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4000 - Advisory Opinions

Undisbursed Loan Proceeds of a Multiple Advance Loan: Part 325--Capital Adequacy


March 27, 1990

Roger A. Hood, Assistant General Counsel

In your recent letter addressed to Roger A. Hood, Assistant General Counsel, you raise a question concerning the capital requirements applicable to your client, an FDIC-insured * * * thrift and loan association ("Institution") which makes multiple disbursement construction loans. You ask that the FDIC concur in your opinion that undisbursed loan proceeds should not be included in the Institution's assets for purposes of determining capital adequacy under 12 CFR Part 325 (1989) ("Part 325"). As an alternative, you ask us to clarify that undisbursed loan proceeds are not assets for purposes of bank reporting, even though interest is charged on the undisbursed amounts.

You observe that loan commitments (including undisbursed loan proceeds of a multiple advance loan) are treated as off-balance sheet items and are not reported as assets in the Federal Financial Institutions Examination Council's Instructions for the Consolidated Report of Condition. Schedule RC-C Loans and Lease Financing Receivables, General Instructions (FFIEC 031). You further note that loan commitments are only partially converted to "weighted risk assets" for the purpose of calculating our proposed risk-based capital ratio. 53 FR 8554 (March 15, 1988).

You express concern that the FFIEC Call Report Instructions appear to provide that a loan commitment is treated as a fully disbursed loan for capital adequacy purposes if the Institution charges interest on undisbursed as well as disbursed loan funds. You observe that the Institution is required to report the undisbursed loan funds as a deposit from the borrower. You feel that this categorization requires the Institution to treat the loan as if it were fully disbursed to the borrower and deposited with the Institution solely because the bank collects interest on the full amount of the loan, rather than the disbursed amount.

You feel that this treatment of undisbursed loan proceeds is inconsistent with the basic idea that the capital adequacy rules are designed to deal with risk, a danger that is not presented by the payment of interest on undisbursed funds. You note as well that loan commitments are not treated the same as loans under the Federal bankruptcy laws.

The General Instructions to our Schedule RC-C--Loans and Lease Financing Receivables (FFIEC 031) exclude from the asset classifications for loans and lease receivables undisbursed loan funds, sometimes referred to as incomplete loans or loans in process, unless the borrower is liable for and pays the interest thereon. If interest is being paid by the borrower on the undisbursed proceeds, the amounts of such undisbursed funds should be included in both loans and deposits.

The above language makes it clear that undisbursed funds for which an Institution is charging interest must be included in the Institution's assets as a loan and in its liabilities as a deposit. Part 325 of our regulations is based upon the reporting requirements of our Call Reports. While it may modify these fundamental standards, it only does so by an express provision in Part 325 itself. The part provides no exception for undisbursed funds upon which an Institution is charging interest. Thus, for Call Report and Part 325 purposes, this sort of undisbursed fund should be reported as both a loan and a deposit.

Even assuming that your position with respect to the federal bankruptcy laws were to apply to undispersed funds for which interest is charged, these laws do not affect receiverships of institutions which are insured by the FDIC.

The reporting requirements which you have brought into question existed long before Part 325 was issued. We know of no reason why Part 325 would silently modify these longstanding principles and standards for bank regulatory reporting. Since 1978 Call Report requirements have been established in a uniform fashion by an inter-agency committee consisting of the Comptroller of the Currency, the Chairman of the FDIC, a Governor of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, and the Chairman of the National Credit Union Administration Board. 12 U.S.C. § 3303, 12 CFR Part 1101 (1989).

The provision in question has not in the past been cited as a hardship by the other insured banks throughout the country. It does not appear to impose a hardship upon any institution since its application can be simply avoided by the charging of interest upon outstanding loan balances, rather than upon undispersed funds as well.

Your request would involve the modification of longstanding financial reporting standards and require action by inter-agency committee. As discussed above, we see no compelling reason to modify longstanding and uniform reporting requirements. Therefore, we do not concur in your opinion set forth above, nor can we provide you with the clarification requested. We wish to also note that if your client is not subject to the primary supervision of the FDIC, the statements made here would not apply to your client.

If you have any further questions, please write or call Mr. Gerald Gervino on my staff at (202) 898-3723.

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