1310. Loans to corporations

and their subsidiaries

(a) Law-12 U.S.C. 84

"The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus funds. The term 'obligations' shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such association and the liability of the endorser, drawer, or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such association and shall include in the case of obligations of a copartnership or association the obligations of the several members thereof and shall include in the case of obligations of a corporation all obligations of all subsidiaries thereof in which such corporation owns or controls a majority interest. ***”

(b) Purpose

The section is intended to prevent one individual, or a relatively small group, from borrowing an unduly large amount of the bank's deposits for the use of the particular business enterprises in which they are engaged. It is intended to safeguard the bank's depositors by spreading the loans among a relatively large number of persons engaged in different lines of business.

(c) General rules

Obligations of a parent corporation shall be combined with obligations of all subsidiary corporations in which the parent owns or controls a majority interest. For example: (1) If a parent corporation is not obligated to the bank, obligations of its subsidiaries are not required to be combined. (2) Obligations to the bank of a subsidiary corporation, half

(or less) owned or controlled by each of two parent corporations, are not required to be combined with the obligations of either parent corporation.

In addition, loans made to a corporation must be combined with extensions of credit to its stock holders owning or controlling substantially all the stock of the corporation, if the proceeds of the loan to the individuals are used for the benefit of the corporation or in furtherance of enterprises closely related to the operation of the corporation.

1320. Loans to members of a

partnership or association

(a) Under 12 U.S.C. 84 the obligations of the several members of a partnership, regardless of the purpose or the use of proceeds, are required to be combined with obligations of the partnership.

(b) In addition, where persons engaged in a common enterprise, whether in the form of a partnership, joint venture, or other association, individually borrow funds which are to be used in that enterprise, the loans must be considered as a single credit.

1321. Combining partner's or non-corporate shareholder's obligations with obligations of partnership or corporation (Deleted)

1322. Combining obligations of a corporation and controlling shareholders (Deleted)

1330. Loans to former subsidiaries or members

Obligations of a former subsidiary or member are not combined with the obligations of the borrowing parent corporation, partnership or association, whether or not the subsidiary's or member's obligations have been charged off on the books of the bank.

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1500. General principle

as to exceptions

(a) Law-12 U.S.C. 84

"Such limitation of 10 per centum shall be subject to the following exceptions: * * *"

(b) The general rule is that advances to any one customer shall not exceed 10% of capital and surplus, and situations in which it is permissible to go beyond this limit are exceptions. Larger loans are permitted only in exceptional circumstances, and an exception to the 10% limit is not applicable unless the transaction meets the standard.

1510. Exception 1:

Drafts and bills of exchange

(a) Law-12 U.S.C. 84(1)

[Such limitation of 10 per centum shall be subject to the following exceptions:]

"(1) Obligations in the form of drafts or bills of exchange drawn in good faith against actually existing values shall not be subject under this section to any limitation based upon such capital and surplus."

(b) General scope

Exception 1 applies to negotiable drafts and to bills of exchange drawn by the seller of commodities upon the purchaser and bearing the acceptance of the latter, or drawn by the purchaser of commodities upon his bank and endorsed by the seller. In order to qualify under exception 1, drafts or bills of exchange must be two name paper. Thus, unaccepted drafts are not eligible, nor are bills of exchange endorsed without recourse or not endorsed.

(c) Drafts payable on demand
or at sight

(1) Demand or sight drafts should be presented to the drawee for payment and not for acceptance. If such a draft is accepted instead of being paid the liability of the drawer would ordinarily be discharged. A bank purchasing the instrument would not be protected by the liability of both parties to a current mercantile transaction and, consequently, the obligation would not be eligible under exception 1.

(2) A demand or sight draft executed and endorsed to the bank in such a manner as to preserve the negotiability of the instrument and the liability of both the buyer and the seller of the goods is eligible under exception 1. An appropriate waiver by the drawer of demand for acceptance and payment will ordinarily preserve the liability of the drawer after acceptance by the drawee. (d) Drafts where the drawer

is not to be held liable

Where there is a tacit or express understanding of all the parties concerned that the drawer is not to be held liable and the bank does not rely upon the credit of the drawer, the paper is not eligible under exception 1. Examples of this nature may occur when drafts are drawn by the grower of agricultural products upon the buyer thereof.

(e) Drafts payable a specified period

after arrival of shipment

A draft payable a specified period after arrival of a shipment is not eligible under exception 1. Since the arrival of a shipment is not certain such a condition impairs the instrument's negotiable character. See ¶1530(e). (f) Drafts where a buyer and

a seller are not parties

Where the parties to a draft do not include the buyer and the seller in an actual sale of a commodity, the draft is not eligible under exception 1.

Examples:

(1) A draft drawn by a purchasing agent on his principal covering shipments of the commodities to the latter.

(2) A draft drawn by a principal upon his selling agent in connection with a shipment forwarded to the agent for sale.

(3) A draft drawn by one corporation on an affiliated corporation where both are parts of a single co-ordinated business enterprise.

1520. Exception 2: Discount of commercial and business paper

(a) Law-12 U.S.C. 84(2) [Such limitation of 10 per centum shall be subject to the following exceptions:]

"(2) Obligations arising out of the dis

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count of commercial or business paper actually owned by the person, copartnership, association, or corporation negotiating the same shall not be subject under this section to any limitation based upon such capital and surplus."

(b) General scope

Exception 2 applies to negotiable paper given in payment of the purchase price of commodities purchased for resale or to be used in connection with the fabrication of a product, or to be used for any other business purpose which may reasonably be expected to provide funds for payment of the paper, and bearing the full recourse endorsement of an actual owner.

It also applies to the renewal of such paper when the renewal is consistent with these conditions.

It also applies to negotiable paper given in payment of the purchase price of commodities in export transactions. In such cases it may bear the full recourse endorsement of an actual owner or may be endorsed by such owner without recourse or with limited recourse, or may be accompanied by a separate agreement for limited recourse, but if endorsed without full recourse, must be supported by an assignment of appropriate insurance covering the foreign, political, and credit risks applicable to the paper. The insurance provided by the Export-Import Bank and the Foreign Credit Insurance Association is considered appropriate insurance for this purpose and the paper for which it may be used is considered to be commercial or business paper to which exception 2 is applicable.

This exception does not ordinarily apply to non-negotiable paper and does not ordinarily apply to negotiable paper arising out of the purchase by consumers of consumer goods. Obligations on the part of the seller of such paper may be considered under exception 13.

(c) Overdue commercial paper

When paper meets the requirements of exception 2, neither the obligation of the maker nor that of the endorser need be taken into account when applying the lending limits, so long as the paper is kept current as to principal and interest payments due. However, since the reason for the unlimited credit under exception 2 is that the paper arises from the sale of a commodity which may reasonably

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be expected to provide funds for payment of the paper, failure to pay either principal or interest when due removes the reason for the unlimited credit. Hence, although the line of credit to the maker or the endorser of such paper should not be classified as excessive by reason of such default, the paper on which the default has occurred must thereafter be taken into consideration in determining whether an additional extension of credit can be made within the limits of 12 U.S.C. 84 to either the maker or the endorser of such paper.

If the bank renews exception 2 paper, or receives in its stead a new note signed by the same maker and indorsed by the same indorser (for either an installment or the whole note), such extended or renewed notes must be regarded as though the bank had made a new extension of credit in that amount. See 1540(f).

1530. Exception 3: Obligations secured by goods in shipment

(a) Law-12 U.S.C. 84(3)

[Such limitation of 10 per centum shall be subject to the following exceptions:]

"(3) Obligations drawn in good faith against actually existing values and secured by goods or commodities in process of shipment shall not be subject under this section to any limitation based upon such capital and surplus."

(b) General scope

Exception 3, like exception 1, relates to obligations drawn in good faith against actually existing values. The obligations must be secured by goods or commodities in process of shipment, but the form of the obligation is not specified. It is, accordingly, immaterial whether the obligation is negotiable or nonnegotiable and whether it is one name or two name paper. The remaining requirements clearly indicate, however, that exception 3 relates only to paper arising in connection with a sale transaction.

(c) In process of shipment

The phrase "in process of shipment" embraces mainly the period of time when the goods or commodities are in the hands of a carrier and actually in transit. It may also include the period required for assembling the

goods at the warehouse of the carrier and the time the goods are in such warehouse awaiting suitable shipping facilities.

It is not essential that the goods be in continuous motion toward the consignee, but all of the steps necessary to accomplish the ultimate delivery of the goods to a specified destination must have been taken by the shipper and the goods must be in the hands of the carrier with instructions to thus deliver them to that destination. Goods or commodities which are merely stored in a warehouse with the expectation that at some future date they will be sold or shipped are not "in process of shipment."

(d) Secured by goods or commodities

The requirement that exception 3 paper be "secured by goods or commodities in process of shipment" is satisfied only if the notes or drafts held by the bank are accompanied by order bills of lading. Such shipping documents give the bank effective legal control of, and security title to, the shipments and prevent diversion of the goods by the shipper. This is not true with respect to invoices, bills of sale, straight bills of lading, chattel mortgages, etc., and consequently documents of these types are not eligible security for the purposes of exception 3.

(e) Drafts payable a specified period
after arrival of a shipment

A draft payable a specified period after the arrival of a shipment which is not eligible under exception 1 [see ¶ 1510 (e)] is eligible under exception 3 when accompanied by an order bill of lading covering the shipment.

1540. Exception 4: Guaranty of short term paper

(a) Law-12 U.S.C. 84(4)

[Such limitation of 10 per centum shall be subject to the following exceptions:]

"(4) Obligations as indorser or guarantor of notes, other than commercial or business paper excepted under (2) hereof, having a maturity of not more than six months, and owned by the person, corporation, association, or copartnership indorsing and negotiating the same, shall be subject under this section to a limitation of 15 per centum of such capital and surplus in addition to

such 10 per centum of such capital and surplus."

(b) Obligations as endorser

or guarantor

For the definition of this phrase as used in 12 U.S.C. 84 see ¶1125.

(c) Separate guaranty or

repurchase agreement

Exception 4 applies not only to endorsement and guaranties appearing on the instruments themselves, but also applies to guaranties or repurchase agreements embodied in separate documents, provided the notes covered thereby are adequately identified. (d) Having a maturity of

not more than six months

The six months maturity mentioned in exception 4 refers to the period of time from (a) the date on which the notes are acquired by the bank to (b) the final maturity of the endorsed or guaranteed notes. An agreement to repurchase in not more than six months a note having a later maturity is not eligible under exception 4.

(e) Demand notes

Exception 4 also applies to endorsements and guaranties of demand notes owned by the endorser or guarantor, but it ceases to be applicable, in the case of a demand note, six months after such note is acquired by the bank.

(f) Overdue paper: renewals

and extensions

Where a national bank holds endorsed or guaranteed notes under exception 4, such notes, after they mature, are no longer within the scope of that exception, and they must thereafter be included among the endorser's or guarantor's obligations subject to the 10% limit.

If such matured paper is carried in an overdue status, an excessive loan to the endorser or guarantor is not created thereby, although the dollar amount of such paper must be taken into consideration in applying the 10% limit to new extensions of credit to the endorser or guarantor. However, if the bank extends the maturity or accepts renewal notes, the extended or renewed notes must be regarded as though the bank had made a new extension of credit in that amount. Renewed or extended exception 4 paper will not again qualify under exception 4. There

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fore, if the endorser or guarantor already had a direct obligation to the bank equal to its 10% limit, renewal or extension of matured exception 4 paper would bring the indorser's or guarantor's line above the 10% limit permitted by 12 U.S.C. 84. Renewed or extended exception 2 paper may, however, qualify under exception 4. See ¶1520(c).

1550. Exception 5:

Banker's acceptances

(a) Law-12 U.S.C. 84(5)

[Such limitation of 10 per centum shall be subject to the following exceptions:]

"(5) Obligations in the form of banker's acceptances of other banks of the kind described in [12 U.S.C. 372] shall not be subject under this section to any limitation based upon such capital and surplus." (b) General scope

The obligations described in 12 U.S.C. 372 arise out of the acceptance of time drafts or bills of exchange drawn on the bank which grow out of transactions involving the importation or exportation of goods; or which grow out of transactions involving domestic shipment of goods provided certain security requirements are met. These obligations are subject to certain limitations set forth or provided for in 12 U.S.C. 372. See ¶7420 as to use of banker's acceptances to finance credit transactions.

(c) Acceptance by bank

on behalf of customer

A national bank may obligate itself as acceptor on a time draft drawn for the account of a particular customer even though the other obligations of that customer to the bank are equal to the bank's legal limit under 12 U.S.C. 84. The limitations of 12 U.S.C. 84 on the amount which may be lent by a national bank to one borrower are separate and distinct from the limitations of 12 U.S.C. 372 and in no way restrict the amount of time drafts that a member bank may accept for any one person, firm or corporation. If, however, the bank purchases its own acceptances under the foregoing circumstances it must treat the transaction as a loan and not as an acceptance and would have to include the amount thereof with other obligations of the customer in applying the limitations of 12 U.S.C. 84.

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For the purposes of exception 6, the important characteristic of warehouse receipts and order bills of lading is that the holder of such a document has control of the commodity and can obtain immediate possession. In the event of default on a loan secured by such documents, the bank would be in a position to sell the underlying commodity and promptly transfer title and possession to the purchaser, thus being able to protect itself without extended litigation. This is not true of trust receipts, chattel mortgages and similar documents, so that documents of these types are not eligible security for loans under exception 6.

(3) Field warehouse receipts

Field warehouse receipts may be acceptable collateral under exception 6 whenever the receipts are issued by a duly bonded and licensed grain elevator or warehouse, having exclusive possession and control of the commodities covered thereby, even though the grain elevator or warehouse is maintained on the commodity owner's premises.

(4) Pledge of commodities to bank

In cases where it is not possible to establish and maintain a satisfactory field warehousing plan, it is sometimes feasible to comply with exception 6 through a pledge arrangement. The requirements of exception 6 may be satisfied by a pledge of eligible commodities to the lending bank or its agent, even though the pledged commodities remain on the borrower's premises. If an agent of the bank, acting on its behalf, actually has exclusive possession and control of the pledged property, under an arrangement