TDR: Explain Troubled Debt Restructuring (3.1-41)
If payments are over P&I, it goes in books w/o change
If payments are under P&I, have immediate loss and recognize interest over life of the loan
TDR: A loan was restructured with a modified interest rate. Does the bank book at total payments to be received or at the present value of the future payments? PV of future payments
TDR: Restructured troubled debt - How should the bank account for a restructuring of interest rate only? (note: there is a difference in treatment depending on whether the property is returned to the bank.) (3.1-41)
Transfer of Assets - Assets received by the bank from the debtor in full satisfaction of the book value of the bank's loan or security must be recorded at fair value. Any excess of the recorded investment in a loan over the fair value of the assets received is a loss to be charged to the ALLL; any excess of the recorded investment in securities over the fair value should be classified as a securities loss.
If the bank is willing to offer a new mortgage loan at a concessionary rate of interest to effect the sale of the realty, before booking the new transaction, the bank must establish its economic value. The value is represented by the sum of the PV of the income stream to be received from the new loan, discounted at the current market rate for this new type of credit, and the PV of the principal received, also discounted at the current market rate.
This is the proper carrying value, and if less than the fair value at foreclosure, an additional loss has been incurred and should be immediately recognized in the ALLL. However, the loss should be treated as "other operating expenses" if the sale does not take place within a short period of time.
The new loan is placed on the books ($100,000) and the difference between the new loan and the "economic value" ($78,000) is treated as an unearned discount ($22,000), which is reduced periodically as it is earned over the life of the new loan.
Modification of terms - If the terms are modified to the extent that total future cash receipts are less that the outstanding principal balance plus accrued and unpaid interest (plus or minus unamortized premium or discount), immediate loss recognition is necessary. This might arise of the bank forgives a portion of principal or interest. The amount of loss is the difference between the total future payments under the modified terms and the current balance of the present obligation. The initial balance the asset would be carried on the books would be equal to these total future payments. No interest income should be recognized over the life of this restructured asset, instead all payments are to be applied to the loan or security balance.
TDR: Troubled Debt Restructuring: Principal and accrued interest $48M. Future payments $43M; Principal $45M. How should this be shown in report? (3.1-29)
·Discount payments at market rate; difference between BV and future pmts is Loss
(Note the difference in accounting if the property is returned to the bank--if not returned add all of the interest and principal)
Total future cash receipts are less than the outstanding principal balance plus accrued interest -- immediate loss is required. The amount of loss is represented by the difference between total future payments under modified terms and the current balance of the present obligation. The initial balance at which the asset would be carried on the bank's books would be equal to these total future payments. No interest income should be recognized over life of this restructured asset -- all payments made to principal balance.
If property is returned, add all of the interest and principal.
A bank restructures a loan and capitalizes interest and offers a new interest rate at a below market rate. The future principal and interest payments are greater than the current principal balance and accrued interest. How should this loan be shown on the bank's books?
Immediate recognition of loss is NOT required. Loss suffered is accounted for by the reduced income to be received over the life of the restructured debt.
A loan was restructured due to deterioration in asset quality. If P&I payments total $40M and the balance was $45M, how should this be accounted for? What about accrual of interest on the remainder?
An asset received in full satisfaction of a loan should be recorded at the lessor of:
2) The recorded amount of the loan (plus the amount of any senior debt to which the property is subject) at the time of the foreclosure or repossession).
The recorded amount of a loan is the loan balance adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest. The lessor of these two amounts becomes the "cost" of the foreclosed asset. Any excess over FV is a loss.
After foreclosure, each foreclosed RE asset must be carried at the lower of:
1) The fair value of the asset minus the estimated costs to sell the asset or
2) The cost of the asset (as defined previously)
If the fair value of the foreclosed asset minus the estimated costs to sell the asset is less that the asset's cost, the deficiency must be recognized as a valuation allowance against the asset which is created through a charge to expense. The valuation allowance should thereafter be increased or decreased (but not below zero) through charges or credits to expense for changes in the asset's fair value or estimated selling costs.
Identify loan classification definitions:
Pass - quality credit
Substandard - Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have well defined weaknesses or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.
Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
Special Mention - A Special Mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. (Usually correctable by management. Weak origination and/or servicing. Not merely a TE loan).
A director/loan committee member appraises a property to secure a loan granted by the bank. What are the problems with this situation? (not independent) Can appraise property, but cannot be involved with the credit decision.
A loan was made to finance an apartment building. The local economy has declined for the past four years. An appraisal was performed on the apartment building when the loan was made, but nothing more recent. Your estimate of the value of the property, based on the declining economy, value per unit of comparable properties, etc., indicates that the property value is less than the loan balance. However, the loan is current, has no credit problems and records show that it is fully leased, with most leases running for at least two years. You classify the loan:
Determine total replacement cost for the structure
Deduct depreciation
Physical - wear & tear
Functional - technical obsolescence
External - neighborhood or location problems
Add the value of the site/land
Add entrepreneurial profit
Key to this approach is availability and reliability of comparison data.
RATIO MODELS: (for small simple property types)
An appraiser takes the subject property's effective gross income and multiplies it by a market average multiplier to determine the subject property's value.
Looking at an apt. project with annual effective gross income (EGI) of $220M. The appraiser would find several comparable apt. sales in the market and perform the following to determine the multiplier from each comp:
Sales price of comp / annual EGI of comp = EGI multiplier
The calculation would be repeated for several comps and a market average EGI multiplier would be determined. If the multiplier was 4.5, then $220M x 4.5 = $990M
DIRECT CAPITALIZATION MODEL: (only accurate when the project's NOI and mkt. conditions are at a stable level)
Annual Stabilized NOI / Market Cap Rate = estimated value
Lower cap rates produce higher values, and higher cap rates produce lower values.
Cap Rate = NOI / sales price (The calculation is repeated for several sales until a pattern emerges)
Potential Gross Revenue (Rent, ect.)
Less: Vacancy/credit loss (vacancy, bad checks, etc.)
= Effective Gross Income (EGI)
Expenses:
Taxes
Maintenance
Utilities
Insurance
Management fee_____% of EGI
Release commissions
Capital expenditure reserve
Other
= Total Expenses
EGI - Total Expenses = Net Operating Income (NOI)
(If given an NOI figure make sure to add back depreciation & interest expense)
Discounted Cash Flow Model (DCF): (used when the project's NOI is not at a stable level, or when erratic cash flows are typical for the property type)
(SEE EXAMPLE IN OMEGA BOOK if interested - includes a discount factor and a reversion factor)
Given an income statement for a 150-unit apartment and a 10% cap rate, calculate the value of the property. (Hint: you need to know what to do with debt service.)
Add back depreciation + Interest
NOI / Cap Rate = Est Value
A seasonal inventory loan on an amortizing basis. There was delinquency, however, the borrower always
paid when inventory was sold. Borrower has strong personal financial statement. How is the credit rated?
Special Mention - The problem is with the structuring of the loan, not the borrower. Repayment is not structured with repayment source.
A borrower is past due for a closed-end instalment loan. The last payment the borrower made was a $90 partial payment on 3-15-94. The borrower's monthly payment is $100. As of 6-30-94, the borrower owes $310. How many payments is the borrower past due, and, according to uniform classifications for instalment loans, how would it be rated (3.1-27)?
·3 payments, Substandard
90% payment is considered pymt in full.
Pymts were due 4-15, 5-15, 6-15
What percent of a IL is considered a full payment? (3.1-40) 90%
Given a loan amount and payments past due, classify closed-end and open-end credit based on the formula method?
Closed End: 4 Payments & 90-119 Days Past Due = SUB (II)
5+ Payments & 120+ Days Past Due = LOSS (IV) Remember: with consumer instalment
Open End: 4-6 Payments & 90-179 Days Past Due = SUB (II) loans, a 90% payment is not
7+ Payments & 180+ Days Past Due = LOSS (IV) considered delinquent.
What is the class. of a closed-end consumer loan 105 days delinquent? (3.1-40)
Substandard
What is the classification for a closed-end instalment loan 5 payments late?
Classify an instalment loan given monthly payment amount, amount owing, payment due date, and exam date.
Determine what loans are past due and Calculate Past Due Ratio?
All loans past due 30-89 days & still accruing
+ All loans past due over 90 days & still accruing Also: 2 Payments or Cycles
+ All Nonaccrual Loans
= ALL PAST DUE & NONACCRUAL LOANS
Past Due Ratio:
ALL PAST DUE & NONACCRUAL LOANS / GROSS LOANS & LEASES (Usually as of asset review date)
You are given a commercial company's BS and IS for three years. You can see the company has lowered maintenance expense a lot. You should recognize that a lack of maintenance will cause vacancy rates to increase or rental income to decrease.
Scenario: Commercial RE property 120 days past due. Examiner believes the value of the property is less than the appraised value, and the borrower does not have the personal cash flow to service the debt. How should the credit be classified?
Commercial RE Loan in declining mkt, cash flow can't meet debt requirements, examiner EV is 200M less than bank application that is only 24 months old - how classified?
200M Loss, the rest Sub. Borrower is troubled, original AV must have been flawed. Bank is
under-collateralized, borrower's capacity is inadequate.
What is cap rate?
·Rate of return for investor ...
·Rate of return for investor including inflation rate
·Cents per dollar to receive each year
·Used for distressed income stream
Represents what an investor is willing to pay to have access to the income stream.
A higher cap rate lowers the value, a lower cap rate raises the value.
Calculate a cap rate for an appraisal?
Usually given, the expected return by an investor, if market is poor, cap rate is higher
Then: NOI / Cap Rate = Estimated Value
Determine the reasonableness of an appraiser's cap rate?
Based on what the investor expects for a return (market-based).
A higher cap rate lowers the value, a lower cap rate raises the value.
How to classify? $400 (monthly rent) X 150 (# of units) X 90% (market occupancy rate) X 12 (to annualize) = $648,000. Subtract all expenses and add back interest and depreciation; then divide by the cap rate of 10%. The examiner classified the result II and the remainder Loss. (need to see if one should deduct real estate taxes from the expense total) No, RE taxes are an expense.
Appraisal with unreasonable cap rate and other factors.
Define Hypothecation Agreement. (3.1-55)
a. agreement that subordinates the officers/shareholders of a corporation to the bank's loan
b.owner of property grants a security interest in the collateral to the bank to secure indebtedness to a 3rd party
c. allow banks to sell securities pledged as collateral if borrower defaults
An agreement whereby the owner of property grants a security interest in collateral to the bank to secure the indebtedness of a third party. Banks often take possession of the stock certificates, plus stock powers endorsed in blank, in lieu of a hypothecation agreement. However, caution should dictate that the bank take a hypothecation agreement to clearly establish the bank's rights in the event of default.
Lending limit is 100% equity which is $5MM. Bank considers all direct and indirect credit which includes guarantees. Borrower has $3.5MM direct loans. Guarantees $2MM business loans. Bank also issued SBLC for $1.25MM. What should examiner show in the report?
Scenario: A bank's local economy was in a recession for 4 years which was driving down the prices of RE and therefore rental rates. When the examiner adjusted the appraisal for the current market conditions, he found that the RE value was significantly below the loan amount, but the building was fully leased up and the lease maturities exceeded the loan maturity and the borrower had always paid on time. Given: Rental information; vacancy rate factor; discount factor; and expenses of the building. You must then come up with the classification.
1) Pass (paying as agreed)
2) $5MM Sub
3) $2.8MM Pass $2.2MM Sub
4) $3.1MM Pass $1.9MM Sub
(1) Pass - Apparent Cash Flow, Performance
Given situation involving a loan, balance $100M, non-refundable fees $4M and origination costs of $1.5M. At what amount should the bank book the loan?
$96M
$97.5M
$98.5M
Fees and costs are deferred and recognized over the life of the loan as an adjustment to yield (interest income). Book loan at $100M, net the fees & costs and set up a contra-account liability for $2.5M.
This question has also been answered as $97.5M, for call report purposes.
Scenario: A bank has a loan secured by a mini-storage warehouse facility. A recent study has determined that about 20% of the land under the units is contaminated. The study does not give an estimate of the cleanup costs and a study to determine the costs to correct the damage is not yet complete. How classified?
a. Pass
b. 20% II, 80% Pass
c. III
What are the characteristics of agricultural lending? (3.1-14)
Seasonal - used primarily for the crops
Intermediate and long term - Purchase capital assets
Sizeable and uncontrollable fluctuations in commodity prices.
Agricultural Bank, well-managed, father owns, family runs - what are primary concerns?
Management - one man bank
Depth & succession
Capital fortification
Local Economy - Weather, Commodity Prices
Overdue loans at an examination should include:
a. overdrafts 1 - 29 days past due
c. installment loans 1 pymt past due (installment loans must be two pmts PD)
d. leases 1 -29 days past due
Overdue loans: How to classify?
Matured loans past due 1-29 days$10,000
Matured loans past due 30+ days$ 5,000 Past Due
Lease payment past due 1 payment$ 2,000
Unplanned overdraft 1-29 days $ 5,000
Unplanned overdraft 30+ days $ 7,000 Past Due
A bank's LTV are X, X,and X, which do not meet guidelines. Do you ...?
a. cite a violation
b. cite a contravention of policy
c. make a recommendation to revise in the report and cite nothing
d. make an oral recommendation and do not comment in the report
e. do nothing
Contravention to Interagency policy statement, Not SOP!!!
Has the Board approved the exceptions? Is management sticking to the policy?
The aggregate limit of all exceptions should not exceed 100% of total capital. If the bank has no policy or if the Board is not reviewing annually - it's a violation of Part 365.
Loan was previously classified, part of it charged off, loan pays for three years, 70% LTV, appraisal does not meet USPAP standards but seems reasonable - how do you classify?
Pass - payments of three years shows capacity, 70% LTV shows adequate coverage
This is a borderline question....how many years are necessary to show capacity & how much LTV shows adequate coverage. Some would still classify as substandard.
Appraisal - for $135M AV; uniform neighborhood; 3 comps with two in similar neighborhood and one in same neighborhood. Appraiser adjusted value up. Loan policy required 85% LTV. What is problem?
·Unjustified increased value in property
A loan was made to a director in the amount of 15% of capital. At a later date an additional 15% was extended, secured by marketable assets. What violations, if any, should be cited?
Reg O violation because the 2nd loan put the director's loans over the 25% limit.
A director guaranteed a loan 2 years ago that was adequately underwritten at the time it was made. Now the loan is classified. What should you as EIC do?
1) Ask the director to improve the credit or resign
2) Recommend an 8e on the director
3) Cite a Reg O and seek CMP's since the loan is classified
4) Do nothing except cite the credit weaknesses and have the Board monitor the credit
(4) is correct. Since the loan was adequate at origination, no dire citations are needed.
Is subject concentration considered a class of borrower of single repayment source.
Concentrations are by nature dependent upon a key factor (financial capacity, management of sources of revenue, industry, or collateral support). If a weakness develops in the key factor, a problem could develop.
Bank with 1MM in Capital has due froms of 500M, CD's of 200M, and fed funds secured by U.S. Treasuries of 600M from Bank B. Is Bank B listed on the concentrations page?
No - 100% requirement - 500M + 200M = 700M, but Capital is 1,000M (70%)
Fed Funds of 600M are fully secured by US Treasuries and are excluded
Calculate concentration given appropriate information. (3.1 & ROE instructions pg.59)
* small interrelated group of individuals
* single repayment source with normal or greater credit risk
* short term obligations of one financial institution or affiliate group
*** If capital is so low to make a concentration by % of Tier 1 meaningless, use 2% of assets as a guideline.
Do NOT list government securities or obligations secured by them.
DO list purchased loans or participations, mutual funds (25% BV), & loans to foreign government.
What is the proper examination treatment given a concentration in out-of-territory lending?
25% of capital, banks sometimes go outside their normal trade area to extend credit via loans, securities, or other types of obligations. Such a group of obligations may be regraded as a "class of borrower" regardless of the diversification within the group, and be listed as a concentration in the ROE. An exception to this general rule should be made for investment quality securities issued by states or political subdivisions. Generally, banks should not acquire significant investments outside the normal trade area unless equipped to evaluate and service them.
However, according to the ROE instructions on pg. 60.......generally do not list out-of-territory lending....it is more of a loan administration issue.
Concentration policy - what should bank look at? (3.1)
Address the goals for portfolio mix & limits within loan and other asset categories. Consider tracking and monitoring different factors.
Question gives several transactions with correspondent bank. Is it a concentration? (3.1)
What is required to perfect liens on securities (stocks & bonds)?
Identify items needed for perfection of security interests?
Once the creditor's security interest is attached, a lien has been created and the loan is
secured. Lien perfection can be effected by:
- Filing a copy of the security agreement or financing statement w/ appropriate public official
- Or, possibly nothing (depending on the collateral)
Under UCC, farm products, inventory, equipment, intangibles require filing
Purchase money security interests in consumer goods and farm equip (under 2.5M) require no filing.
Creditor can perfect by doing nothing only if debtor is "ultimate consumer"
Filing is good for 5 years, extension (for 5 more yrs) must be filed before expiration. Can file for extension within 6 months of expiration.
How much collateral is required for securities lending?
The minimum initial collateral on securities loans is at least 102% (this is not a typo) of the mkt. value of the lent security plus, for debt securities, any accrued interest.
Problems of bad credits (COSTILFLOPP) (3.1-24).
For example, a strong bank is anticipating bad credits due to a poor economy. Why? (possible reasons: overemphasis on income, economic downturn)
Be able to associate loan problems to the COSTILFLOPP factors.
Eg.,Bank can't put together a loan package. Loan quality is poor. Management is unsatisfactory. Bank is sustaining heavy losses by engaging in credits for which is has no specific expertise. A recommendation for the bank's loan policy would include:
technical incompetence
generalized fields of lending
review of the loan loss reserve
loan grading function
Based on the way this question is worded, this would be my choice. Need to be careful.
Identify problems related to loan administration - Poor Selection of Risks (3.1-19)
Absence of sound lending policies or sound credit judgement in advancing certain loans. Review:
2 - Based on Expectation of Event rather than sound worth or collateral
3 - Loans for Speculative Purchase of Securities
4 - Loans made without adequate margin of security (LTV)
5 - Loans Made because of Other Benefits (eg. bank gets control of deposit balances) rather than sound worth or collateral
6 - Loans without Adequate Owner Equity in RE
7 - Loans predicated on collateral which has questionable liquidation value
8 - Loans predicated on unmarketable Stock of a local corporation when bank is also lending directly to the corporation.
9 - Loans which are adequately protected but involve borrower of poor character risk and credit reputation
10- Loans which are adequately protected by collateral but involve borrower with limited or unassessed repayment ability.
11- Abnormal amount of Out-of-Territory loans
12- Loans involving Brokered Deposits or link financing
Company wanted to borrow $100M to finance working capital, seasonal inventory... Bank lent $200M and put on amortization for 36 months because they amortize all loans to help them more easily monitor credits... What problems are evident?
* lack of supervision
A loan policy does not have standards for acceptable loans. What could this lead to?
Policy didn't address interest rates, repayment terms on loans. What problem is this?
Failure to establish or enforce liquidation agreements.
Scenario: Bank that was very strong but due to a poor economy was anticipating bad credits. What could the reasons be?
a. Overemphasis on income
b. economic downturn
c. etc.
Loan to finance a property which looks okay, but borrower not creditworthy. What type of loan problem is this? Technical Incompetence
Poor Selection of Risk
Incomplete`credit information
Management has not developed amortization schedules. What type of loan problem is this?
Technical Incompetence
Failure to enforce liquidation agreements
If a bank's loan policy does not address interest rates (loan pricing) and doesn't address repayment terms. This is an example of:
1) Poor Selection of Risk
2) Overlending
3) Failure to enforce liquidation agreements
(Know the 11 indicators of lending problems & be able to apply them)
What do construction loans usually require?
* Usually backed by purchase or takeout agreement
* Procedures for controlling disbursements and collateral margins and assuring timely completion of projects and timely repayment of loan
* Background information on related parties
Floor plan loan - What is really not important? Borrower's financial condition.
Loan secured by margin stock. How do you classify?
(by market value of stock - don't be confused by LTV limits)
Identify the proper accounting for the sale of loans - where is income shown?
Bank sells credit card portfolio to improve capital ratios. Gains on sales should be reported where?
Other noninterest income (losses on sales should be reported as other noninterest expense)
Confusing loan question where a national bank was extended credit, secured by the national bank's stock. In addition, a $50M CD was pledged to cover the first quarterly interest payment. Detailed in the examination booklet were financial statements indicating poor/deteriorating financial condition and inadequate cash flow. No information was provided on payment status or prior delinquencies. I took that to mean that the loan was current.
(a) Pass
(b) $450 Substandard
(d) $500 Doubtful
Despite the possible current status, the other factors seemed to warrant classification. I didn't choose (b) because the CD was only to be applied to interest, not principal.
Tricky question . . . your guess is as good as mine. Loan scenario where you know absolutely nothing except that it's an income producing property. An 18-month old appraisal indicated a value of $500M, predicated on the direct capitalization approach to value; however, the examiner felt that the appraisal was overstated. The examiner re-calculated the direct capitalization approach and arrived at a value of $395M. The examiner also performed a discounted cash flow analysis, deriving a value of $425M; a net realizable value of $450M was calculated. Which value should be utilized for classification purposes?
(a) $500M
(b) $395M (Direct capitalization approach if income is stable)
(c) $425M (Discounted cash flow approach if income is not stable)
(d) $450M
Bank forecloses with 2nd lien & takes over first lien - which is true?
1) 1st lien holder has recourse over property
2) 1st lien holder has recourse over property and bank
Bank own RE mortgage sub - what are concerns?
2) No concern, all single family mortgages
Which of the following should NOT be included in the lending policy? Gives four choices. Three are directly from the manual. Choose the one that isn't.
1) General fields of lending in which the bank will engage and the kinds and types of loans within each general field
2) Lending authority of each loans officer
3) Lending authority of a loan or executive committee, if any
4) Responsibility of the BOD in reviewing, ratifying, or approving loans
5) Guidelines under which unsecured loans will be granted
6) Guidelines for rates of interest and the terms of repayment for secured and unsecured loans
7) Limitations on the amount advanced in relation to the value of the collateral and the documentation required by the bank for each types of secured loan
8) Guidelines for obtaining and reviewing RE appraisals as well as for ordering reappraisals, when needed
9) Maintenance and review of complete and current credit files on each borrower
10)Appropriate and adequate collection procedures including, but not limited to, actions to be taken against borrowers who fail to make timely payments
11)Limitations on the maximum volume of loans in relation to total assets
12)Limitations on the extension of credit through overdrafts
13)Description of the bank's normal trade area and circumstances under which the bank may extend credit outside of such area
14)Guidelines, which at a minimum, address the goals for portfolio mix and risk diversification and cover the bank's plans for monitoring and taking appropriate corrective action, if deemed necessary, on any concentrations that may exist
15)Guidelines addressing the bank's loan review and grading system (Watch List)
16)Guidelines addressing the bank's review of the ALLL
17)Guidelines for adequate safeguards to minimize potential environmental liability
Characteristics of a term loan? (3.1-3)
B)Generally require regular amortization.
C)Usually for the purpose of acquiring capital assets such as plant and equipment.
D)May involve greater risk because of the length of time the credit is outstanding.
What are the warning signs of a troubled real estate market or project? (3.1-11)
Signs of troubled real estate markets or projects include but are not limited to:
1.Rent concessions or sales discounts resulting in cash flow below the level projected in the original appraisal.
2.Changes in concept or plan: for example, a condominium project converting to an apartment project.
3.Construction delays resulting in cost overruns which may require renegotiation of loan terms.
4.Slow leasing or lack of sustained sales activity and/or increasing cancellations which may result in protracted repayment or default.
5.Lack of any sound feasibility study or analysis.
6.Periodic construction draws which exceed the amount needed to cover construction costs and related overhead expenses.
7.Identified problem credits, past due and nonaccrual loans.
What are the 4 types of construction lending? (3.1-12)
1)Unsecured front money - These types of loans are working capital advances to a borrower who may be engaged in a new and unproven venture.
2)Land development loans - Appraisals should be done on an "As is" basis and a "As completed" basis.
If any one of the following criteria is met, a lease must be accounted for as a capital lease:
1. ownership of the property is transferred to the lessee at the end of the lease term, or
2. the lease contains a bargain purchase option, or
3. the lease term represents at least 75% of the estimated economic life of the leased property, or
4. PV of the min lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property
Net Lease:The bank is not directly or indirectly obligated to assume the expenses of maintaining the equipment. Does not prohibit bank from paying delivery & set up charge
Leverage Lease:The bank as lessor purchases & becomes the owner of equipment by providing a relatively small (20-40%) of the capital needed. Balance of funds is borrowed from long-term lenders who hold a 1st lien on the equip & assignment of the lease & lease rental payments. Specialized & complex. Prompted by desire of lessor to shelter income from taxation. Credit Worthiness of lessee is paramount.
Rentals: Only those payments reasonably anticipated by the bank at the time the lease is executed.
Full Payout Lease:The bank expects to realize both the return of its full investment & the cost of financing the property over the term of the lease. This payout can come from rentals, est tax benefits, & est residual value of the property.
Question giving lease term, economic life, lease payments, and AV. Is it a capital lease, and how should it be shown on the books?
·Is a capital lease
·Show lease payment as operating expense
What are the characteristics of a floor plan loan? (3.1-16)
1)A form of retail goods inventory financing in which each loan advance is made against a specific piece of collateral. As each piece of collateral is sold by the dealer, the loan advance against that piece of collateral is repaid.
2)The bank establishes a line of credit for the borrower and authorizes the manufacturer of the goods to draw drafts on the bank in payment for goods shipped.
3)Riskier than other loans because the bank does not exercise full control over the floored items.
Tracing loan proceeds helps accomplish/detect what? (3.1-34)
Disclose fraudulent or fictitious notes, misapplication of funds, loans made for the benefit or accommodation of parties other than the borrower of record, or utilization of loans for purposes other than those reflected in the bank's files.
Rights of the Debtor? (3.1-51)
1.Right of redemption (right to extinguish the creditor's security interest by repaying the debt)
2.Right to expect reasonable care of the collateral
3.Right to surplus (in the case where the creditor repossesses and sells the goods)
4.Right to transfer ownership of the collateral.
What are the three common types of bankruptcy and their definitions? (3.1)
1. Chapter 7 - Liquidation (most cases in court)
Bankruptcy trustee collects all of the debtor's nonexempt property, converts it into cash, and distributes proceeds among debtor's creditors. Debtor obtains a discharge of all debts outstanding at the time the petition was filed which releases him from all liability for those pre-bankruptcy debts.
Creditors' claims are satisfied not via liquidation of the obligor's assets but from future earnings. Debtors are allowed to retain their assets, but obligations are restructured and a plan is implemented by which creditors may be paid. Before the plan can be confirmed, bankruptcy court must find it has been proposed in good faith and that creditors will receive an amount at least equal to what would be received in Chapter 7 proceedings. All creditors are entitled to vote whether or not to accept the repayment plan (majority rules). Available to all debtors (individuals, corporations, partnerships)
3. Chapter 13 - Reorganization for individuals - "Wage earner plan"
Same as Chapter 11, except only for individuals who have regular incomes, secured debts are less than $350M and unsecured debts are less than $100M. Only secured creditors are entitled to vote to accept repayment plan (majority rules).
Chapter 11 & 13 usually result in greater debt recovery than Chapter 7
Benefits (to bank and borrower) of accounts receivable financing. (3.1-3)
Bank: 1. Generates relatively high yield loan, new business, and a depository relationship.
2. Permits continuing banking relationships with long-standing customers whose financial conditions no longer warrant unsecured lending.
3. It minimizes potential loss when the loan is geared to a % of the accounts receivable collateral.
Borrower: 1. Efficient way to finance an expanding operation because borrowing capacity expands as sales increase.
2. Permits the borrower to take advantage of purchase discounts because the company receives immediate cash on its sales and is able to pay trade creditors on a satisfactory basis.
3. Insures a revolving, expanding line of credit.
4. The actual interest paid may be no more than that for a fixed rate unsecured loan.
Highly Leveraged Transactions - HLTs (3.1-4)
Purpose: the buyout, acquisition or recapitalization of an existing business. Must also meet one of the following conditions:
1) transaction at least doubles liabilities and results in leverage ratio > 50%,
2) transaction results in leverage ratio of >75%, or
3) transaction is designated as HLT by syndication agent. (leverage ratio = TL/TA)
Define HLT and Identify Policy Requirements (3.1-4)
HLT is a highly leveraged transaction. HLT's are both credits extended in connection with an acquisition by, or a restructuring of, an organization and the extension results in "high leverage" (over 75% total debt to total assets) or is made to an already highly leveraged organization. Examiners should ensure that the Board has adopted a written policy that clearly defines a HLT and lists the bank's overall philosophy and objectives in financing HLT's.
Policy Requirements:
1 - Purpose & Use 6 - In-house limits relative to capital
2 - Permissible Lending & Investment Activities 7 - Recognize need - independent credit review
3 - Identification of Suitable Industries 8 - Recognize need - well-defined standards
4 - Recognition of unique risks 9 - Fees will be recognized per FASB 91
5 - Broad-based definition of HLT's
What is the major risk involving real estate construction lending?
Construction loans are most at risk from the necessity to complete projects within specified cost and time limits.
Mgt making loans in specialized areas which they were unfamiliar. AQ not problem. Most needed in lending policy. (ALLL guidelines, Loan review/grading, areas bank can specialize, underwriting standards for...)
For the purpose of evaluating oil and/or gas reserve-based loans, engineering data must meet what criteria?
For evaluation purposes, acceptable engineering reports must be an independent, detailed analysis of the reserve prepared by a competent engineering group. The report must address three critical concerns: pricing, discount factors and timing.
Floor plan line, 4 or 5 cars sold out of trust. Very poor financial condition. How classify? LOSS (remainder of line possibly substandard)
Loan has stock as collateral and is collateral dependent. Hi/lo of 100 and 70. Exam date and latest valuation of stock same day ($70). Stock is to be sold soon or ASAP. Classification?
Depends on how soon the examiner believes the stock will be sold - if right away $70 pass & $30 loss, if sometime in the future - possibly substandard)
Review a borrower's financial statement and choose the choice which best sums up the borrower's financial condition?
Beware of footnotes at the statement bottom which change the entire situation. Beware of investment in own business. Check depreciation & interest. Make sure debt to bank is evident.
Which of the following is not considered a construction loan?
1) Multi-family development
2) Land development
4) 1-4 Family Construction
5) Unsecured Front Money
6)Commercial development
3) Home Equity - since the funds may or may not be use for construction (i.e. purchase auto)
Classifications in a bank held by a multi-bank HC have declined significantly in a short time frame - What should be reviewed?
1) Third Party Obligations
2) Insider Transactions
4) Loan Policy Changes
(3) Loan Participations are often used to "hide" or "shuffle" bad loans between affiliated bank
(2) Could also be correct - Includes transactions with D, EO, PS, & related interests.
If a bank's loans rapidly improve - what would you look for?
1 - Participations with affiliates
2 - Large Charge-offs
3 - Easy renewals and extensions
4 - Improvement in local economy
Given 4 years of income information and vacancy figures, evaluate what will happen to net income in the next year?
Check for trends in income & vacancies. What are the current lease maturities. What is the cash flow needed. Check Depreciation, interest, anticipated repairs, overall financing.
Explain loans sold with recourse?
Similar to securities sold under repurchase agreements, but more rare. Used to generate temporary working funds for liquidity purposes or to invest in more favorable assets. Bank A agrees to sell loans to Bank B with an agreement to buy them back at a specified time for a specified price or yield.
Stay on the bank's books as loans, proceeds are reflected as borrowings.
Explain the two types of home equity lending?
* Traditional second mortgage (funds disbursed up front; fixed repayment schedule)
* Line of credit (borrower can make draws; variable interest rate; flexible repayment schedule)
Loan Officer must be proficient in both instalment and mortgage lending
Construction Loans - Do they normally require periodic appraisals, what are disbursement requirements?
Appraisals are not necessary because Avs are usually not met until finds advanced and improvements are made. However, should have periodic inspection to determine if on schedule.
Disbursements covered by:
1)Standard Payment Plan - used for residential and small commercial. Preestablished schedule of fixed payments at end of each specified construction phase.
2)Progress Payment Plan - used for larger, more complex building projects (Commercial). Monthly disbursement of 90% of value, 10% held till completion.
Bank must be in a position to either complete the project or salvage construction advances. Bank's exposure is that full value is not present at the time of funding. The major risk arises from the necessity to complete projects on time within cost limits.
A bank does not have a loan policy. As EIC, which of the following would you NOT do?
1) Recommend that the bank adopt a policy with all of the items listed in the Manual for a loan policy
2) Encourage the BOD to develop a lending policy specific to the bank's needs
3) Recommend that the BOD develop a collection policy
4) ?
All answers are correct but (1) is the most correct. The lending policy must pertain to the bank's individual needs, desires, & expectations. A RE Loan Policy is required per Part 365.
If a bank does not have an environmental risk program, is this a Violation (see FIL 14-93 dtd 2-25-93)?
No, but it is a contravention of a financial institution's letter regarding environmental risk
Usually just make bank aware at initial exam, but at subsequent exams, if mgmt failed to establish or comply, then EIC should criticize & pursue corrective action
Loan scenario - You look at three years of income statements. Loan is being re-written to shorten the maturity. New note will be 7 years and a $150M monthly payment. Was this a good decision for the bank?
·No. Company can't handle new debt service.
Five loans to borrower (3 individual, 1 business, 1 closely held company); three are adversely classified in report.
Loan participations
Treatment of loan fees and origination costs.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
Bank's ALLL has fluctuated with respect to gross total loans. You are given ratios such as: ALLL to gross total loans for this period or that period; peer ratios for different periods; etc. Based on the information, what can you tell about the reserve?
It's adequate
It's inadequate
Not enough information
Previous asset quality problems, etc. Everything better now. What is least appropriate method to use?
Historical method
Given a scenario, identify which calculation (historical loss, etc.) of the ALLL worksheet would best apply?
Historical Loss - Gives a trend, dependent on similar management & portfolio over the yrs. Not usually a valid method if there is a declining or improving asset quality level.
Estimated Exposure - Best Method, Based on Actual Exposure Today - Need Accurate Watch List
Non-performing Loans - Accurate if bank records regarding nonaccruals & past dues is correct (however, uses state and national ratios)
Bank's method - if internal review and grading adequately identifies risk.
Exam findings?
How determine adequacy.
Worksheet calculations include: institution's method, historical (last 5 years), coverage of non-performing loans and estimate of exposure.
In order to use the institution method, bank must:
1) maintain effective systems,
2) analyzed all significant factors, and
3) established acceptable ALLL evaluation process.
Factors to be considered in determining allowance adequacy include: volume and mix of current portfolio; use of renewals and extensions to keep loans current; trends in loan growth; general and local economic conditions; previous loss experience by type; relationship and trend of recoveries; and available outside info (peer).
Which ALLL method is least desirable? Bank's internal methodology categorizes loans into similar risks, exam classifications were very similar to internally identified. Mgt uses a lot of renewals and extensions. Bank had very little loss this exam, but had much loss in previous 5 years. nonperforming
ALLL is at $500M and is considered to be overfunded. The bank used to have problems and was plagued by a poor economy; however, asset quality as well as the economy is improving. The Board has, therefore, elected to take a negative provision of $50M. At the exam, the methodology and the current level is considered adequate. How would this been shown at the examination.
a. Criticize
A bank has a credit rating system and evaluates its ALLL by taking a percentage of the classified loans and adds this to a percentage of the remaining portfolio to arrive at a required reserve level. At the exam it was found that the examiners classifications are more severe and that percentages used by the bank are too low. What allowance method is more appropriate in this case?
1) Estimated Exposure Method
2) Historical Loan Loss Method
3) Percentage of Nonperforming Loans
(1) is correct if based on examiner's classifications (2) may also be correct (3) flawed since internal recognition of past due and nonaccrual may have led to the inaccurate watch list.
Reasons to increase ALLL:
·Etc.
Which method of calculating loan loss reserve adequacy would be least appropriate given a specific situation?
What would the bank need to do if exam losses exceeded the loan loss reserve?
The ALLL must NEVER have a debit balance. If losses charged off exceed the amount of the ALLL, a provision sufficient to restore the allowance to an adequate level MUST be charged to expense on the income statement IMMEDIATELY. A bank shall not increase the allowance account by transferring an amount from Undivided Profits or any segregation thereof to the ALLL.
Bank has good loan review system. What ALLL method should you use in determining adequacy of the reserve?
ALLL is $450M. Loss classifications $500M.
The bank must show the needed provision by quarter end for call report purposes.
Bank's ALLL is deemed adequate by examiners based upon a % of classified & Past Due and a % of remaining portfolio. However, ALLL as a % of loans is 1.25 compared to peer of 1.35 - which method should the bank use to determine ALLL adequacy?
All of the methods should be utilized and the decision should be based on several factors related to that specific bank. It should not be based solely on Peer, because similar sized banks have differing philosophies regarding loans, investments, service, etc.
ALLL determined by 1.25% of loans. Level had fluctuated between 1.2% and 1.5% during last year. Peer is 1.3% What is accurate statement? (adequate?)
Management cannot simply rely on maintaining the allowance at a certain % of loans -- it doesn't ensure that an adequate valuation reserve has been set aside for anticipated and potential loan losses.
The interagency policy statement provides comprehensive guidance on the maintenance of an adequate ALLL and an effective loan review system. Federally-insured depository institutions must maintain an ALLL at a level that is adequate to absorb estimated credit losses associated with the loan portfolio, including all binding commitments to lend. Methodologies for the determination of the historical net charge-off rate on a pool of loans can range from a simple average of an institution's net charge-off experience over a relevant period of years, coupled with appropriate adjustments as noted above for factors that affect repayment, to more complex techniques, such as migration analysis. It is the responsibility of the Board to maintain the ALLL at an adequate level.
Effective loan review system characteristics:
Loan review elements:
Bank has inadequate loan review function. All of the classifications had been previously identified. Management had already identified them. Classifications were not necessarily excessive, but the bank had sustained heavy losses for the last five years. What method for analyzing the ALLL would be most appropriate?
Bank's method
Estimated exposure method
Nonperforming loans method
Rights of the Creditor? (3.1-51)
When does the creditor with the earliest perfected security interest not get priority?
Three exceptions to rule of priority. When a creditor does not get first rights to the earliest perfected secured interest. (3.1-53)
1) Concerns a specific secured transaction in which the creditor makes a loan to a dealer and takes a security interest in the dealer's inventory. Ex. suppose such a creditor files a financing statement with the appropriate public official to perfect the security interest. While it might be possible for the dealer's customers to determine if an outstanding security interest already exists against the inventory, it would be impractical to do so. Therefore, an exception is made to the general rule and provides that a buyer in the ordinary course of business, i.e. innocent purchaser for value who buys in the normal manner, cuts off the prior perfected security interest in the collateral.
2) Concerns the vulnerability of security interests perfected by doing nothing. Ex. A dealer sells a TV on a secured basis to an ultimate customer. Since the collateral is consumer goods, the security interest is perfected the moment it attaches. But if the original buyer sells the TV to another who buys it in good faith and in ignorance of the outstanding security interest, the UCC provides that the subsequent purchase cuts off the dealer's security interest.
3) Regards the after-acquired property clause which protects the value of the collateral in which the creditor has a perfected security interest. However, it is waived as regards to the creditor who supplies replacements or additions to the collateral or the artisan who supplies materials and services which enhance the value of the collateral as long as a perfected security interest in the replacement or additions, or collateral is held.
Lines of credit: A $1MM line of credit; $800M was funded. The examiner believes that it is uncollectible. How classified? (Classify the loan $800M Loss and the contingent liability $200M Loss) The $200M actually depends on the likelihood of being funded.
Scenario: Given 3 years worth of cash flows for a company. Borrower had a 15 year note structured, and are wanting to reduce to 7 years and increase the payment. The new monthly payment would be $150M in principal and interest but cashflows were on a yearly basis. NI and depreciation totaled $532M, and the borrower wants to pay $150M per month?! Don't know if this is a trick question. Obviously he couldn't service that debt load. So read question carefully. Pay attention to annual vs. monthly.
Why would a banker request an Express Determination letter? (3.1)
Allows bank to conform tax accounting for bad debt to regulatory accounting for loan charge-offs; i.e. use book method for tax purposes.
Does an EDL have to be requested every year? At every exam.
Can the bank deduct well supported charge offs without it? Yes
Is it required when the bank wants to convert from the tax method to the book method? Yes
What are the exam procedures regarding EDLs?
An EDL issued by an examiner verifies the validity of bank's charge-offs for income tax purposes. An express determination letter is to be issued only when requested by the bank during a S&S exam, provided the bank maintains and applies loan loss classifications standards consistent with the FDIC's standards for loan charge-off.
Express determination letter - when can be issued and criteria.
Letter should be issued to a bank only if:
1) the examination indicates that the bank maintains and applies loan loss classification standards that are consistent with the FDIC's standards regarding the identification and charge-off of such loans; and 2) there are no material deviations from the FDIC's standards. Minor criticisms or immaterial deviations should not preclude the issuance of a letter.
Only issued at completion of examination and only if bank requests one.
What is the purpose of an express determination letter?
Purpose is to reduce burden of proof on banks, allows book method for taxes. Determines that
the accounting for charged-off loans is adequate. The bank can deduct well-supported charge-
offs without it. Must be requested at every exam. Required when the bank wants to convert
from tax method to book method. Can be used after October 1992, when the bank's method of
charge-offs is consistent with regulatory charge-off practices. Included with tax return.
Who signs an EDL? EIC
Identify major components.
1) transaction value is 250M or less
2) lien on RE has been taken as collateral in an abundance of caution
3) the transaction is not secured by RE
4) a lien on RE has been taken for purposes other than the RE's value
5) The transaction is a business loan that:
6) lease of RE is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased RE
7) the transaction involves an existing extension of credit at the bank, provided that:
8) the transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including mortgage-backed securities, and each loan or interest in a loan, pooled loan, or real property interest met FDIC regulatory requirements for appraisals at the time of origination
9) the transaction is wholly or partially insured or guaranteed by a U.S. gov't agency or U.S. gov't sponsored agency
10)the transaction either:
11)the regulated bank is acting in a fiduciary capacity and is not required to obtain an appraisal under other law
12)the FDIC determines that the services of an appraiser are not necessary in order to protect federal financial and public policy interests in RE-related financial transactions or to protect the S&S of the bank
State Certified Appraiser (SCA) - has satisfied the requirements for certification in a state whose criteria meet those of the Appraiser Qualifications Board of the Appraisal Foundation.
State Licensed Appraiser (SLA) - has satisfied the requirements for licensing in a state where the licensing procedures comply with Title XI of FIRREA.
Transactions requiring a State Certified Appraiser:
1) All federally related transactions of $1MM or more
2) All federally related transactions of $250M or more, other than those involving appraisals of 1-4 family residential properties (1-4 family residences noncomplex require at least an SLA)
3) All complex 1-4 family residential property appraisals (complex - one in which the property, the form of ownership, or market conditions are atypical)
All federally related transactions not requiring a SCA shall be prepared by a SCA or a SLA.
Appraisals must conform to the 14 USPAP standards:
1 - Be based on the definition of Market Value
2 - Be written and presented in narrative format and sufficiently describe the MV rationale
3 - Analyze and report any prior sales (1 year on 1-4 Fam)(3 years prior on all others)
4 - Analyze & report data on current revenues, expenses, & vacancies if income-producing
5 - Analyze & report a reasonable market period for the property
6 - Analyze & report on current market conditions & trends affecting proj income or absorption
7 - Analyze & report appropriate deductions & discounts for any proposed construction
8 - Include that the appraisal was not based on a requested minimum valuation, loan approval...
9 - Contain sufficient supporting documentation regarding logic, reasoning, judgement, analysis
10 - Include a legal description of the property
11 - Identify & separately value any personal property, fixtures, & intangibles-discuss impact
12 - Follow a reasonable valuation method addressing direct sales comparisons, income & cost
13 - If info deemed required or pertinent is unavailable, disclose & explain
14 - Institutions can provide additional standards
If done by a staff appraiser, that person must be independent of the lending, investment, & collections functions. Can accept an appraisal prepared for another institution provided:
1 - The bank has established procedures for review of real estate appraisals
2 - Reviewed the appraisal under those review procedures and found the appraisal acceptable
3 - Documented the review in writing
S&L had appraisal performed 10 months ago, loan to be refinanced at subject bank, what must subject bank do to accept appraisal?
Part 323.5 states that a regulated institution may accept an appraisal that was prepared by an appraiser engaged directly by another financial services institution if:
(i) appraiser has no direct or indirect interest, financial or otherwise in the property or transaction, and
(ii) the regulated institution determines that the appraisal conforms to the requirements of this part and is otherwise acceptable.
A copy should be kept in the bank files. Document Review.
A director does an appraisal on a conforming 1-4 family RE property $280M. Director is a member of the loan committee when this loan came up for approval the director voted against it. Violation of Part 323? Director is state licensed appraiser. (RR2236.09)
YES. 323.5(a) ... prohibiting directors and officers from participating in any vote or approval involving assets on which they performed an appraisal. Not independent to the transaction.
A director both performed the appraisal as well as approved the loan. What should the EIC do?
b. mention this to the banker
c. criticize in the Report but not cite as a violation
PART 324: AGRICULTURAL LOAN LOSS AMORTIZATION
Per part 324, losses are amortized on what basis and up to how long? (RR2238)
Quarterly, straight-line and not to exceed seven years commencing on the first quarter after the loss was or is charged off so as to be fully amortized not later than 12/31/98.
Identify major components of Part 324 (RR2238-Part 324)
Effective 11-9-87
Qualifying Ag Banks (100MM or Less TA w/25% ag-related loans or otherwise deemed an ag bank) may apply to amortize loan losses over 7 years no later than 12-31-98 provided:
A. Must be an Ag. bank
B. Capital in need of restoration and bank is economically viable
C. No evidence of fraud or criminal abuse
D. Submitted a capital plan approved by corporation
E. Can amortize no more than 7 years nor later than 12-31-98.
PART 337: UNSAFE AND UNSOUND BANKING PRACTICES
Per Part 337, what are the lending limit rules based on both direct & indirect loans, guarantees for other borrowers, standby letters of credit, etc. Distinguish from various scenarios whether a violation and determine what would be considered the total extended credit.
·Refers to limitations regarding Standby Letters of Credit (w/i LLL)
All SBLC will be aggregated with all loans for purposes of the lending limit except where:
1) Prior to or at the time of issuance, the issuing bank paid an amount equal to the bank's max liability under the SBLC; or
2) Prior to or at the time of issuance, the issuing bank set aside sufficient funds in a segregated account to cover the max liability
·Limits extensions of credit to EO's, D's, & PS's to the greater of 25M or 5% to one person + related interests
No insured nonmember bank may extend credit to these individuals in an amount, when aggregated with all credit extended to that individual exceed the greater of $25M or 5% of the bank's capital and unimpaired surplus or $500M unless:
1) The extension has been approved in advance by a majority of the BOD, and
2) The interested party abstained from the voting
·May extend credit to an executive officer for any other purposes
Provided aggregate amount does not exceed the higher of 2.5% of capital and unimpaired surplus or $25M but in no event more than $100M; however, no credit shall be subject to limitation if credit is secured by:
1) A perfected interest in bonds, notes, or Treasury bill fully guaranteed as to principal and interest by the U.S. Gov't
2) Unconditional takeout commitments or gtys of any dept., agency, etc of the U.S. gov't
3) A perfected security interest in a segregated deposit account of the lending bank
·Brokered Deposits are allowed only for well-capitalized banks. Adequately capitalized banks must apply be granted a waiver. Brokered Deposits may not exceed an effective yield of 75 basis points at the time the deposit is accepted, renewed, or rolled over. (Well-capitalized banks have no restriction)
Per Part 337, what are the 3 requirements of a letter of credit? (RR2637-Part 337.2(d))
3) Maintain adequate control and records to the same extent that loans are maintained
Per Part 337, what are the three disclosure requirements of a letter of credit? (RR2637)
1) Adequate control and records must be maintained in order to determine the potential amount of liabilities.
2) Must be reflected in published financial statement
3) Included in lending limit
Bank can't provide maturity dates for Standby Letter of Credit for last year - Violation of Part 337?
Yes, Part 337.2 states that banks must keep comparable records to direct loans.
PART 365: REAL ESTATE LENDING STANDARDS
Percentages of categories under part 365.
Part 365 requires banks to adopt written loan policies establishing limits and standards for loans secured by real estate.
Only Part which requires the Bank maintain a Policy. In this case, the bank must have a policy but if policy does not conform or bank is outside guidelines - only a contravention of Interagency guidelines (IG). If policy is absent; however, then Violation of Part 365.
1) be consistent with safe and sound practices,
2) be appropriate for size and nature of bank,
2) underwriting standards including LTV limits,
3) administration procedures for the bank's RE portfolio, and
4) documentation, approval, and reporting requirements.
Management must monitor conditions in RE market. Also, policies must reflect consideration of interagency guidelines Interagency guidelines.
Institutions should establish their own internal LTV limits for RE loans. These internal limits should not exceed the following supervisory limits:
Raw Land 65%
1-4 Family 85%
Land Development 75%
Improved Property 85%
Commercial, Multi-Family 80%
Permanent, Home Equity 90% (* not established yet)
Loans that exceed supervisory LTV limits should be identified in bank records, amounts reported quarterly to Board. Aggregate amount not to exceed 100% total capital. Further restrictions for commercial, agricultural, multifamily and other non 1-4 family residential properties should not exceed 30% of total capital.
A bank's lending policy has adopted Part 365 LTV limits. A review of loans found numerous loans which exceeded the LTV limits set in the policy. All of the exceptions were approved by the Board. Is this a violation of Part 365?
No; but aggregate amount of loans in excess of supervisory limits can't exceed 100% of total capital.
Not a violation.
Bank has a real estate lending policy which delineates LTV guidelines paralleling those in Part 365; however, the bank does not adhere to these guidelines. Most of the loans originated exceed these limits. How should this be handled?
(a)Cite violation of Part 365
(b)Cite contravention to policy
(c)Discuss with management and address in report *
(d)Do nothing. LTV limits are management's and the BOD's choice.
Not a contravention because these are only interagency guidelines, not a SOP.
Part 365 - no policy. Cite violation? Yes. (RR3173)
Part 365 - what are the percentages of certain categories? What is the maximum amount? (RR3181-3182)
Given a bank's loan-to-value ratios from the loan policy, determine if there is a violation of Part 365 and how it is handled.
Part 365 scenario regarding maximum loan to values - 2 possible answers are violation with reasons & 2 possible answers are not violations with reasons?
Wrong ratios could only represent a contravention of interagency guidelines, not a violation.
LTV exceeded Part 365 limits but BOD approved, is it acceptable?
Such loans should be identified in records (files, minutes) and the aggregate amount should be reported to the Board quarterly. Aggregate amount of such loans should not exceed 100% of Total Capital per Part 325. Commercial and other non 1-4 family loans should not exceed 30% of Total Capital. If all LTV's in policy were above limits - it should be listed as a contravention of interagency guidelines.
Bank has made a lot of loans that exceed supervisory maximum. Commercial and agricultural loans total $600M; capital is $700M.
·Violation of Part 365
·Not a violation of Part 365 in this situation; remind bank of the exceptions to maximums.
·Violation of Part 323
Bank has not adopted a RE lending policy. They do very few RE loans. Is this a violation of Part 365?
YES
If a bank has leased property, how does FASB 13 "Accounting For leases" effect it? (3.4-1)
Any lease which at its inception meets one or more of the following 4 criteria and entered into after 1/77 must be capitalized.
1) Ownership of the property is transferred to the lessee at the end of the lease term.
2) The lease contains a bargain purchase option.
3) The lease term represents at least 75% of the estimated economic life of the leased property.
4) The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date, less any related investment tax credit retained by or expected to be realized by the lessor.
What does FASB 15 deal with? (CRI-TDR)
"Accounting for Debtors and Creditors for Troubled Debt Restructurings"
2 Broad Groups:
1) Those wherein the borrower transfers assets to creditor to satisfy the claim, which would include foreclosures; and
2) Those in which the terms of the debtor's obligation have been modified, which may include reduction in interest rate, extension of the maturity date and at an interest rate that is less than the current market rate for new obligations with similar risk, or forgiveness of principal or interest.
(See loan section for further information).
FASB 15 - be able to assess the bank's method of accounting for the transaction and what adjustments, if any, are required to correctly to account for TDR.
FASB 114 "Accounting by Creditors of Impairment of a Loan"
When a loan is deemed impaired under FASB 114, a bank may choose to measure impairment using:
1) The PV of expected future cash flows discounted at the loan's effective interest rate (the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan)
2) The loan's observable market price
3) the fair value of the collateral, if the loan is collateral dependent.
Does FASB 91 "Accounting for Nonrefundable Fees and Costs Associated with the Originating or Acquiring Loans and Initial Direct Costs of Leases" apply to government guaranteed loans sold?
NO
FASB 91 - Which fees must be expensed immediately and which need to be deferred.
All fees are deferred. All "other-related costs" should be charged to expense as incurred. For example:
FASB 91 - Loan Fees
A) Loan orig. fees are amortized over the life of the loan as an adjustment to the yield.
B) Certain direct loan orig. costs are amortized over the life as an adjustment to the yield.
C) Loan Commitment fees are deferred.
D) Loan fees, direct loan orig. costs and purchase premiums and discounts are amortized as an adjustment to the yield on
the interest method based upon the term of the loan.
What are the provisions of FASB 91? (Give certain criteria and asks if this is applicable under FASB 91)
Bank sold loans for a premium, does FASB 91 apply (see 5.1-3)?
No, FASB 91 applies to lending, committing to lend, and purchasing loans only.
What are the provisions of FASB 91 (See 5.1-3)
The following should all be deferred over the life of the loan
(covers non-refundable fees associated with lending, committing to lend, and purchasing loans)
FASB 91 fees not reported correctly. EIC tell management to do what?
Apply to government sold loans? no - only loans on bank's books
FASB 91 establishes the accounting for non-refundable fees and costs associated with loans.
1) loan origination fees should be recognized over life of related loan as adjustment of yield.
2) certain direct loan administration costs should be recognized over life of related loan as decline in yield.
3) most commitment fees should be deferred.
4) loan fees, certain origination costs, and premiums/discounts should be deferred and accounted as adjustment of yield.
Direct loan origination costs should be offset against related commitment fees.
Only loan syndication fees should be recognized by the bank managing a loan syndication when the syndication is complete, UNLESS a portion of the syndication loan is retained.
Thoroughly identify the components of the so-called "kinder and gentler" memos?
Interagency Policy Statement on Documentation for Loans to Small- and Medium-sized Businesses and Farms
* loans to insiders
* delinquent loans
- the aggregate total of all such loans will be limited to 20% of total capital
- each documentation loan is subject to a maximum loan size of $900,000 or 3% of total capital, whichever is less
(if a borrower has multiple loans in the exempt portion of the portfolio, those loans must be aggregated before the maximum is applied)
An institution should maintain documentation that provides its management with the ability to:
demonstrate appropriate administration and monitoring of a loan
Bank only has 3 Directors. All closely monitor the bank. Do they need any written policies?
1) No Policies Required
2) Required to have policies covering major areas
3) Viol of 365 and recommend other policies
4) Viol of 362 and recommend other policies
(3) Part 365 require a RE Loan Policy, other policies can be strongly recommended.
Can Board depend on loan committee to approve all loans regardless of size?
No - Reg O requires the Board to approve some types. (Board needs to approve insider loans)
Examiner who worked loan left bank. EIC reviews line sheet. Apparent violation of Part 323. EIC writes in the report, "This is an apparent violation and reflects poorly on management."
REG G - SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS
Identify major components of Reg G
Concerns extensions of credit to finance securities transactions. Reg G governs credit secured by margin stock extended by parties other than banks, brokers, & dealers. Registration is required with the Board of Directors within 30 days after the end of the quarter during which credit (secured, directly or indirectly by margin stock) is extended in an amount of 200M or more or which exceeds 500M in total. Exception to lenders who extend credit via an eligible ESOP which will be used to purchase margin stock of the employer.
Margin stock includes any equity security listed on or having unlisted privileges on a national stock exchange, any debt
security convertible into such a security, most mutual funds, and any OTC security trading in the national market system or included on the FRB Board's List of Marginable OTC Stocks.
REG O - LOANS TO OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS
affiliate: means any company of which a member bank is a subsidiary or any other subsidiary of that company.
Tier 1 Capital (included in the bank's risk-based capital based on most recent call report)
+ Tier 2 Capital
+ The balance of the ALLL not included in Tier 2 Capital for purposes of calculating RBC
Prohibition on knowingly receiving unauthorized extension of credit as a means to dictate accountability for the actions of insiders.
What constitutes extension of credit per Regulation O?
The making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever and includes:
1) Purchase under repo agreement
2) Advance by overdraft, cash item
3) Issuance of Standby Letter of Credit
4) Acquisition of any note, draft - insider liable
5) Increase in existing debt (o.k. for AI, Taxes)
6) Advanced of unearned salary over 30 days
7) Other
Not Extensions of Credit:
1) Advance on Salary -30 days or advance on travel
2) Usual receipt of deposit as cash item
3) Acq of note thru merger, or foreclosure (provided that it is not held more than 3 years)
4) Good-faith endorsement or guarantee
5) Indebtedness of 15M or less on bank credit card
6) Indebtedness of 5M by int-bear OD plan
7) Discount of Prom Notes, etc without recourse
8) A director who guarantees the debt of another bank customer to protect the bank from loss would not aggregate that obligation with his other debt under Reg O provisions
Also:
1) Non-interest bearing deposits to the credit of the bank are not considered loans, advances, or extensions of credit to the bank of deposit, nor is the giving of immediate credit to a bank upon uncollected items received in the ordinary course of business.
2) For purposes of prior approval and aggregate lending limits, an extension is considered to be made at the time the bank enters into a binding commitment to make the extensions of credit.
3) A participation purchased without recourse is considered to be an extension of credit by the participating bank, not the originating bank.
4) An extension of credit is considered made to an insider to the extent that the proceeds of the extension of credit are transferred to the insider or used for the tangible economic benefit of the insider,
5) Debt to immediate family member should not be aggregated with the debt of the insider, unless the insider repays the loan, guarantees or otherwise lends his credit to the loan, or receives benefit from the loan proceeds.
Per Reg O, what are the record-keeping requirements?
Each bank must maintain records which:
1) Identify, through annual survey, all insiders & related interests of the bank itself and
2) Maintain records of all extensions of credit to insiders of the bank itself, including the amount and terms of such extensions
Each EO (but NOT affiliate EO) who becomes indebted to another bank in an amount greater than specified for children education, purchase or remodeling of house, or greater of 2.5% or 25M limited to 100M, shall within 10 days make a written report to the subject BOD stating:
Recordkeeping for affiliated insiders:
Annual Report by EO & Principal Shareholders:
If during any calendar year any EO or PS has outstanding an extension of credit from a correspondent bank, the individual shall on or before January 31 of the following year, make a report to the BOD of the member bank:
Public disclosure of insider & related interests credits must be made if requested in writing for any related credits exceeding 5% of Capital & surplus or $500M whichever is less. NO DISCLOSURE IS MADE IF the aggregate amount of extensions to the EO & PS and all related interests does not exceed $25M.
A member bank is not required to disclose the specific amounts of individual extensions of credit.
Reporting requirements for credit secured by certain bank stocks that are NOT publicly traded:
Each EO or director (or affiliated EO or director) of a member bank must annually report to the BOD the outstanding amount of any credit that was extended to them secured by shares of the member bank.
Parent Company stock - N/A.
CMPs are applicable to Reg O.
Identify major components of Regulation O?
Pursuant to Sections 22g & 22h. Reg O covers loans to executive officers (EO), directors (D), & principal shareholders (PS) of member banks. Part 215 of FRB Regulations.
Control, per Reg O, is defined through:
1) Owns, controls, or has the power to vote 25% or more of any class of voting stock
2) Controls in any manner the election of a majority of the directors
3) Has the power to exercise a controlling influence over management or policies
Also: A person is presumed to have control if:
The person is an executive officer or director and He/She directly or indirectly owns, controls, or has the power to vote 10%
4) The person directly or indirectly owns, controls, or has the power to vote 10% and no one else has more stock
However, not considered to have control solely by virtue of position as officer or director
Directors means director, however, advisory directors are not considered directors if not elected by shareholders, not authorized to vote, and provides solely general policy advice
Executive Officers are people who participate or have the authority to participate in major policy-making functions in the bank whether or not the officer has an official title, title is "assistant", or the officer receives no compensation. Generally, the COB, president, every vice president, the cashier, the secretary, and the treasurer are considered EO's, unless the officer is excluded, by resolution of the BOD or the bylaws from participation in major policy-making functions and the officer does not participate therein.
Reg O's Legal Lending Limit - is 15% of the bank's unimpaired capital and unimpaired surplus in the case the loans are not fully secured, and an additional 10% for loans fully secured by readily marketable collateral having a market value at least equal to the loan.
General Prohibitions:
A) Credit extensions to insiders or affiliated insiders must be on substantially the same terms as offered the general public and does not represent more then the normal credit risk.
B) Extension to any insiders or affiliated insiders when aggregated with all other extensions of credit to that person and their related interests exceeds the higher of 25M or 5% of the bank's unimpaired capital & surplus unless:
1) The extension has been approved in advance by a majority of the BOD and
2) The interested party has abstained from participating directly or indirectly in voting
In no event, may the aggregate credit extensions exceed 500M except by complying w/above
Not required for an extension of credit made pursuant to a line of credit approved w/i 14 mo
C) Aggregate lending limit states that credit extensions to all insiders (and affiliated insiders) and related interests of all insiders must not exceed 100% of the bank's unimpaired capital & surplus.
If deposits of less than $100MM, may apply to limit of 200% of capital & surplus if:
Board needs to attract or retain directors
Resolution states reasons
Meet/exceed capital requirements
Satisfactory rating
D) Exceptions include: (NOT INCLUDED IN INDIVIDUAL OR AGGREGATE LIMITS)
1) extensions fully secured by US fully secured or backed investments,
2) secured by unconditional takeout commitments,
3) secured by segregated deposit account,
4) arising from the discount of negotiable or nonnegotiable installment consumer paper that is acquired from an insider and carries a full or partial recourse endorsement or guarantee by the insider provided that:
a) the financial condition of the maker is reasonably documented
b) the maker is not an insider
c) the bank is not relying upon the GTY of an insider
Overdrafts:
No Member bank may pay an overdraft of an EO or D or affiliated EO or D unless payment of funds is made in accordance with:
1) A written, preauthorized interest-bearing extension of credit plan that specifies a repayment method
2) A written, preauthorized transfer of funds from another account
(Does not apply to payment of inadvertent overdrafts in aggregate amount of 1M or less provided
1) Not overdrawn for more than 5 business days and
2) Bank charges the EO or D the same fee charged any other customer
Exceptions to the prohibitions:
Bank may extend credit to any EO of the bank for:
1) the financing of EO's children's education in any amount
2) to finance or refinance construction or addition to home (in any amount with no prior approval) provided
Secured by first lien
If refinancing, no additional credits are added other than closing costs
3) in any amount if well-secured by:
a) A perfected interest in bonds, notes, certificates of indebtedness, or Treasury bills of the U.S. or in other such obligations fully guaranteed as to principal and interest by the U.S.;
b) Unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission or establishment of the U.S. or any corporation wholly-owned directly or indirectly by the U.S.;
c) A perfected security interest in a segregated deposit account in the lending bank.
Is a line of credit included in the legal lending limit? (RR7644-Reg O)
Exec. Officer given advance against unearned salary of $10M, advance against earned salary of $11M, overdraft $1,200 for 3 days and did not pay charge, according to Reg O what is true?
A. Total Reg O extensions $23,200
C. Violation because Overdraft over $1,000
D. No violation because Overdraft under 5 days
Individual lending limit is 15% of unimpaired capital and surplus in the case of loans are not fully secured and an additional 10% if loans fully secured by readily marketable collateral. Aggregate limit: 100% unimpaired capital and surplus. This is for all insiders.
EO gets an advance against unearned salary for 15 days; then another for 35 days. Also has an overdraft of $500 for two days (he paid a fee). Is this a violation?
NO ?? (but the advance over 30 days is considered an extension of credit)
The cashier is the lowest paid employee in the bank. By BOD resolution he was excluded from executive officer status; however, he is still permitted to participate in Board meetings and he always takes an active role. In addition, he assisted in developing the audit program. Which of the following is true?
(a) Cashier is subject to the more severe restrictions of Reg. O *
(b) Cashier and his related interests are subject to the more severe restrictions of Reg. O
(c) Cashier is not subject to Reg. O because a Board resolution was passed
(d) Cashiers are never subject to Reg. O
The bank's cashier is the lowest paid individual in the bank, however, he was instrumental in formulating the audit policy. He also participates in every Board meeting. The Board has adopted a resolution declaring that the cashier is not an executive officer - As EIC, what is your determination?
1) He is not under any restrictions
2) He is under more severe loan restrictions than Directors or Princ. SH
3) He and his related interests are under more severe loan restrictions than Directors or PS
4) He is under the same restrictions as directors
(2) He is under more severe restrictions than D & PS since he performs policy-making functions.
Cashier of bank exempted by board as executive officer, but participates in policy making.
Treasurer of bank earns big salary but only does internal audit, reports to board once a month. Board has not excluded him as executive officer.
Basically, there are additional restrictions on loans to executive officers and to answer these questions, must first determine if executive officer. Only apply to bank's executive officers. Executive officer is person who participates or has authority to participate in policymaking functions. Cashier and Treasurer (along with chairman of board, president, VP, and secretary) are considered executive officers unless excluded by board resolution. Exclusion for cashier in this case no good as participates in policymaking and thus considered executive officer.
Additional restrictions include:
(a)no credit unless that described in c and d
(b) no credit in amount greater than in c
(c)authorized credit is - any amount to finance child education, prior approval any amount for refi or purchase of house, any amount for part d, and for other purposes not exceed 2.5% capital or $25M - in no event >$100M
(d)credit shall be promptly reported to board, compliance with a, preceded by detailed current FS, and may become due and payable if officer indebted to other bank for amount greater than specified in part c.
Executive Officer (EO) of a bank owns 30% of company. Which of the following is true?
2) Loans to the EO and related interests fall under more severe restrictions
3) Loans to related interest fall under 23A restrictions
EO is under Reg O restrictions
EO's related interest are also subject to Reg O - prior approval, terms, credit risk, & lending limits (3) is not true unless EO also owns 25% of the bank
Reg O 15% limitation applies for
Given a list of transactions, which are not considered extensions of credit under Reg O.
A Director guarantees a loan that has been adversely classified. What are the proper exam procedures?
a. cite a violation of Reg O
b. do not cite a violation of Reg O
c. make Director resign immediately
d. make Director correct or resign
e. Directors should watch loan closely
a. cite an apparent violation (more than the normal risk of repayment) --assess CMPs for further violation. **if good at the time of origination and since deteriorated. Then urge Board to require director to correct or resign.
DOS manual (4.1-10) if a director has a personal financial interest in a loan or other transaction subject to adverse classification, board should be urged to require that director to strengthen the credit sufficiently to remove adverse classification within reasonable time frame or resign from the board.
A director owns 11% of a bank's stock and has personal debt at the bank. The bank has $100MM in capital. Which of the following are true concerning Reg O?
1) The director can have loans up to $100M
2) The director can have personal loans up to $1MM
3) The director and related interests can have personal loans up to $1MM
4) In aggregate, directors, executive officers, and principal shareholders can borrow $100MM
5) In aggregate, directors, executive officers, principal shareholders, and their related interests can borrow $100MM
(5) is correct. Aggregate of 100MM to all insiders and related interests, plus all insiders and related interests of affiliates (which is a sub), and wives of Directors and Executive Officers. LLL of 15% Capital & Reserves or 25% Capital & Reserves to Directors.
Loan made to director on one date for 15% of Capital, another loan to same director made on another date for 15% of capital is secured by marketable assets, what are the applicable violations, if any?
Violation of Reg O's Legal Lending Limit (Limited to 15% for unsecured & an additional 10% if secured by marketable assets). However, only the 2nd loan which put him over the limit if 25% would be in violation.
Identify major components of Reg T
Refers to loans by securities brokers, not applicable to commercial banks or thrifts. In general, such entities may not extend credit to their customers unless the loan is secured by margin securities nor may they arrange for credit to be extended by others on terms better than they themselves are permitted to extend. Generally, a broker/dealer may not extend credit on margin securities used as collateral in excess of the percentage of current market value permitted by the Board. If allowed to use "good faith" (or its own judgement) then may not exceed 100%. Also prescribes rules governing cash transactions among brokers, dealers, their customers, and other brokers/dealers. Also limits the sources from which borrowing brokers/dealers may secure funds in the ordinary course of business. Also permits any self-regulatory
organization or registered broker/dealer to impose more stringent rules.
REG U - CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK
Reg U only pertains to extensions of credit for the purpose, whether immediate, incidental, or ultimate, of BUYING OR CARRYING MARGIN STOCK.
The LTV 50% limit based on market value only applies at origination.
What is the REG U margin LTV restriction?
A customer gets a $50M loan to buy stock secured by $90M of stock listed on AMEX. The bank did not fill out a U-1 purpose statement. The current balance remains $90M and the MV of $100M. The bank is violation of Reg U by:
a. Not filing the U-1 purpose statement
c. It's not a violation because the loan is less that $100M
b. Margin requirements are 50% of the current market value.
Per Reg U - Customer put 1,000 shares of NYSE stock with MV $50M a share up for collateral, but did not fill out part 1 of Form U-1. Loan proceeds were not used to purchase other stock. Loan balance is $40M; the stock high price for the year was $50M, the low price $30, and current price $40. What should be cited? (RR7759)
1) Violation for not filling out Form U-1
2) Loan Classified Substandard
3) Loan Not Adversely Classified since the high price indicates adequate collateral value
4) Loan Classified Doubtful
Not a violation (not over 100M), U-1 not required
Can't classify on collateral alone - (3) correct Reg U - Customer gets a loan for $90M, secured by $90M of AMEX stock. The bank did not fill out the U-1 Purpose Statement. The current loan balance remains $90M and the Mkt value of the stock has increased to $100M. The bank is in violation of Reg U because? (RR7761)
1) Not Filing a U-1 Purpose Statement
2) Lending Above Margin Requirements
3) It's not a violation because the loan is under $100M
What are the requirements of Reg U? (only applies at origination)
(1)No bank shall extend credit secured by margin stock in an amount exceeding maximum loan to value limits of 50% of its market value
(2)Whenever a bank extends credit secured by margin stock in an amount exceeding $100M the bank shall require its customer to execute form FR U-1.
(3) Purpose of credit must be to purchase or carry margin stock
Regulation U general requirements:
1) no bank shall extend any purpose credit secured by margin stock exceeding maximum LTV limit.
2) bank may continue to maintain credit initially made in compliance.
Purpose statement -- form FR U-1 must be filled out when extension exceeds $100M. Maximum loan value is 50% of current market value. (exemptions: banks, foreign banks, outside US, ESOP, "plan lender", customer - temp finance Purchase or Sale, in transit, emergency expenses).
Reg U question. Gave loan amount (over $100M) and collateral values at inception and exam dates. Decide if there's a problem with LTV.
Regulation U question (Know 50% margin/ >$100M loan)
Per Reg U - Bank loans $110M to a borrower secured by AMEX listed and traded stock valued at inception at $150M and currently at $105M. A U-1 form is not filed. The examiner should?
1) Violation for not filling out Form U-1
2) Loan Classified Substandard
3) Violation of margin requirements
4) Require additional collateral and call a violation for inadequate collateral
Identify Reg U?
Securities Credit by Banks - Requires U-1 form if loan collateralized by stocks, bonds, etc.
If loan purpose is to purchase or carry stock and security is on FRB margin list, limits loan to 50% of current mkt value of stk. Otherwise, 100% for Good-Faith Value, non margin; but 0% for options. Value is taken at time of loan. Loan must be in excess of 100M to apply.
Identify major components of Reg X
Extends the provisions of Reg's G, T, & U to certain borrowers and to certain types of credit extensions not specifically covered by those regulations (i.e. domestic or foreign persons controlled by or acting on behalf of or in conjunction with U.S. persons who obtain credit outside the U.S. or within the U.S. to purchase or carry U.S. Securities. Exempted borrowers:
1) Any borrower who obtains purpose credit w/i the U.S. unless the borrower willfully causes the credit to be extended in contravention of Reg G, T, or U.
2) Any borrower whose permanent residence is outside the U.S. who has obtained or has outstanding during any calendar year no more than $100M in purpose credit obtained outside the U.S.
In general, whenever the regulation applies, the borrower is responsible for ensuring that the credit conforms to one of the three margin regulations.