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On July 1, 2014, a number of changes to Florida banking laws went into effect. Despite the Florida legislature’s stated desire to decrease regulation on businesses, a new law serves to greatly increase regulation on community banks with respect to loans-to-one-borrower limits.

Specifically, the new law redefines the term “related interests.” Loans to “related interests” are counted with each other toward a bank’s loan-to-one-borrower limit. Although the new law is substantially similar to current Office of the Comptroller of the Currency regulations applicable to national banks, the change in the definition is noteworthy for two reasons.

First, it removes from the definition a person’s siblings and parents, as well as people (other than dependents) who reside in the person’s household. It also removes a person’s partner from the definition, which means that unmarried cohabitants do not necessarily count as one borrower, while a married couple still does.

Second, it requires, in certain circumstances, that parties engaged in a “common business enterprise” be counted as the same borrower. A “common business enterprise” exists and will be counted as the same borrower in three circumstances:

  1. Where the borrowers’ expected source of repayment is the same and no borrower has another income source sufficient to repay all of that borrower’s obligations. However, wages from an employer will not count as the same source of repayment, unless the borrowers are related through common control (including where one controls the other) and there is significant financial interdependence between them (where 50% of one borrower’s annual gross receipts or expenditures are from transaction with another borrower).
  2. Loans to borrowers for the purpose of acquiring more than 50% of a business.
  3. If the Office of Financial Regulation (OFR) determines that a common enterprise exists.

The first circumstance is vague and difficult to understand or apply. More remarkably, the third circumstance allows the OFR to interpose its judgment after loans have been made.

These changes could greatly increase a bank’s risk that it will inadvertently exceed its loans-to-one-borrower limit or have the OFR make an after-the-fact determination that the bank did so.

Given the difficulty in dealing with overline loans after they have closed, this statutory change seems patently unfair to banks.

To best avoid having the OFR find an inadvertent violation or make a negative after-the-fact determination, a bank should consider engaging in a thorough factual and legal analysis of any loans to borrowers who may be deemed to be part of a “common business enterprise.”