October 18, 2010
Authored by: Jerry Blanchard
The Georgia Department of Banking and Finance announced proposed rule making on September 23, 2010 to conform DBF rules to statutory changes adopted in the 2010 legislative session. One of those rules addresses the issues that have arisen concerning interpretation of the amendment to the Georgia legal lending limit statute. That amendment was adopted earlier this year in response to many banks finding themselves unable to renew loans due to the fact that loan renewals were treated as a new extension of credit for legal lending limit purposes and banks had suffered capital reductions making the renewal unlawful. HB 926 was proposed as a means to allow state chartered banks in Georgia to deal with this situation in the same way that national banks currently deal with it. The legal lending limit for national banks is found at 12 USC § 84 and the applicable regulations are found in 12 CFR § 32.2. The OCC regulations do not consider a loan renewal to be an extension of credit for purposes of the legal lending limit. 12 CFR § 32.2 (k)(2)(iv) provides that an extension of credit does not include:
A renewal or restructuring of a loan as a new “loan or extension of credit,” following the exercise by a bank 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 bank to the borrower (except as permitted by § 32.3(b)(5)), or a new borrower replaces the original borrower, or unless the OCC determines that a renewal or restructuring was undertaken as a means to evade the bank’s lending limit.
The amendment to the Georgia statute used a similar approach. A bank must use reasonable efforts to try and bring a loan into compliance with the legal lending limit. If it is unable to do so then the bank would be authorized to renew the loan even though its capital has shrunk and the loan would constitute a violation of the legal lending limit. The revised statute now provides that a renewal or restructuring of a loan following the exercise by the bank of reasonable efforts, consistent with safe and sound banking practices, to bring the loan into conformance with the lending limits of the statute will not be considered a new extension of credit unless unless:
(A) New funds are advanced by the bank to the borrower, except as permitted under the statute;
(B) A new borrower replaces the original borrower; or
(C) The department determines that a renewal or restructuring was undertaken as a means to evade the bank’s lending limit.
A number of questions have arisen about the actual application of the safe harbor provided in the revised statute to fact situations involving credits that for whatever reason may not be current at the time of renewal. The DBF has, when asked, given its informal opinion that the statute should only be used for performing credits. While the language of the amendment is actually silent as to whether the loan needs to be performing or not, the DBF has taken the position that the proposed language was introduced to the legislature with the understanding that the new safe harbor would only be used for performing credits. The proposed rule is then, in effect, the DBF’s interpretation of legislative intent as to how the amended statute is to be applied. The proposed rule states that the statutory safe harbor is only for performing loans. For the purposes of the proposed rule, a “performing loan” is defined as an accruing loan that is ninety (90) days or less past due.
Banks seeking to use the statutory safe harbor can expect that the DBF and the FDIC will scrutinize their efforts to insure that the renewals are consistent with the language of the statute and the legislative intent. Since a violation of the legal lending limit can have very detrimental effects on board members we believe that banks grappling with this issue would be prudent to document in the board loan committee minutes the bank’s efforts to bring the loan into conforming status before a decision was made to renew the credit. The minutes should also reflect the fact that the loan was truly a performing loan.