To: Examiner Lambert - Commercial Banks Division
From: Assistant Counsel Barras
Date: November 12, 1992
Subject: [ ] - Lending Limits
[ ], which is in a precarious financial condition, is, seeking permission to renew, restructure or roll-over certain loans which were within the, applicable lending limits when made but currently exceed those limits because of the decrease in [ ] capital. Attached to your memorandum is a letter dated June 4, 1992 from the New Hampshire Banking Department to institutions under its jurisdiction on the matter. ,The position of that Department is further detailed in a declaratory ruling dated January 23, 1991.
Section 103(1) of the Banking Law states that a bank may not make a loan or loans to any one borrower in excess of the limits set forth therein. I agree with the opinion of the New Hampshire Banking Commissioner that banks may restructure nonperforming loans without considering the applicable lending limit. In such cases, the bank is not actually making a new loan but is formulating a "workout" of an existing loan. If a loan is in default, the borrower generally cannot obtain refinancing at a different financial institution and the bank's best possibility of being repaid on that loan is through the "workout". The four conditions specified in the June 4, 1992 letter have merit and should be imposed by our Department in cases in which banks such as [ ] restructure nonperforming loans. Those conditions, with modifications, are:
- Loan must have been within lending limits when made.
- New funds are-not advanced absent special circumstances.
- Original obligor is not released.
- Security is not released unless loan is repaid to point where remaining security is sufficient. Substitute security is, permitted if adequate.
These conditions should not adversely affect banks because they would generally abide by them in "workout" situations in any event.
In the case of performing loans which are not in imminent danger of becoming nonperforming loans, I do not believe that the Department should sanction the restructuring of existing loans which, at the time of restructuring, exceed the legal lending limits. If a borrower is current on loan repayments he/she may obtain refinancing at another financial institution or alternatively, the lending bank may sell a portion of the loan to another financial institution through a participation arrangement. Loans which are deemed performing do not need a "workout" restructuring .and there is no justification for ignoring the mandate of Section 103(1): A bank which restructures a performing loan should adhere to the provisions of that section.
It is not clear to me what the position of the New Hampshire Banking Commissioner is on the matter of restructuring performing loans. In his declaratory ruling dated January 23, 1991, the Commissioner indicates that he would permit banks to restructure both nonperforming and performing loans without regard to lending limits if certain conditions are met. However, in his letter to institutions dated June 4, 1991, the Commissioner's statement clarifying that declaratory ruling appears to exempt only nonperforming loans from the lending limitations.