The Georgia Department of Banking and Finance (“DBF”), announced today a significant change in the way in which the legal lending limit will be applied in the context of loan renewals.  Due to a shrinking capital base, a large number of banks have been struggling with the issue of what to do with loans whose renewal would cause a violation of the legal lending limit.  These were loans that met the requirements when the loan was made but could not be made today due to the bank’s smaller capital position. The position of the DBF has been that a bank should not renew such a loan.  In the current economic environment this places banks in an untenable situation because borrowers are unable to pay off the loans due to a lack of liquidity and no other financial institutions are willing to take over the credits.  The only option left for a bank in such a situation is to enter into some sort of forbearance agreement with the borrower.  The result of that, however, is that after 90 days the loan will need to be downgraded to substandard, regardless of whether the borrower is able to keep interest payments current.

Following direct discussions among GBA President Joe Brannen, GBA counsel Walt Moeling and Jerry Blanchard, Commissioner Rob Braswell, and the DBF Staff dealing with this issue, the DBF announced today that it shall be the position of the DBF that if loans are modified or renewed by the bank without any additional extension of credit outstanding, such loans will not be cited for a violation of the new rules of the Department contained in Rule 80-1-5-.11.  The DBF goes on to note, however, that the fact that a violation of the lending limit rule is not being cited should not be interpreted as a finding of creditworthiness by the DBF. A decision to classify a credit or credit relationship is an independent process from the application of statutes and rules.

In the announcement, the DBF acknowledged that this new interpretation is based on a recognition of the current challenging environment facing the financial services industry.  If it appears that a bank is structuring transactions in an effort to avoid the legal lending limit rules as opposed to working with borrowers to attempt to bring the loan back into a conforming one, the DBF reserves the right to review such activities on an individual basis.

We believe that banks faced with renewing such loans should carefully document the fact that they are taking reasonable steps to bring the loan into conformity.  Due to the serious consequences that intentional violations of the legal lending limit can have on boards of directors, we think it is prudent that renewals of these non-conforming loans be submitted to the entire board for review and that the board make a finding that the renewal is (i) consistent with safe and sound banking practices, (ii) in the best interest of the bank, and (iii) that management has been instructed to use reasonable efforts to bring the loan into conformity with the legal lending limit.