On February 11, 2010, the Governor signed House Bill 926 (HB 926), an amendment to the Georgia legal lending limit statute, to permit banks to renew maturing loans without violating the legal lending limit statute. The Georgia legal lending statute is found at Ga. Code Ann.§ 7-1 -285.  The statute is supplemented by the rules adopted by the Georgia Department of Banking and Finance, specifically Rule 80-1-5-.01(12).  The amendment was proposed as a solution to a problem which many banks are currently facing due to a reduction in their capital base. At issue is the language in the Rule which states that a bank may not renew a loan which although proper when made would now no longer meet the legal lending limit requirement.

“(12)  Where the “statutory capital base” as defined in Section 7-1-4(35) is reduced by operating losses, loan losses, or for other reasons, existing debt which was in conformity with the legal limitations at the time it originated shall not be construed to be non-conforming with new legal limitations resulting from the reduced statutory capital base; provided, however, in the absence of agreements to the contrary and originating at the time such debt originated regarding repayment programs for the debt in question, any extension, renewal, rollover or the like of the existing debt shall be determined to be a new loan and must conform to the new, lower lending limitations.” (emphasis added)

Due to a shrinkage in capital many banks are faced with loans which are maturing but that the regulations will not allow to be renewed.  As a practical matter these loans are not subject to being repaid immediately due to lack of liquidity by borrowers nor are there any other financial institutions willing to take over the credits. Banks are forced to enter into forbearance type arrangements which does not result in the loan being renewed and must carry the loan on their books as past due.

Bank boards do not want to find themselves accused of intentional violation of the legal lending statute and thus banks have been in the unenviable position of having to let a loan go into default in order to comply with the state’s guidance on this matter. This then has consequences for non-performing loan levels and reserves since a forbearance does not result in the loan being kept current.

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 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 adopts 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. HB 926 provides as follows:

Code Section 7-1-285 of the Official Code of Georgia Annotated, relating to the limits on obligations of a bank to one person or one corporation, is amended in subsection (c) by deleting “and” from the end of paragraph (7), substituting “; and” for the period at the end of paragraph (8), and adding a new paragraph to read as follows:

“(9) A renewal or restructuring of a loan as a new loan or extension of credit 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 this Code section, unless:

(A) New funds are advanced by the bank to the borrower, except as permitted under this Code section;

(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.”