2005 Idaho Code - 26-705 — LOANS TO ONE PERSON

                                  TITLE  26
                              BANKS AND BANKING
                                  CHAPTER 7
               LIMITATIONS ON LOANS, INVESTMENTS, AND PRACTICES
    26-705.  LOANS TO ONE PERSON. (1) The total loans and extensions of credit
by a bank to a person outstanding at one (1) time, shall at no time exceed
twenty percent (20%) of the capital structure of such bank.
    (2)  "Loans and extensions of credit" means a bank's direct or indirect
advance of funds to or on behalf of a borrower based upon an obligation of the
borrower to repay the funds, or repayable from specific property pledged by or
on behalf of the borrower, and includes, for the purposes of this section:
    (a)  A contractual commitment to advance funds;
    (b)  A maker or endorser's obligation arising from a bank's discount of
    commercial paper;
    (c)  A bank's purchase of securities subject to an agreement that the
    seller shall repurchase the securities at the end of a stated period, but
    not including a bank's purchase of type I securities, as defined in 12 CFR
    part 1, subject to a repurchase agreement, where the purchasing bank has
    assured control over or has established its rights to the type I
    securities as collateral;
    (d)  A bank's purchase of third-party paper subject to an agreement that
    the seller shall repurchase the paper upon default or at the end of a
    stated period. The amount of the bank's loan is the total unpaid balance
    of the paper owned by the bank less any applicable dealer reserves
    retained by the bank and held by the bank as collateral security. Where
    the seller's obligation to repurchase is limited, the bank's loan is
    measured by the total amount of the paper the seller may ultimately be
    obligated to repurchase. A bank's purchase of third party paper without
    direct or indirect recourse to the seller is not a loan or extension of
    credit to the seller;
    (e)  An overdraft, whether or not prearranged, but not an intra-day
    overdraft for which payment is received before the close of business of
    the bank that makes the funds available;
    (f)  The sale of federal funds with a maturity of more than one (1)
    business day, but not federal funds with a maturity of one (1) day or less
    or federal funds sold under a continuing contract; and
    (g)  Loans or extensions of credit that have been charged off on the books
    of the bank in whole or in part, unless the loan or extension of credit:
         (i)   Is unenforceable by reason of discharge in bankruptcy;
         (ii)  Is no longer legally enforceable because of expiration of the
         statute of limitations or a judicial decision; or
         (iii) Is no longer legally enforceable for other reasons, provided
         that the bank maintains sufficient records to demonstrate that the
         loan is unenforceable.
    (3)  The following items do not constitute loans or extensions of credit
for purposes of this section:
    (a)  Additional funds advanced for the benefit of a borrower by a bank for
    payment of taxes, insurance, utilities, security, and maintenance and
    operating expenses necessary to preserve the value of real property
    securing the loan, consistent with safe and sound banking practices, but
    only if the advance is for the protection of the bank's interest in the
    collateral, and provided that such amounts must be treated as an extension
    of credit if a new loan or extension of credit is made to the borrower;
    (b)  Accrued and discounted interest on an existing loan or extension of
    credit, including interest that has been capitalized from prior notes and
    interest that has been advanced under terms and conditions of a loan
    agreement;
    (c)  Financed sales of a bank's own assets, including other real estate
    owned, if the financing does not put the bank in a worse position than
    when the bank held title to the assets;
    (d)  A renewal or restructuring of a loan as a new loan or extension of
    credit, following the exercise by a bank of reasonable efforts, consistent
    with safe and sound banking practices, to bring the loan into conformance
    with the lending limit, unless new funds are advanced by the bank to the
    borrower (except as permitted by this section), or a new borrower replaces
    the original borrower, or unless the director determines that a renewal or
    restructuring was undertaken as a means to evade the bank's lending limit;
    (e)  Amounts paid against uncollected funds in the normal process of
    collection; and
    (f)  (i)   That portion of a loan or extension of credit sold as a
         participation by a bank on a nonrecourse basis, provided that the
         participation results in a pro rata sharing of credit risk
         proportionate to the respective interests of the originating and
         participating lenders. Where a participation agreement provides that
         repayment must be applied first to the portions sold, a pro rata
         sharing shall be deemed to exist only if the agreement also provides
         that, in the event of a default or comparable event defined in the
         agreement, participants must share in all subsequent repayments and
         collections in proportion to their percentage participation at the
         time of the occurrence of the event.
         (ii)  When an originating bank funds the entire loan, it must receive
         funding from the participants before the close of business of its
         next business day. If the participating portions are not received
         within that period, then the portions funded shall be treated as a
         loan by the originating bank to the borrower. If the portions so
         attributed to the borrower exceed the originating bank's lending
         limit, the loan may be treated as nonconforming, rather than a
         violation, if:
              1.  The originating bank had a valid and unconditional
              participation agreement with a participating bank or banks that
              was sufficient to reduce the loan to within the originating
              bank's lending limit;
              2.  The participating bank reconfirmed its participation and the
              originating bank had no knowledge of any information that would
              permit the participant to withhold its participation; and
              3.  The participation was to be funded by close of business of
              the originating bank's next business day.
    (4)  The following loans or extensions of credit are not subject to the
lending limits of this section:
    (a)  The discount of bills of exchange drawn in good faith against actual
    existing values;
    (b)  The discount of bankers' acceptances of other banks;
    (c)  The discount of commercial or business paper actually owned by the
    person negotiating the same;
    (d)  The obligations of the United States or general obligations of any
    state or of any political subdivision thereof, or obligation issued under
    authority of the federal farm loan act;
    (e)  Loans made on warehouse receipts and bills of lading, when such
    warehouse receipts and bills of lading cover nonperishable commodities of
    the marketable value of at least one hundred twenty percent (120%) of the
    amount loaned thereon;
    (f)  Loans and extensions of credit to the extent secured or covered by
    guaranties, or by commitments or agreements to take over or to purchase,
    made by any Federal Reserve Bank or by the United States or any
    department, bureau, board, commission, or establishment of the United
    States, including any corporation wholly owned directly or indirectly by
    the United States; or
    (g)  Loans, including portions thereof, secured by a segregated deposit
    account in the lending bank, provided a security interest in the deposit
    has been perfected under applicable law.
    (5)  Combination. Loans or extensions of credit to one (1) borrower shall
be attributed to another person and each person shall be deemed a borrower
when proceeds of a loan or extension of credit are to be used for the direct
benefit of the other person, to the extent of the proceeds so used, or when a
common enterprise is deemed to exist between the persons.
    (a)  Direct benefit. The proceeds of a loan or extension of credit to a
    borrower shall be deemed to be used for the direct benefit of another
    person and shall be attributed to the other person when the proceeds, or
    assets purchased with the proceeds, are transferred to another person,
    other than in a bona fide arm's length transaction where the proceeds are
    used to acquire property, goods or services.
    (b)  Common enterprise. A common enterprise shall be deemed to exist and
    loans to separate borrowers shall be aggregated:
         (i)   When the expected source of repayment for each loan or
         extension of credit is the same for each borrower and neither
         borrower has another source of income from which the loan (together
         with the borrower's other obligations) may be fully repaid. An
         employer shall not be treated as a source of repayment under this
         paragraph because of wages and salaries paid to an employee unless
         the standards of paragraph (b)(ii) of this subsection are met;
         (ii)  When loans or extensions of credit are made:
              1.  To borrowers who are related directly or indirectly through
              common control, including where one (1) borrower is directly or
              indirectly controlled by another borrower; and
              2.  Substantial financial interdependence exists between or
              among the borrowers. Substantial financial interdependence is
              deemed to exist when fifty percent (50%) or more of one (1)
              borrower's gross receipts or gross expenditures (on an annual
              basis) are derived from transactions with the other borrower.
              Gross receipts and expenditures include gross revenues/expenses,
              intercompany loans, dividends, capital contributions, and
              similar receipts or payments;
         (iii) When separate persons borrow from a bank to acquire a business
         enterprise of which those borrowers will own more than fifty percent
         (50%) of the voting securities or voting interests, in which case a
         common enterprise is deemed to exist between the borrowers for
         purposes of combining the acquisition loans; or
         (iv)  When the director determines, based upon an evaluation of the
         facts and circumstances of particular transactions, that a common
         enterprise exists.
    (c)  Loans to a corporate group.
         (i)   Loans or extensions of credit by a bank to a corporate group
         may not exceed fifty percent (50%) of the bank's capital and surplus.
         A corporate group includes a person and all of its subsidiaries. For
         purposes of this paragraph, a corporation or a limited liability
         company is a subsidiary of a person if the person owns or
         beneficially owns directly or indirectly more than fifty percent
         (50%) of the voting securities or voting interests of the corporation
         or company.
         (ii)  Except as provided in paragraph (c)(i) of this subsection,
         loans or extensions of credit to a person and its subsidiary, or to
         different subsidiaries of a person, are not combined unless either
         the direct benefit or the common enterprise test is met.
    (d)  Loans to partnerships, joint ventures, and associations.
         (i)   Partnership loans. Loans or extensions of credit to a
         partnership, joint venture or association are deemed to be loans or
         extensions of credit to each member of the partnership, joint venture
         or association. This rule does not apply to limited partners in
         limited partnerships or to members of joint ventures or associations
         if the partners or members, by the terms of the partnership or
         membership agreement, are not held generally liable for the debts or
         actions of the partnership, joint venture or association, and those
         provisions are valid under applicable law.
         (ii)  Loans to partners.
              1.  Loans or extensions of credit to members of a partnership,
              joint venture or association are not attributed to the
              partnership, joint venture or association unless either the
              direct benefit or the common enterprise test is met. Both the
              direct benefit and common enterprise tests are met between a
              member of a partnership, joint venture or association and such
              partnership, joint venture or association, when loans or
              extensions of credit are made to the member to purchase an
              interest in the partnership, joint venture or association.
              2.  Loans or extensions of credit to members of a partnership,
              joint venture or association are not attributed to other members
              of the partnership, joint venture or association unless either
              the direct benefit or common enterprise test is met.
    (e)  Loans to foreign governments and their agencies and
    instrumentalities.
         (i)   Aggregation. Loans and extensions of credit to foreign
         governments and their agencies and instrumentalities shall be
         aggregated with one another only if the loans or extensions of credit
         fail to meet either the means test or the purpose test at the time
         the loan or extension of credit is made.
              1.  The means test is satisfied if the borrower has resources or
              revenue of its own sufficient to service its debt obligations.
              If the government's support (excluding guarantees by a central
              government of the borrower's debt) exceeds the borrower's annual
              revenues from other sources, it shall be presumed that the means
              test has not been satisfied.
              2.  The purpose test is satisfied if the purpose of the loan or
              extension of credit is consistent with the purposes of the
              borrower's general business.
         (ii)  Documentation. In order to show that the means and purpose
         tests have been satisfied, a bank must, at a minimum, retain in its
         files the following items:
              1.  A statement (accompanied by supporting documentation)
              describing the legal status and the degree of financial and
              operational autonomy of the borrowing entity;
              2.  Financial statements for the borrowing entity for a minimum
              of three (3) years prior to the date the loan or extension of
              credit was made or for each year that the borrowing entity has
              been in existence, if less than three (3) years;
              3.  Financial statements for each year the loan or extension of
              credit is outstanding;
              4.  The bank's assessment of the borrower's means of servicing
              the loan or extension of credit, including specific reasons in
              support of that assessment. The assessment shall include an
              analysis of the borrower's financial history, its present and
              projected economic and financial performance, and the
              significance of any financial support provided to the borrower
              by third parties, including the borrower's central government;
              and
              5.  A loan agreement or other written statement from the
              borrower that clearly describes the purpose of the loan or
              extension of credit. The written representation will ordinarily
              constitute sufficient evidence that the purpose test has been
              satisfied. However, when, at the time the funds are disbursed,
              the bank knows or has reason to know of other information
              suggesting that the borrower will use the proceeds in a manner
              inconsistent with the written representation, it may not,
              without further inquiry, accept the representation.
    (6)  Calculation. For purposes of determining compliance with this
section, a bank shall determine its lending limit as of the last day of the
preceding calendar quarter. A bank's lending limit calculated in accordance
with this section shall be effective on the date that the limit is to be
calculated. If the director determines for safety and soundness reasons that a
bank should calculate its lending limit more frequently than required by this
subsection, the director may provide written notice to the bank directing the
bank to calculate its lending limit at a more frequent interval, and the bank
shall thereafter calculate its lending limit at that interval until further
notice from the director.
    (7)  Nonconforming loans. A loan, within a bank's legal lending limit when
made, shall not be deemed a violation but shall be treated as nonconforming if
the loan is no longer in conformity with the bank's lending limit because:
    (a)  The bank's capital has declined, borrowers have subsequently merged
    or formed a common enterprise, lenders have merged, or the lending limit
    or capital rules have changed. A bank must use reasonable efforts to bring
    a loan that is nonconforming under this subsection into conformity with
    the bank's lending limit unless to do so would be inconsistent with safe
    and sound banking practices.
    (b)  Collateral securing the loan to satisfy the requirements of a lending
    limit exception has declined in value. A bank must bring a loan that is
    nonconforming under this subsection into conformity with the bank's
    lending limit within thirty (30) calendar days, except when judicial
    proceedings, regulatory actions or other extraordinary circumstances
    beyond the bank's control prevent the bank from taking action.
    (8)  When in the judgment of the director the loans and extensions of
credit to any person, or the combined loans and extensions of credit to any
corporation and one (1) or more of its stockholders are excessive, he shall
require the reduction thereof to such limits and within such time as he shall
prescribe.
    Provided, further, that the director may compel the reduction of any loan
which shall in his judgment appear excessive or dangerous.