April 21, 1995
Dear [ ]:
In a telephone conversation with you on April 12, 1995, I discussed with you the question of whether loans made to separate corporations are required to be aggregated for lending limit purposes if they are all guaranteed by the same individual. In a letter to me dated April 13, 1995, you seek confirmation of the fact that "it is not necessary for [a] bank to aggregate loans to separate corporations which are guaranteed by the same individual for the purpose of determining the legal lending in compliance with Section 103". Although this may be the case in most situations, it appears that I must clarify the Banking Department's position on this matter.
The mere fact that an individual guarantees a loan to one or more corporations (presumably ones in which he/she has a controlling interest) is not dispositive of the question of whether or not the loan or loans must be aggregated for lending limit purposes. Aggregation would only be required if the loan or loans were considered to be a loan or loans to the individual who has guaranteed the loans. The fact of the guarantee raises the question of the sufficiency of the corporation's capitalization with regard to the credit being extended. In the context of the guarantee, the issue that must be resolved is whether the bank is making the loan in primary reliance on the guarantor.
Whether or not a bank is primarily relying on the credit and income of the guarantor is a question of fact in each case. In some cases a review of the lending agreement will provide the answer to the question. For example, if the lending agreement contains numerous provisions that are designed to ensure that the guarantor maintains the ability to repay the loan (e.g. maintenance by guarantor of certain level of net worth and prohibitions against guarantor borrowing additional funds), the Banking Department would conclude that the bank was relying on the credit and income of the guarantor and not that of the corporation in making the loan. Consequently the Department would opine that the loan must be viewed as being made to the guarantor for lending limit purposes.
The Banking Department believes that a bank's counsel is in the best position to determine whether a borrower's capitalization is sufficient to support an extension of credit and whether, given the terms of the lending agreement, the bank is primarily relying on the borrower for repayment of the loan.
I trust that this letter is of assistance to you.
Very truly yours,