The OCC has issued a new publication titled Asset-Based Lending, which the OCC added to the Comptroller’s Handbook, which provides guidance on asset-based lending to all national banks and federal savings associations. The guidance released on March 27 discusses the OCC’s risk management and underwriting expectations for asset-based lending activities, provides examples of credit risk-rating assessments of asset-based lending facilities, and replaces the asset-based lending guidance for federal savings associations previously found in Section 214, “Other Commercial Lending,” of the OTS Examination Handbook. According to the guidance, the OCC considers asset-based lending to be a specialized form of credit that provides a fully collateralized loan to a commercial borrower based on assets pledged as collateral and structured to provide a flexible source of working capital. The guidance distinguishes asset-based lending from operating cash flow lending on the basis of the reliance on funds provided by the conversion of working capital assets to cash to service the debt in asset-based lending. According to the guidance, credit risk is the most significant risk associated with asset-based lending because characteristics of higher default risk, such as high leverage, erratic cash flows, limited working capital, and frequently changing collateral pools, are common with asset-based credit facility borrowers. The OCC expects each bank engaged in asset-based lending activities to identify, measure, monitor and control risk by implementing an effective risk management system appropriate for the size and complexity of the bank’s operations. OCC examiners’ assessments of a bank’s risk management systems will consider the adequacy of the bank’s policies, processes, personnel and control systems.
Nutter Notes: According to the OCC’s guidance, strong controls and careful monitoring are essential features of an asset-based lending program. OCC examiners expect asset-based lending policies to be written and subject to initial and periodic review and approval by a bank’s board of directors. The OCC expects such policies to address, among other things, loan approval requirements that mandate sufficient senior-level oversight, staff responsibilities for establishing and maintaining sound underwriting standards, and standards for liquidity and collateral monitoring, advance rates, field audits and loan covenants. There are no aggregate limitations on asset-based lending for national banks, provided that the volume and nature of the lending do not pose unwarranted risk to the bank’s financial condition. Certain limitations on asset-based lending apply to federal savings associations under the Home Owners’ Loan Act (“HOLA”), and Section 160.30 of the OCC’s regulations, which implements HOLA’s lending and investment limits. Asset-based loans typically would be classified as commercial loans under HOLA, which cannot exceed 20% of total assets of a federal savings association, provided that amounts above 10% of total assets are used only for small business loans. However, a federal savings association may engage in asset-based lending in reliance on other authority, depending on the circumstances. For example, asset-based loans may be aggregated with other non-residential real property loans, which cannot exceed 400% of total capital. Furthermore, any portion of asset-based loans by a federal savings association secured by non-residential real property that are fully insured or guaranteed by the Economic Development Administration, the Farmers Home Administration, or the Small Business Administration are not subject to lending limits under HOLA.