Legal Loan Limit

PURPOSE: Section 362.170, RSMo limits the amount which may be loaned to “any individual, partnership, corporation, or body politic.” Section 362.170.2(c), RSMo requires that certain loans be aggregated for the purpose of determining whether the limit on loans to a certain entity has been exceeded. Thus, the law states that liabilities of an individual, partnership or corporation must be aggregated with all loans made for the benefit of that individual, partnership or corporation. This office will attempt to effectuate the strong public policy evidenced by the law which is to prevent a bank from becoming overextended to any single concern. Recently, we have witnessed several departures from this public policy and sound banking principles with potentially disastrous results. In order to comply with this section of law, a bank must know which loans should be aggregated and treated as a single line of credit and which loans may be treated separately. This rule establishes some guidelines for compliance with the statute and formalizes the existing policy of the Division of Finance. (1) Rule. The obligations of two (2) or more corporations, partnerships or individuals, or a combination, shall be aggregated pursuant to the following guidelines: (A) If the proceeds of loans to two (2) or more entities were used for the benefit of a single individual or enterprise, the loans shall be aggregated; and (B) If two (2) or more entities are effectively operating as separate departments or divisions of a single enterprise, loans to these entities shall be aggregated. (2) Factors. The decision to aggregate two (2) or more loans under this rule shall be made after considering all relevant factors, including the following: (A) The extent to which the loans are made to borrowers controlled by the same shareholder or group of shareholders; (B) The degree to which the bank is relying on a single entity as the source of repayment; (C) The degree to which one (1) individual, or small group of individuals, dominates management decisions of two (2) or more borrowers; (D) The proportionate dependence of one (1) borrower upon another as a market for, or supplier of, goods or services; (E) The extent to which proceeds of a loan to one (1) obligor will flow to the obligor of other loans; and (F) The degree to which repayment of one (1) loan is secured by or dependent upon moneys to be paid by the obligor of other loans. (3) Examples. (A) Corporation A derives all of its income from the production of sausage. Its entire production is sold each year to corporation B whose income is one hundred percent (100%) derived from the retail marketing of this sausage. A is B’s sole supplier of this sausage. A and B are owned or controlled by the same individual or group of individuals. The Division of Finance would treat A and B as a single enterprise and loans to A would be aggregated with loans to B to determine compliance with the legal loan limit. (B) A and B corporations are owned by the same individuals but operated independently. A is engaged in the dental supply business and B is exclusively engaged in farm machinery. A loan to A would not be attributed to B unless the proceeds were loaned or paid over to B by A or unless the bank looks primarily to one (1) corporation for repayment of both debts. (C) One (1) individual owns three (3) corporations which are primarily engaged in the construction business. Corporation A holds title to real estate (a warehouse), corporation B holds title to construction equipment and corporation C is an operating company which borrows for inventory, receivables, payroll (work in progress). Loans to these three (3) corporations would be combined since they are effectively operating as separate departments or divisions of a single enterprise. (D) Corporation A has substantial indebtedness and needs additional capital funds. Corporation B is formed by the principals of corporation A for the single purpose of acquiring certain assets from corporation A and leasing them back to A. The Division of Finance would treat A and B as a single enterprise and loans to A would be aggregated with loans to B to determine compliance with the legal loan limit. (E) Assume all the same facts that are set forth in subsection (3)(D), with the exception that the entity acquiring the property to be leased back is a large independent corporation in the leasing business. Loans to B would not be attributed to A if it is determined the sale lease back is an arms-length business transaction. (F) An individual borrows money to purchase stock or indebtedness in a closely held corporation. The credit would be attributed to the corporation if the corporation, directly or indirectly, receives the proceeds and if there were no source of repayment other than the successful operation of the corporation. (G) Assume the same situation as set forth in subsection (3)(F), except the loan to the individual is secured by readily marketable stock of a publicly held corporation. Obligations of individuals which are secured by readily marketable securities of a publicly held corporation will not be aggregated with indebtedness of the corporation which issued the securities. (4) Effect on Existing Credit. This rule, until January 1, 1984, shall not affect any credit in existence on September 11, 1982 which, absent this rule, would have been in compliance with the previous policy toward attribution of loans; provided that an extension to January 1, 1985 may be obtained from the Division of Finance upon the bank’s demonstration, in writing, that an undue hardship would result. AUTHORITY: sections 361.105, RSMo 1986 and 362.170, RSMo Supp. 1989.* This rule originally filed as 4 CSR 140-2.080. Original rule filed June 14, 1982, effective Sept. 11, 1982. Moved to 20 CSR 11402.080, effective Aug. 28, 2006. *Original authority: 361.105, RSMo 1967 and 362.170, RSMo 1939, amended 1941, 1943, 1945, 1959, 1963, 1967, 1977, 1981, 1983, 1985, 1986, 1989.