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Legislation would prevent banks from concentrating loans with corporate groups


Iowa banking superintendent Jim Schipper has introduced legislation that would prevent state-chartered banks from lending to multiple corporate entities controlled by an individual or common group of investors.

    The legislation was first proposed in 2006 by Schipper’s predecessor, Tom Gronstal. It was not introduced at that time because of opposition from the state banking industry, Gronstal said during an interview a few days before he stepped down as banking superintendent.

    Schipper took the reins of the Iowa Division of Banking on Jan. 17, having been tapped by Gov. Terry Branstad to replace Gronstal.

    Gronstal and Schipper are old acquaintances, and Schipper supports the bill, which was being drafted when he took office.

    The legislation also would make it easier for banks to extend or modify loans under certain situations, making it a possible boon for banks whose loans are near their regulated lending limits.
    “Probably less than a dozen banks would be affected by the legislation, but for those who are affected, it’s a big deal,” Gronstal said. “We don’t really want to stand in the way of a bank doing what it needs to do to continue to take care of the needs of its good customers.”

    In a letter to the General Assembly, Schipper said the legislation allows the Division of Banking to group related parties together for the purposes of determining a bank’s lending limit to corporate groups.

    The legislation would allow a bank to lend up to 50 percent of its aggregate capital to a corporate group, the same level that has been established for national banks.

    In addition, banks could renew or restructure existing loans, but could not provide new funds, to a corporate group without violating the lending limit restriction. Currently, a loan can not be modified if the renewal or extension of credit would exceed a bank’s lending limit because of reduced capital levels.
    The law would eliminate a situation in which individual loans were made to separate corporate entities, such as limited liability companies. Separately, each loan would not exceed a bank’s lending limit, but when considered together they would run afoul of regulators.

    Gronstal said that in 2006, when the changes were first proposed, it was apparent that lenders were approving loans to developers who had controlling interests in multiple limited liability companies. When former Regency principal James Myers filed for bankruptcy in 2009, he listed interests in more than 200 limited liability companies, some of which had defaulted on loans that contributed to the more than $175 million in liabilities claimed in the filing.

    Under the proposed law, a bank could not lend more than 15 percent of its capital to an individual entity in a corporate group.

    “I think the events of the past few years have shown that we probably should have been a little more strict about limiting the concentrations with various groups,” Gronstal said.

    Schipper noted that Iowa banks have emerged from the recession in better financial condition than other states. However, several have watched their capital levels decline as they have shifted funds into reserves to cover loan losses.

    That shift in capital, stricter regulatory oversight and tighter underwriting standards have made it difficult for some banks to make loans or extend loans for existing business customers.

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