1100. Lending limits

(a) Law-12 U.S.C. 84

"The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. The term 'obligations' shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such association and the liability of the endorser, drawer, or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such association and shall include in the case of obligations of a copartnership or association the obligations of the several members thereof and shall include in the case of obligations of a corporation all obligations of all subsidiaries thereof in which such corporation owns or controls a majority interest. Such limitation of 10 per centum shall be subject to the following exceptions: * * *.” [For exceptions to lending limits see paragraph 1510 et seq.] (b) Capital debentures

The proceeds of capital notes, capital debentures or other similar obligations issued by a national bank, which are subordinate in right of payment to the prior payment in full of all deposit liabilities of the bank, may be included as part of the aggregate amount of unimpaired capital stock and unimpaired surplus funds for the purpose of the computation of the limit on loans to individual borrowers contained in 12 U.S.C. 84. See Regulation 7.7 (12 CFR 7.7).

(c) Undivided profits and reserves

The term "unimpaired surplus fund" as used in 12 U.S.C. 84 includes all capital accounts (other than capital stock), derived from either paid-in capital funds or retained earnings, not subject to known charges, and which are considered interchangeable by resolution of the bank's board of directors.

(1) Some examples of capital accounts

which are includable in the term "unimpaired surplus fund" are:

(i) Surplus (paid-in or earned);

(ii) Undivided profits (paid-in or earned -unearned income must be deducted);

(iii) Reserve for loan losses or bad debts, less the amount of tax which would become payable with respect to the tax-free portion of the reserve if such portion were transferred from the reserve;

(iv) Valuation reserve for securities;
(v) Reserve for contingencies.

(2) Accounts which are subject to known specific charges are not includable in the "unimpaired surplus fund." Some examples of such accounts are:

(i) Reserve for dividends declared;

(ii) Reserve for taxes, interest and expenses.

1105. Purchase of open accounts (a) General

The purchase of open accounts is a part of the business of banking and within the power of a national bank. Such accounts need not in every case represent an evidence of debt.

(b) Export transactions

A national bank may also purchase open accounts in connection with export transactions, particularly when the accounts are protected by insurance such as that provided by the Foreign Credit Insurance Association and the Export-Import Bank.

1110. Purchase of paper:

repurchase agreements

Where a bank buys third party paper (including open accounts), but the seller agrees to repurchase it upon default, the seller's obligation to repurchase is subject to the lending limit and is measured by the total unpaid balance of the paper owned by the bank less the applicable seller's reserves against defaulted paper, if any. Where the seller's obligation to repurchase is limited, it is measured by the total amount of paper the seller may ultimately be obligated to repurchase.

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fied fee. The transaction does not create on the part of the buyer an obligation subject to 12 U.S.C.84 or a borrowing subject to 12 U.S.C. 82, but is to be considered a purchase and sale of such funds.

1131. Purchase or sale of securities:

resale or repurchase agreement

The purchase or sale of securities by a bank, under an agreement to resell or repurchase at the end of a stated period, is not a borrowing subject to 12 U.S.C. 82 nor an obligation subject to the lending limit of 12 U.S.C. 84.

1132. Sale of mortgage loans

The purchase or sale of mortgage loans by a bank, under an agreement to resell or repurchase at the end of a stated period, is not a borrowing subject to 12 U.S.C. 82 nor an obligation subject to the lending limit of 12 U.S.C. 84.

1135. Sale of loan participations:

agreement on effect of default

Where a participation in a loan is sold to another bank the agreement may provide that repayment must first be applied to the share sold. Since one of the purposes of such a sale may be to reduce the bank's retention of loans which may exceed its lending limit, the agreement should as a matter of prudent banking practice also provide that, in the event of default or a comparable event defined in the agreement, the participants shall share in all subsequent repayments and collections in proportion to the percentage of participation at the time of the happening of the event.

1150. Interest or discount on loan

The lending limit applies, without regard to the form of the obligation, to the amounts actually advanced by the bank and not to any interest which may accrue thereon.

1160. Commitments to lend or pay

An agreement to lend to a customer or to pay others for its account, under irrevocable sight letters of credit or otherwise, does not result in an obligation subject to the lending limit until the bank is required to make the

advance or payment. The making and management of agreements of this nature will require the exercise of prudent banking judgment to prevent the creation of loans in excess of the lending limit.

1161. Overdrafts

The use of overdrafts which represent prearranged financing is a legal means of extending credit. Significantly sizable overdrafts will be reviewed for credit quality and adherence to statutory lending limits in the same manner as other loans.

1175. Obligations limited to

collateral transferred

Where the obligation of a customer to repay a loan is limited to the proceeds of a contract or to an asset transferred as security therefor and his obligation with respect to the collateral is limited to a warranty of validity as of the date of its transfer, neither the described obligations of the customer nor the collateral represent obligations of the customer subject to the lending limit. As a matter of prudent banking judgment, a bank should take appropriate action to insure that there will not be an undue concentration of underlying collateral substantially dependent upon a limited area of economic activity.

1180. Investment securities:

separate limitation

The lending limits prescribed by 12 U.S.C. 84 are separate and distinct from the investment limits prescribed by 12 U.S.C. 24. Accordingly, a national bank may make loans to one borrower to the full amount permitted by 12 U.S.C. 84 and also hold eligible investment securities of the same obligor to the full amount permitted by 12 U.S.C. 24.

1181. Loan to industrial

development authority

A loan or other extension of credit to an industrial development authority or similar public entity created for the purpose of constructing and leasing a plant facility to an industrial occupant is not an obligation of the authority for the purpose of 12 U.S.C. 84 if: (1) the bank relies on the credit of the industrial occupant in making the loan; (2) the authority's liability with respect to the loan is limited solely to whatever interest it has in the particular facility; (3) the authority's interest is assigned to the bank as security for the loan; and (4) the industrial occupant's lease rentals are assigned and paid directly to the bank.

1185. Loan or credit guaranteed by

state or political subdivision

To the extent a loan or other extension of credit to a bank customer is guaranteed by a state or political subdivision thereof, such as an industrial development authority, the loan or credit extension is not an obligation of the customer for the purpose of 12 U.S.C. 84 if the guarantee is supported by a pledge of the full faith and credit of the state or subdivision. See Regulation 1.3(e) (12 CFR 1.3(e)) and 2145(a) and (f).

1190. Loan secured by

public securities

A loan or other extension of credit secured by public securities having a value equal to the amount of the loan is not an obligation subject to the limitation and exceptions of 12 U.S.C. 84. The value of the public securities may be determined by their par or face value. See Regulation 1.3 (12 CFR 1.3) for definition of "public security." Also see Regulation 6 (12 CFR 6) and ¶1580.

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