On September 23, 2010, the Georgia Department of Banking and Finance (DBF) published proposed new and amended loan-to-one-borrower and mortgage industry rules to conform DBF rules to statutory changes adopted in the 2010 legislative session. The DBF invites comments on the rules through October 25, 2010.
The primary rule change affecting community banks is a clarification of the DBF’s interpretation of the exception from the state’s legal lending limit for the renewal and restructuring of maturing loans.
In addition, new definitions would clarify the reach of the DBF’s loan-stacking rule and the limitation applicable to loans to “corporate groups.” “Control,” “capital,” and “surplus” would track definitions in Regulation O, 12 C.F.R. § 215, and in the context of national banks. Under the loan-stacking or “common enterprise” concept, loans to separate borrowers are aggregated for purposes of the lending limit in part when there is a relationship between the parties that includes control and financial interdependence. Loans to corporate groups—corporations and their subsidiaries—are separately capped at 50% of capital and surplus, as defined.
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.
As we’ve previously discussed, the Georgia Department of Banking and Finance had proposed to modify the way in which loans to related entities are treated, among other changes. No material changes to the proposed rules have been made, and the new final rules are effective on September 7, 2009. The new final rules are available from the DBF’s website or directly here.
The new rules, effectively consolidating many related party loans, may cause the consolidated relationships to become in technical violation of Georgia’s loans to one borrower rule upon renewal. However, the DBF, in recognition of the current economic environment, has allowed for a transitional phase for loans that were previously made and separately remain in compliance with the DBF’s prior rule on an unconsolidated basis. Those loans should be reworked to comply with the new regulations if feasible, but will otherwise be treated as grandfathered under the prior rules. So long as such loans are modified or renewed by the bank without any additional extension of credit, the loans will not be cited for a violation of the Georgia legal lending limit.
The DBF has NOT provided any relief from loan to one borrower issuers in the context of declining legal lending limits due to reduced capital. Under the Georgia regulations, where the bank’s statutory capital base is reduced for any reason, existing debt which was in conforming with the legal limitations at the time it originated are not construed to be non-conforming with new legal limitations resulting from the reduced statutory capital base. However, extensions, renewals and rollovers are generally considered to be a new loan, and must conform to the new, lower lending limitations.
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. There are few options left for a bank in such a situation; e.g., 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. We have had extensive discussions with the Georgia DBF on this issue, focused on the OCC rules, which permit extensions or renewals in this situation. However, the Georgia DBF has stated that it will not modify its position at this time.
Georgia Department of Banking and Finance Commissioner Rob Braswell has advised us that the Department’s announcement last week was intended to provide relief only in the context of “loan stacking” under the Department’s proposed new Rule 80-1-5-.11. Accordingly, the Department will permit renewals of loans which had originally been made in conformity to the loan to one borrower, but would otherwise not be in conformity with the loan to one borrower rule solely due to the the Department’s proposed new “loan stacking” rules.
Renewals and extensions of loans where the loan to one borrower issues arises solely because of capital losses since the loan was originally made are NOT covered by the Department’s announcement. We are continuing to pursue this issue with the Department, but in the meantime, our recommendation is that banks should NOT extend or renew loans to borrowers where the extension or renewal would violate the loan to one borrower rule as a result of reductions in the limit resulting from capital losses.
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.
As noted in the FDIC’s latest Frequently Asked Questions on the TLGP, the FDIC will fully guarantee public funds deposits in NOW accounts so long as the interest rate does not exceed 0.5 percent and the institution has committed to maintain the interest rate at or below 0.5 percent (assuming the institution has not opted out of the Transaction Account Guarantee). The amount of collateral required for such guaranteed public funds, if any, is imposed by state law and not by the FDIC’s regulation. As noted by the FDIC, the amount of collateral will depend upon the wording and meaning of each state’s laws.
As noted below, the Georgia statutes are not 100% clear, but we believe that Georgia depository institutions should not be required to provide collateral for public funds that are fully guaranteed by the FDIC under the Transaction Account Guarantee portion of the TLGP. We believe the statutes should be read as treating the FDIC guarantee in the same manner as FDIC insurance. Although the FDIC has generally been careful to use the term “guarantee” rather than “insurance” for the Transaction Account Guarantee portion of TLGP, in their December 4th press release, the FDIC stated that such funds will be “fully insured by the FDIC.”
We also understand that the going rate for public funds in Georgia is currently in excess of the 50 basis points permitted for NOW accounts to be treated as noninterest-bearing transactional accounts under TLGP. However, given moving rates and the possibility of fully guaranteed FDIC funds, we could see enterprising bankers using this provision to their advantage.
Moreover, all banks with public fund deposits should re-examine their calculations for the amount of securities that must be pledged to confirm that they have taken into effect the increase in FDIC deposit insurance from $100,000 to $250,000.
On October 24, 2008, the Georgia Department of Banking and Finance issued a press release waiving approval of a state financial institution seeking to amend its articles to facilitate the issuance of preferred stock to the U.S. government as part of its participation in the Treasury program. Shareholder approval is still required, but this news provides some regulatory relief for Georgia banks without holding companies that must amend their articles to provide for blank check preferred stock.
De novo Georgia banks would still be required to submit changes to their business plan for Department review and approval, although such review related to participation in the Treasury program will be expedited.
For more information, see the full Georgia DBF Press Release.