Posted on 08/19/2011 at 12:46 PM by Howard Hagen
Below is a very brief summary of changes in the 2011 legislative session that could affect Iowa banks: Loans to Borrowing Groups Section 524.904 of the Code was amended to expand the universe of potential groups for purposes of loan limits. The concept of a corporate group for loan limit purposes has been replaced with a more expansive borrowing group concept. The Act includes a comprehensive definition of what constitutes a borrowing group." With respect to borrowing groups, banks must document a borrowing entitys current ownership, the persons who have voting rights with respect to the entity, the names of the entitys senior management, and the entitys means of servicing the loanincluding the specific reasons that support such assessment. In addition, loan files must contain financials, present and projected economic and financial performance, and the significance of financial support from borrowing group members and third parties. The Superintendent of Banking is given the authority to approve a loan limit of up to 50% of aggregate capital if all the loans to any one borrower with a borrowing group otherwise meet the requirements of the 25% and 35% loan limit provisions, and the financial strength of any one group member is not relied upon as a basis for loans to any other group member. With regard to renewals or loan restructurings, if a bank has made reasonable efforts to bring a loan into compliance, consistent with safe and sound banking practices, the loan will be exempted from the lending limits. However, such exemption will not be available if new funds are advanced, a new borrower replaces the original borrower, or the Superintendent concludes that the renewal or restructuring was done to evade lending limits. Loan and Deposit Production Offices The provision stating that a bank could not operate a loan production or deposit production office in the state unless it either had prior approval from the Superintendent or had operated the office before July 1, 2006, was eliminated. Recordkeeping The mandatory recordkeeping requirement for banks was reduced from 11 years to 7 years. The statute of limitations for claims based on written contracts or bank record entries was reduced from 10 years to 6 years. Summary The major change this past year was the change to loan limits vis-à-vis borrowing groups. These new limits could present new risks to lenders and may necessitate even greater scrutiny of borrowers and added due diligence. Such efforts should be undertaken to prevent inadvertent violations of the lending limit rules as a result of certain loans being combined on the basis of the borrowers constituting a borrower group under the expanded definitions. The possibility of increasing the loan limit to 50% of capital with the approval of the Superintendent is a welcome addition for Iowa community banks. As with all new legislation, the Iowa Division of Banking may be consulted regarding specific questions or issues; in this case, particularly regarding the new borrowing group language.