02-029 C.M.R. ch. 128, § 3 - DEFINITIONS

1. "Borrower" means a person who is named as a borrower or debtor in a loan or extension of credit; a person to whom a financial institution has credit exposure arising from a derivative transaction entered by the financial institution; or any other person, including a drawer, endorser, or guarantor, who is deemed to be a borrower under the "direct benefit" or the "common enterprise" tests set forth in section 6 of this regulation.
2. "Contractual commitment to advance funds":
A. Includes a financial institution's obligation to:
(1) Make payment (directly or indirectly) to a third person contingent upon default by a customer of the financial institution in performing an obligation and to make such payment in keeping with the agreed upon terms of the customer's contract with the third person, or to make payments upon some other stated condition;
(2) Guarantee or act as surety for the benefit of a person;
(3) Advance funds under a qualifying commitment to lend, that is, a legally binding written commitment to lend that, when combined with all other outstanding loans and qualifying commitments to a borrower, is within the financial institution's lending limit when entered into, and has not be disqualified; and
(4) Advance funds under a standby letter of credit as defined in subsection 3(13) of this regulation, a put, or other similar arrangement.
B. The term does not include commercial letters of credit and similar instruments where the issuing financial institution expects the beneficiary to draw on the issuer, that do not guarantee payment, and that do not provide for payment in the event of a default by a third party.
3. "Control" is presumed to exist when a person directly or indirectly, or acting through or together with one or more persons:
A. Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of another person;
B. Controls, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person; or
C. Has the power to exercise a controlling influence over the management or policies of another person.
4. "Credit derivative" means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider).
5. "Derivative transaction" includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
6. "Eligible credit derivative" means a single-name credit derivative or a standard, non-tranched index credit derivative provided that:
A. The derivative contract meets the requirements of an eligible guarantee, as defined in subsection 3(7) of this regulation and has been confirmed by the protection purchaser and the protection provider;
B. Any assignment of the derivative contract has been confirmed by all relevant parties;
C. If the credit derivative is a credit default swap, the derivative contract includes the following credit events:
(1) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(2) Bankruptcy, insolvency, or inability of the obligor on the reference exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due and similar events;
D. The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract;
E. If the derivative contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss with respect to the derivative reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
F. If the derivative contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provides that any required consent to transfer may not be unreasonably withheld; and
G. If the credit derivative is a credit default swap, the derivative contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.
7. "Eligible guarantee" means a guarantee that:
A. Is written and unconditional;
B. Covers all or a pro rata portion of all contractual payments of the obligor on the reference exposure;
C. Gives the beneficiary a direct claim against the protection provider;
D. Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
E. Is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;
F. Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;
G. Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; and
H. Is not provided by an affiliate of the financial institution, unless the affiliate is an insured depository institution, bank, securities broker or dealer, or insurance company that:
(1) Does not control the financial institution; and
(2) Is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be).
8. "Eligible protection provider" means:
A. A sovereign entity (a central government, including the U.S. government; an agency; department; ministry; or central bank);
B. The Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or a multilateral development bank;
C. A Federal Home Loan Bank;
D. The Federal Agricultural Mortgage Corporation;
E. A depository institution, as defined in section 3 of the Federal Deposit Insurance Act, 12 U.S.C. §1813(c);
F. A bank holding company, as defined in section 2 of the Bank Holding Company Act, as amended, 12 U.S.C. §1841;
G. A savings and loan holding company, as defined in section 10 of the Home Owners' Loan Act, 12 U.S.C. §1467a;
H. A securities broker or dealer registered with the SEC under the Securities Exchange Act of 1934, 15 U.S.C. §78o et seq.;
I. An insurance company that is subject to the supervision of a State insurance regulator;
J. A foreign banking organization;
K. A non-U.S.-based securities firm or a non-U.S.-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies; and
L. A qualifying central counterparty, for example, a clearing house that:
(1) Facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts;
(2) Requires all participants in its arrangements to be fully collateralized on a daily basis; and
(3) The bank demonstrates to the satisfaction of the Bureau that it is in sound financial condition and is subject to effective oversight by a national supervisory authority.
9. "Financial institution" has the same meaning that is set forth in 9-B MRSA §131(17).
10. "Loans or extensions of credit" has the same meaning that is set forth in 9-B MRSA §439-A(1)(A)
A. "Loans or extensions of credit" include:
(1) Any credit exposure, as determined pursuant to section 8 of this regulation, arising from a derivative transaction;
(2) A contractual commitment to advance funds;
(3) An overdraft, whether or not prearranged, but not an intraday overdraft for which payment is received before the close of business of the financial institution that makes the funds available;
(4) The sale of Federal funds with a maturity of more than one business day, but not Federal funds with a maturity of one day or less or Federal funds sold under a continuing contract; and
(5) Loans or extensions of credit that have been charged off on the books of the financial institution in whole or in part, unless the loan or extension of credit:
(a) Is unenforceable by reason of discharge in bankruptcy;
(b) Is no longer legally enforceable because of expiration of the statute of limitations or a judicial decision; or
(c) Is no longer legally enforceable for other reasons, provided that the financial institution maintains sufficient records to demonstrate that the loan is unenforceable.
B. In addition to the exclusions from limitations found in 9-B MRSA §439-A(3), the following items do not constitute "loans or extensions of credit" for purposes of this regulation:
(1) Additional funds advanced for the benefit of a borrower by a financial institution for payment of taxes, insurance, utilities, security, and maintenance and operating expenses necessary to preserve the value of real property securing the loan, consistent with safe and sound banking practices, but only if the advance is for the protection of the financial institution's interest in the collateral, and provided that such amounts must be treated as an extension of credit if a new loan or extension of credit is made to the borrower;
(2) Accrued and discounted interest on an existing loan or extension of credit, including interest that has been capitalized from prior notes and interest that has been advanced under terms and conditions of a loan agreement;
(3) Financed sales of a financial institution's own assets, including Other Real Estate Owned, if the financing does not put the financial institution in a worse position than when the financial institution held title to the assets;
(4) A renewal or restructuring of a loan as a new ''loan or extension of credit,'' following the exercise by a financial institution of reasonable efforts, consistent with safe and sound banking practices, to bring the loan into conformance with the lending limit, unless new funds are advanced by the financial institution to the borrower, or a new borrower replaces the original borrower, or unless the Bureau determines that a renewal or restructuring was undertaken as a means to evade the financial institution's lending limit;
(5) Amounts paid against uncollected funds in the normal process of collection;
(a) That portion of a loan or extension of credit sold as a participation by a financial institution on a nonrecourse basis, provided that the participation results in a pro rata sharing of credit risk proportionate to the respective interests of the originating and participating lenders. Where a participation agreement provides that repayment must be applied first to the portions sold, a pro rata sharing will be deemed to exist only if the agreement also provides that, in the event of a default or comparable event defined in the agreement, participants must share in all subsequent repayments and collections in proportion to their percentage participation at the time of the occurrence of the event.
(b) When an originating financial institution funds the entire loan, it must receive funding from the participants before the close of business of its next business day. If the participating portions are not received within that period, then the portions funded will be treated as a loan by the originating financial institution to the borrower. If the portions so attributed to the borrower exceed the originating financial institution's lending limit, the loan may be treated as nonconforming subject to section 7 of this regulation, rather than a violation, if:
(i) The originating financial institution had a valid and unconditional participation agreement with a participant or participants that was sufficient to reduce the loan to within the originating financial institution's lending limit;
(II) The participant reconfirmed its participation and the originating financial institution had no knowledge of any information that would permit the participant to withhold its participation; and
(ii) The participation was to be funded by close of business of the originating financial institution's next business day; and
(7) Intraday credit exposures arising from a derivative transaction.
11. "Perpetual preferred stock" means preferred stock that does not have a stated maturity date and cannot be redeemed at the option of the holder.
12. "Person" has the meaning as defined in 9-B MRSA §131(30).
13. "Standby letter of credit" is any letter of credit, or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuer:
A. To repay money borrowed by or advanced to or for the account of the account party;
B. To make payment on account of any indebtedness undertaken by the account party; or
C. To make payment on account of any default by the account party in the performance of an obligation.
14. "Subsidiary" has the meaning as defined in 9-B MRSA §131(39-A). A "service corporation," as defined in 9-B MRSA §131(37), is a "subsidiary" for the purposes of this regulation.
15. "Total capital and surplus" means:
A. A financial institution's Tier 1 and Tier 2 capital calculated under the risk-based capital standards applicable to the institution as reported in the financial institution's Consolidated Reports of Condition and Income (Call Report); plus
B. The balance of a financial institution's allowance for loan and lease losses not included in the financial institution's Tier 2 capital, for purposes of the calculation of risk-based capital described in paragraph (A) of this subsection, as reported in the financial institution's Call Report.


02-029 C.M.R. ch. 128, § 3

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