Avoiding Lending Limit Problems

by Mary Beth Guard, BOL Guru

The lending limit law is like the banking equivalent of the old proverb "Don't put all your eggs in one basket."
It seeks to reduce risk by limiting the amount an institution may loan to any one borrower or related group of borrowers.
Penalties for violations can be harsh indeed, so it pays to understand how to apply the limit.
We've devised some worksheets to help.

Access a larger text version of this form in ready-to-print PDF format by clicking here.

Name of borrower: ______________________________________________ Amount of Loan: $ __________ Amount of other extensions of credit made directly to this borrower: $ __________ Collateral: _____________________________________________ If collateral is of a type that qualifies for a total or partial exemption from the lending limit, subtract the exempted amount: $ __________ Guarantor: ______________________________________________ Purpose of Loan: ________________________________________________ If borrower is an entity, what type of entity? __________________________ Describe the entity's ownership structure: ____________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ If a corporation, list any person which has direct or indirect ownership or beneficial ownership of the corporation:
(names and percentage of ownership) _______________________________________________________________ _______________________________________________________________ If a partnership, list partners and their ownership interest: (names and ownership interest) ________________________________________________________________ ________________________________________________________________ If an LLC, list members and their ownership interest: _________________________________________________________________ _________________________________________________________________ If a joint venture, list joint venturers: _________________________________________________________________ _________________________________________________________________ TESTS FOR COMBINING LOANS. Loans to separate borrowers must be combined, for lending limit purposes,
if either the direct benefit test or the common enterprise test is met. 1. Direct benefit test. Who will receive the proceeds or direct benefit of the proceeds? ______________________________________________________ ______________________________________________________ ______________________________________________________ Attribute the loan to any person who received the direct benefits of the
proceeds (other than in a bona fide arm's length transaction), as well as to
the borrower. If the proceeds of a loan are used for the direct benefit of another, loans
to one will be attributed to another. Under this test, as set forth above,
the following loans should be combined:
__________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ 2. Common enterprise test. Determine whether there is a common enterprise between this borrower and any other person.
There are three tests. If a common enterprise is deemed to exist under any one of the tests,
loans must be combined.
Tests for common enterprise: Test One: Source of Repayment Is the expected source of repayment for each extension of credit the same?
(Answer yes only if neither borrower has another source of income from which the loan,
along with the borrower's other obligations, may be fully repaid.)
_________ Yes __________ No If the expected source of repayment for each extension of credit is the same,
the borrowings should be aggregated for lending limit purposes.
Under this test for common enterprise (source of repayment), as set forth above, the following loans should be combined: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ OR Test Two: Common control/substantial financial interdependence Perform the following two-part analysis: a. Is the extension of credit being made to persons related through common control? (This would include where one borrower is directly or indirectly controlled by another borrower.) _________ Yes __________ No If the answer to the above question is yes: b. Is there substantial financial interdependence between the borrowers? (The answer is yes if 50 percent or more of one borrower's gross receipts or
gross expenditures on an annual basis are derived from transactions with the borrower.) _________ Yes __________ No If the answer to the two questions above is yes, there is a common enterprise between two or more persons,
and loans to one will be attributed to the other persons.
Under the common enterprise (substantial financial interdependence) test, the following loans should be combined: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ Test Three: Acquisition of business enterprise A common enterprise will be deemed to exist if this borrower, along with other borrowers,
is separately borrowing from this bank for the purpose of acquiring a business enterprise
of which those persons will own more than 50% of the voting securities.
Does this loan meet this test? _________ Yes __________ No If the answer to the above question is yet, there is a common enterprise and loans to those
separate borrowers must be combined. Under the common enterprise test relating to acquisition
of a business enterprise, the following loans should be combined: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ Combination of corporation and subsidiary borrowings: If the borrower is a corporation, who is it a subsidiary of? (A corporation is a subsidiary of any person which owns, or beneficilly owns, directly or indirectly, more than 50% of the voting stock of the corporation.) _____________________________________________________________ _____________________________________________________________ Is there a common enterprise between the corporation and the person of which it is deemed to be a subsidiary? _________ Yes _______ No If there is a common enterprise between the corporation and the entity of which it is a subsidiary, their loans must be combined. Under this test,
the following loans should be combined: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ If the borrower is a member of a partnership, LLC, joint venture or association is there a common enterprise between the two? _________ Yes _______ No If there is a common enterprise between the person and the entity, or the direct benefit
test is met, their loans must be combined. Under this test, the following loans should be combined:
__________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ Loans to the partnership, LLC, joint venture, etc. must be considered loans to each member of the partnership, etc.
(unless under the law or agreement the partner/member is not liable for the debts or actions of the partnership).
Under this test, the following loans should be combined: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ Is the borrower also a guarantor on any loans which are in default or on which he received direct benefit of the proceeds? If so, list: __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ __________________________________________________________ $ __________ TOTAL ALL LOANS WHICH MUST BE COMBINED. Subtract any amounts which are subtractible using lending limit exceptions. TOTAL COMBINED DEBT ATTRIBUTABLE TO THIS BORROWER AND RELATED INTERESTS: $ __________ First published on BankersOnline.com