4000 - Advisory Opinions
Reporting of Unused Portions of Approved Lines of Credit
December 8, 1994
Andrea J. Winkler, Counsel
This responds to your letter to Mark Mellon dated October 28, 1994, which requests guidance regarding the reporting of unused portions of approved lines of credit.
As you were previously advised by our letter dated August 30, 1994, credit is considered to be extended when the bank enters a binding commitment to extend credit and the borrower becomes obligated to the bank. Where a line of credit is approved, but the bank retains a right of refusal as to draws on that line, credit may be considered to be extended only at the time of the draw, if, in fact, that is when the borrower becomes obligated. Any determination regarding the time the obligation arises must be based upon the facts of the particular case.
Your letter describes the following as the procedures in place at the bank. The bank's board of directors approves a line of credit, a note is issued and signed by the borrower for the full amount of the approved line ($500,000), and the full amount is posted to the bank's outstanding loans. The following day, a nonmonetary credit is posted to the borrower's loan balance to reduce the balance to the amount of the borrower's initial draw ($100,000), and a proceeds check is issued in the amount of the draw. All subsequent draws are subject to the approval of the lending officer before a proceeds check is issued.
Your letter does not indicate the precise terms of the bank's approval of the line of credit or of subsequent draws. If, for example, the bank has committed to extend credit in draws for a stated period (e.g., 90 days) subject only to the approving officer confirming that there has been no material adverse change in the borrower's circumstances, the bank is obligated to the full amount of the credit line, and must report the full unused amount ($400,000) on Call Report Schedules RC-L1 (Unused commitments) and the full amount on RC-M--Memoranda la (Extensions of credit to executive officers, directors, etc.). If, however, the approving officer must make a fully-informed credit decision before a draw is approved, such as is made at the time the line of credit was approved (e.g., a credit check is made of the borrower and a new credit decision is made regarding the making of each draw), then the unused portion of the line of credit ($400,000) need not be reported by the bank on those schedules.