings association 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 or savings association's loan or extension of credit is assigned to the bank or savings association 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 savings association, 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 or savings association'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. (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 or savings association 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. (i) The completion of funding is consistent with safe and sound banking practices and is made to protect the position of the bank or savings association; (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 or savings association's qualifying commitment to lend. (c) Loans not subject to the lending limits. (1) Loans arising from the discount of commercial or business 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 or 12 U.S.C. 1464(u), as applicable, and this part. (2) Bankers' acceptances. (i) A national bank's or savings association's acceptance of drafts ineligible for rediscount (which constitutes a loan by the bank or savings association to the customer for whom the acceptance was made, in the amount of the draft); (ii) A national bank's or savings association's purchase of ineligible acceptances created by other banks or savings associations (which constitutes a loan from the purchasing bank or savings association to the accepting bank or savings association, in the amount of the purchase price); and (iii) A national bank's or savings association's purchase of its own acceptances (which constitutes a loan to the bank's or savings association's customer for whom the acceptance was made, in the amount of the purchase price). (3)(i) Loans secured by U.S. obligations. (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 a loan or extension of credit under paragraph (c)(3)(i) of this section, the national bank or savings association must perfect a security interest in the collateral under applicable law. (4) Loans to or guaranteed by a Federal agency. (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 national bank or savings association is not substantially diminished or impaired if loss should result from factors beyond the bank's or savings association's control. Protection against loss is not materially diminished or impaired by procedural requirements, such as an agreement to pay on the obligation 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 or savings association. (5) Loans to or guaranteed by general obligations of a State or political subdivision. (ii) A loan or extension 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 or savings association has an opinion of counsel or the opinion of that State Attorney General, or other State legal official with authority to opine on the guarantee or collateral in question, that the guarantee or collateral is a valid and enforceable general obligation of that public body. (6) Loans secured by segregated deposit accounts. (i) Where the deposit is eligible for withdrawal before the secured loan matures, the bank or savings association must establish internal procedures to prevent release of the security without the lending bank's or savings association'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 or savings association must establish procedures to periodically 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 appropriate Federal banking agency. (8) Loans to the Student Loan Marketing Association. (9) Loans to industrial development authorities. (i) The national bank or savings association 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 or savings association as security for the loan or the industrial occupant issues a promissory note to the bank or savings association 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 or savings association. (10) Loans to leasing companies. (i) The national bank or savings association 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 or savings association 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 or savings association; (v) The lessee's lease payments are assigned and paid to the bank or savings association; and (vi) The lease terms are subject to the same limitations that would apply to a national bank or savings association acting as a lessor. (11) Credit Exposures arising from transactions financing certain government securities. (12) Intraday credit exposures. (d) Special lending limits for savings associations $500,000 exception for savings associations. (2) Loans by savings associations to develop domestic residential housing units. provided that: (A) The savings association is, and continues to be, in compliance with 12 CFR part 3, part 390, subpart Z, or part 324, as applicable; (B) Upon application by a savings association under paragraph (d)(2)(iv) of this section, the appropriate Federal banking agency permits, subject to conditions it may impose, the savings association to use the higher limit set forth under this paragraph (d)(2)(i); (C) The loans and extensions of credit made under this paragraph (d)(2)(i) to all borrowers do not, in aggregate, exceed 150 percent of the savings association's unimpaired capital and unimpaired surplus; and (D) The loans and extensions of credit made under this paragraph (d)(2)(i) comply with the applicable loan-to-value requirements. (ii) The authority of a savings association to make a loan or extension of credit under the exception in paragraph (d)(2)(i) of this section ceases immediately upon the association's failure to comply with any one of the requirements set forth in paragraph (d)(2)(i) of this section or any condition(s) set forth in an order issued by the appropriate Federal banking agency under paragraphs (d)(2)(i)(B) and (d)(2)(iv) of this section. (iii) As used in this section, the term “ to develop domestic” (iv) Procedures Federal savings associations 1 Application. ( i ( ii ( iii ( iv ( 2 Expedited review. (B) State savings associations. (3) Commercial paper and corporate debt securities. [60 FR 8532, Feb. 15, 1995, as amended at 63 FR 15746, Apr. 1, 1998; 66 FR 31120, June 11, 2001; 66 FR 35072, Nov. 1, 2001; 77 FR 37277, June 21, 2012; 79 FR 11312, Feb. 28, 2014; 80 FR 28479, May 18, 2015] § 32.4 Calculation of lending limits. (a) Calculation date. (1) The last day of the preceding calendar quarter; or (2) The date on which there is a change in the bank's or savings association's capital category for purposes of 12 U.S.C. 1831o and 12 CFR 6.3 or 12 CFR 324.402, as applicable. (b) Effective date. (i) The date on which the bank's or savings association's Call Report is submitted; or (ii) The date on which the bank's or savings association's Call Report is required to be submitted. (2) A national bank's or savings association's lending limit calculated in accordance with paragraph (a)(2) of this section will be effective on the date that the limit is to be calculated. (c) More frequent calculations. [63 FR 15746, Apr. 1, 1998, as amended at 77 FR 37278, June 21, 2012; 79 FR 11312, Feb. 28, 2014] § 32.5 Combination rules. (a) General rule. (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. (c) Common enterprise. (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 national bank or savings association 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 appropriate Federal banking agency 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. (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 Partnership loans. (2) Loans to partners. (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 Aggregation. (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. (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 national bank's or savings association'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 or savings association 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 Non-combination rule. (ii) Qualifying restructuring. (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. [60 FR 8532, Feb. 15, 1995, as amended at 77 FR 37279, June 21, 2012] § 32.6 Nonconforming loans and extensions of credit. (a) A loan or extension of credit, within a national bank's or savings association's legal lending limit when made, will not be deemed a violation but will be treated as nonconforming if the loan or extension of credit is no longer in conformity with the bank's or savings association's lending limit because— (1) The bank's or savings association'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; (2) Collateral securing the loan to satisfy the requirements of a lending limit exception has declined in value; or (3) In the case of a credit exposure arising from a transaction identified in § 32.9(a) and measured by the Model Method specified in § 32.9(b)(1)(i) or § 32.9 (c)(1)(i), the Current Exposure Method specified in § 32.9(b)(1)(iii), or the Basel Collateral Haircut Method specified in § 32.9(c)(1)(iii), the credit exposure subject to the lending limits of 12 U.S.C. 84 or 12 U.S.C. 1464(u), as applicable, or this part increases after execution of the transaction. (b) A national bank or savings association must use reasonable efforts to bring a loan or extension of credit that is nonconforming as a result of paragraph (a)(1) or (a)(3) of this section into conformity with the bank's or savings association's lending limit unless to do so would be inconsistent with safe and sound banking practices. (c) A national bank or savings association 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 or savings association's lending limit within 30 calendar days, except when judicial proceedings, regulatory actions or other extraordinary circumstances beyond the bank's or savings association's control prevent it from taking action. [77 FR 37279, June 21, 2012, as amended at 78 FR 37944, June 25, 2013] § 32.7 Residential real estate loans, loans to small businesses, and loans or extensions of credit to small farms (“Supplemental Lending Limits Program”). (a) Residential real estate, loans to small businesses, and loans or extensions of credit to small farms. (2) In addition to the amount that a national bank or savings association may lend to one borrower under § 32.3, an eligible national bank or eligible savings association may make loans to small businesses to one borrower in the lesser of the following two amounts: 10 percent of its capital and surplus; or the percent of its capital and surplus, in excess of 15 percent, that a State bank is permitted to lend under the state lending limit that is available for loans to small businesses or unsecured loans in the state where the main office of the national bank or home office of the savings association is located. (3) In addition to the amount that a national bank or savings association may lend to one borrower under § 32.3, an eligible national bank or eligible savings association may make loans or extensions of credit to small farms to one borrower in the lesser of the following two amounts: 10 percent of its capital and surplus; or the percent of its capital and surplus, in excess of 15 percent, that a State bank or savings association is permitted to lend under the State lending limit that is available for loans or extensions of credit to small farms or unsecured loans in the State where the main office of the national bank or savings association is located. (4) The total outstanding amount of a national bank's or savings association's loans and extensions of credit to one borrower made under § 32.3(a) and (b), together with loans and extensions of credit to the borrower made pursuant to paragraphs (a)(1), (2), and (3) of this section, shall not exceed 25 percent of the bank's or savings association's capital and surplus. (5) The total outstanding amount of a national bank's or savings association's loans and extensions of credit to all of its borrowers made pursuant to the supplemental lending limits provided in paragraphs (a)(1), (2), and (3) of this section may not exceed 100 percent of the bank's or saving association's capital and surplus. (b) Application process. (1) Certification that the bank or savings association is an “eligible bank” or “eligible savings association”; (2) Citations to relevant State laws or regulations; (3) A copy of a written resolution by a majority of the bank's or savings association's board of directors approving the use of the limits provided in paragraphs (a)(1), (2), and (3) of this section, and confirming the terms and conditions for use of this lending authority; and (4) A description of how the board will exercise its continuing responsibility to oversee the use of this lending authority. (c) Duration of approval. (d) Discretionary termination of authority. (e) Existing loans. [66 FR 31120, June 11, 2001, as amended at 69 FR 32436, June 10, 2004; 69 FR 51357, Aug. 19, 2004; 72 FR 31444, June 7, 2007; 77 FR 37279, June 21, 2012; 80 FR 28479, May 18, 2015; 85 FR 42642, July 14, 2020; 85 FR 61810, Oct. 1, 2020] § 32.8 Temporary funding arrangements in emergency situations. In addition to the amount that a national bank or savings association may lend to one borrower under § 32.3 of this part, an eligible bank or eligible savings association with the written approval of the appropriate Federal banking agency may make loans and extensions of credit to one borrower subject to a special temporary lending limit established by the appropriate Federal banking agency, where the appropriate Federal banking agency determines that such loans and extensions of credit are essential to address an emergency situation, such as critical financial markets stability, will be of short duration, will be reduced in amount in a timeframe and manner acceptable to the appropriate Federal banking agency, and do not present unacceptable risk. In granting approval for such a special temporary lending limit, the appropriate Federal banking agency will impose supervisory oversight and reporting measures that it determines are appropriate to monitor compliance with the foregoing standards as set forth in this paragraph. [73 FR 14924, Mar. 20, 2008, as amended at 77 FR 37280, June 21, 2012] § 32.9 Credit exposure arising from derivative and securities financing transactions. (a) Scope. (b) Derivative transactions Non-credit derivatives. (i) Model Method Credit exposure. (B) Calculation of current credit exposure. (C) Calculation of potential future credit exposure. 1 ( i ( ii ( 2 1 i 1 ii (D) Net credit exposure. (ii) Conversion Factor Matrix Method. Table 1—Conversion Factor Matrix for Calculating Potential Future Credit Exposure 1 Original maturity 2 Interest rate Foreign exchange rate and gold Equity Other 3 1 year or less .015 .015 .20 .06 Over 1 to 3 years .03 .03 .20 .18 Over 3 to 5 years .06 .06 .20 .30 Over 5 to 10 years .12 .12 .20 .60 Over ten years .30 .30 .20 1.0 1 2 3 (iii) Current Exposure Method. (iv) Standardized Approach for Counterparty Credit Risk Method. (2) Credit Derivatives Counterparty exposure In general. (B) Special rule for certain effective margining arrangements. EMA threshold (ii) Reference entity exposure. (3) Special rule for central counterparties. (ii) Paragraph (b)(3)(i) of this section does not apply to a national bank or saving association that uses an internal model pursuant to paragraph (b)(1)(i) of this section if such model reflects the initial margin and any contributions to a guaranty fund. (4) Mandatory or alternative method. (c) Securities financing transactions In general. (i) Model Method. ( 1 ( 2 (B) Any substantive revisions to a model made after the bank or savings association has provided notice of the use of the model to the appropriate Federal banking agency pursuant to paragraph (c)(1)(i)(A)( 1 2 (ii) Basic Method. (A) Repurchase agreement. (B) Securities lending 1 Cash collateral transactions. ( 2 Non-cash collateral transactions. (C) Reverse repurchase agreements. (D) Securities borrowing 1 Cash collateral transactions. ( 2 Non-cash collateral transactions. TABLE 2—Collateral Haircuts SOVEREIGN ENTITIES Residual maturity Haircut without currency mismatch 1 OECD Country Risk Classification 2 ≤1 year 0.005. >1 year, ≤5 years 0.02. >5 years 0.04. OECD Country Risk Classification 2-3 ≤1 year 0.01. >1 year, ≤5 years 0.03. >5 years 0.06. CORPORATE AND MUNICIPAL BONDS THAT ARE BANK-ELIGIBLE INVESTMENTS Residual maturity for debt securities Haircut without currency mismatch All ≤1 year 0.02. All >1 year, ≤5 years 0.06. All >5 years 0.12. OTHER ELIGIBLE COLLATERAL Main index 3 0.15. Other publicly-traded equities (including convertible bonds) 0.25. Mutual funds Highest haircut applicable to any security in which the fund can invest. Cash collateral held 0. 1 2 3 (iii) Basel Collateral Haircut Method. (2) Mandatory or alternative method. [77 FR 37280, June 21, 2012, as amended at 78 FR 37944, June 25, 2013; 79 FR 11312, Feb. 28, 2014; 85 FR 4414, Jan. 24, 2020] Appendix A to Part 32—Interpretations Section 1. Interrelation of General Limitation With Exception for Loans To Develop Domestic Residential Housing Units 1. The § 32.3(d)(2) exception for loans to one borrower to develop domestic residential housing units is characterized in the regulation as an “alternative” limit. This exceptional $30,000,000 or 30 percent limitation does not operate in addition to the 15 percent General Limitation or the 10 percent additional amount a savings association may loan to one borrower secured by readily marketable collateral, but serves as the uppermost limitation on a savings association's lending to any one person once a savings association employs this exception. Example: Savings Association A's lending limitation as calculated under the 15 percent General Limitation is $800, 000. If Savings Association A lends Y $800,000 for commercial purposes, Savings Association A cannot lend Y an additional $1,600,000, or 30 percent of capital and surplus, to develop residential housing units under the paragraph § 32.3(d)(2) exception. The § 32.3(d)(2) exception operates as the uppermost limitation on all lending to one borrower (for savings associations that may employ this exception) and includes any amounts loaned to the same borrower under the General Limitation. Savings Association A, therefore, may lend only an additional $800,000 to Y, provided § 32.3(d)(2) prerequisites have been met. The amount loaned under the authority of the General Limitation ($800,000), when added to the amount loaned under the exception ($800,000), yields a sum that does not exceed the 30 percent uppermost limitation ($1,600,000). 2. a. This result does not change even if the facts are altered to assume that some or all of the $800,000 amount of lending permissible under the General Limitation's 15 percent basket is not used, or is devoted to the development of domestic residential housing units. b. In other words, using the above example, if Savings Association A lends Y $400,000 for commercial purposes and $300,000 for residential purposes—both of which would be permitted under its $800,000 General Limitation—Savings Association A's remaining permissible lending to Y would be: first, an additional $100,000 under the General Limitation, and then another $800,000 to develop domestic residential housing units if the savings association meets the paragraph § 32.3(d)(2) prerequisites. (The latter is $800,000 because in no event may the total lending to Y exceed 30 percent of unimpaired capital and unimpaired surplus). If Savings Association A did not lend Y the remaining $100,000 permissible under the General Limitation, its permissible loans to develop domestic residential housing units under § 32.3(d)(2) would be $900,000 instead of $800,000 (the total loans to Y would still equal $1,600,000). 3. In short, under the § 32.3(d)(2) exception, the 30 percent or $30,000,000 limit will always operate as the uppermost limitation, unless the savings association does not avail itself of the exception and merely relies upon its General Limitation. Section 2. Interrelationship Between the General Limitation and the 150 Percent Aggregate Limit on Loans to All Borrowers To Develop Domestic Residential Housing Units Numerous questions have been received regarding the allocation of loans between the different lending limit “baskets,” i.e., Example: Savings Association A's General Limitation under § 32.3(a) is $15 million. In January, Savings Association A makes a $10 million loan to Borrower to develop domestic residential housing units. At the time the loan was made, Savings Association A had not received approval under an order issued by the appropriate Federal banking agency to avail itself of the residential development exception to lending limits. Therefore, the $10 million loan is made under Savings Association A's General Limitation. 2. In June, Savings Association A receives authorization to lend under the Residential Development exception. In July, Savings Association A lends $3 million to Borrower to develop domestic residential housing units. In August, Borrower seeks an additional $12 million commercial loan from Savings Association A. Savings Association A cannot make the loan to Borrower, however, because it already has an outstanding $10 million loan to Borrower that counts against Savings Association A's General Limitation of $15 million. Thus, Savings Association A may lend only up to an additional $5 million to Borrower under the General Limitation. 3. However, Savings Association A may be able to reallocate the $10 million loan it made to Borrower in January to its Residential Development basket provided that: (1) Savings Association A has obtained authority under an order issued by the appropriate Federal banking agency to avail itself of the additional lending authority for residential development and maintains compliance with all prerequisites to such lending authority; (2) the original $10 million loan made in January constitutes a loan to develop domestic residential housing units as defined; and (3) the housing unit(s) constructed with the funds from the January loan remain in a stage of “development” at the time Savings Association A reallocates the loan to the domestic residential housing basket. The project must be in a stage of acquisition, development, construction, rehabilitation, or conversion in order for the loan to be reallocated. 4. If Savings Association A is able to reallocate the $10 million loan made to Borrower in January to its Residential Development basket, it may make the $12 million commercial loan requested by Borrower in August. Once the January loan is reallocated to the Residential Development basket, however, the $10 million loan counts towards Savings Association A's 150 percent aggregate limitation on loans to all borrowers under the residential development basket (§ 32.3(d)(2)). 5. If Savings Association A reallocates the January loan to its domestic residential housing basket and makes an additional $12 million commercial loan to Borrower, Savings Association A's totals under the respective limitations would be: $12 million under the General Limitation; and $13 million under the Residential Development limitation. The full $13 million residential development loan counts toward Savings Association A's aggregate 150 percent limitation. [77 FR 37282, June 21, 2012]