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Home > Library > Accounting > GAAP Call Report Lending Limit Considerations
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GAAP, Call Report and Lending Limit Considerations for Loan Participations

5/12/2011

By Daniel J. Dibella, CPA

Most banks are structuring loan participations to qualify as participating interests. This ensures that incoming cash flows are split pro-rata among participants, and that no call option, put option or repurchase requirements are present in participation agreements – in order to achieve sale treatment for financial and regulatory reporting purposes. However, there may be instances in which a loan participation is not structured to achieve sale treatment. While GAAP, Call Report and legal lending limit considerations are straightforward for loan participation transfers that qualify as a participating interest, they are less so for agreements that do not qualify. The table below shows a comparison of GAAP treatment, call report treatment and lending limit considerations for loan participations.

Transfer Qualifies as a Participating Interest
  GAAP Treatment  Call Report Treatment   Lending Limit Considerations 
Selling Bank  The amount "sold" reduces the balance of loans.  The amount "sold" reduces the balance of loans and, correspondingly, reduces risk-weighted assets. Loan amount is the gross loan amount, net of the amount "sold."
Purchasing Bank  The amount “purchased” increases the balance of loans.  The amount “purchased” increases the balance of loans and, correspondingly, increases risk-weighted assets. Loan Amount is the amount "purchased."

 


  

Transfer Does Not Qualify as a Participating Interest
  GAAP Treatment  Call Report Treatment   Lending Limit Considerations 
Selling Bank  The transfer is a secured borrowing – the gross loan amount is reported as a loan and the amount “sold” is reported as a liability. (In essence, the selling bank is borrowing from the purchasing bank using a loan as collateral)   The transfer is a secured borrowing – the gross loan amount is reported as a loan and the amount “sold” is reported as a liability with a pledge of collateral. Risk-weighted assets are not reduced by the amount “sold.” Also, the gross loan amount is expected to be included in the calculations of allowance for loan loss adequacy. Since the “sold” portion is not deemed a sale for GAAP and Call Report purposes, could the gross loan amount exceed the selling bank’s legal lending limit? It is our understanding that the OCC and various states will use the net loan amount instead of the gross loan amount in determining the legal lending limit as long as cash flows and rights in the event of default are pro-rata (in essence, disregarding the factors that preclude participating interest treatment except for pro-rata cash flows and rights in the event of default). However, not all states have issued guidance, and guidance may vary from state to state. Banks should contact their regulators if they are unsure as to whether a loan will be within legal lending limits if it does not qualify as a participating interest. 
Purchasing Bank  The amount “purchased” is a loan, but is deemed to be a collateralized loan to the selling bank rather than a purchase of an interest in an individual loan.    The amount “purchased” is a loan, but is deemed to be a collateralized loan to the selling bank rather than a purchase of an interest in an individual loan. However, for slotting purposes for schedule RC-C and RC-R, the “purchased” amount should be classified as appropriate to the underlying loan collateral (no different than as if the “purchase” qualified as a participating interest). Since the “purchased” loan is a loan to the selling bank for GAAP and Call Report purposes, and not a purchase of an interest in an individual loan, is a bank limited in the amount of aggregate purchases from any single institution? It is logical that legal lending limit considerations for purchasing banks should be symmetrical with those of selling banks (as discussed above); however, not all states have issued guidance and guidance may vary from state to state. Banks should contact their regulators if they are unsure as to whether aggregate loan purchases from any single institution will be within legal lending limits if they do not qualify as a participating interests.