The purpose of this bulletin is to clarify the Bureau's position on combining related credits pursuant to Section 196(1) of the Banking Code.

Section 196(1) states, in part:

"...If the Commissioner determines at any time that the interests of a group of more than 1 person, copartnership, association or corporation are so interrelated that they should be considered as a unit for the purpose for which credit was extended, the total indebtedness of that group acquired at any time shall be combined and deemed indebtedness acquired from 1 customer in applying the limitations of Sections 196 to 198. A bank shall not be deemed to have violated Sections 196 to 198 solely by reason of the fact that the indebtedness of a group then held exceeds the limitations of Sections 196 to 198 at the time of a determination by the Commissioner that the indebtedness of that group shall be combined but if required by the Commissioner, the bank shall dispose of indebtedness of the group in the amount in excess of the limitations of Sections 196 to 198 within such reasonable time as shall be fixed by the Commissioner."

General Characteristics of Interrelated Indebtedness

Determination of interrelated debt is, in each case, unique to the nature of the credit relationship, the structure of the entities, the collateral, and the cash flow supporting the borrowing entities. Credits considered for unitization are identified when portions of the debt appears to be inappropriate and/or excessive on the basis of: (1) common use of loan proceeds, (2) common sources of repayment or (3) reliance by more than one obligor on common collateral. Analysis of the unit determinations made in recent years reflects concerns with the following areas. This listing identifies general criteria and should not be considered to be all-inclusive or restrictive in nature:

Excessive debt to a limited function subsidiary of a parent corporation or affiliate which has existing debt to the bank.

Advances to an individual and to his/her personally owned corporation which in the aggregate exceed the bank's legal lending limitation.

Loans to non-related persons or entities where singular use and/or repayment of funds is identified.

Advances to non-related persons/entities in support of existing workout credits which approach the bank's legal lending limitations.

Division examiners consider each potential unit grouping on an individual case basis. Following routine discussion with management, a potential unit grouping is listed in the examination report as Assets Listed for Special Mention or, if applicable, as a Concentration of Credit. The grouping is not cited as a violation of Section 196(1) of the Banking Code of 1969, in the report at that time.

The grouping of credits is analyzed by the Review Section of the Bank and Trust Division when the report is forwarded to the Lansing Office. If the Review Section determines that the group of credits should be combined, a staff memorandum is prepared for the express purpose of requesting formal unit determination by the Commissioner. If the Commissioner makes this determination, the bank is allowed 90 days from the date of formal notification to reduce the combined credit to an amount within the bank's legal lending limitation. Failure to reduce the unit borrowing to the legal lending limit within the 90 day period constitutes a violation of Section 196(1) of the Banking Code of 1969. Directors of record are subject to potential liability for losses relating to that amount exceeding bank's 20% legal lending limitation. Should any loss be realized by the bank, the directors will be held liable for the identified overline amount. If the directors are unwilling to accept this liability the Commissioner is empowered under Section 35 of the Banking Code of 1969 to initiate an action against the bank and its current directorate stipulating that they seek indemnification for overline losses from existing or former directors.

Signed:	Eugene W. Kuthy, Commissioner
	Gifford Knudsen, Director, Bank & Trust Division
Dated:	June 12, 1984