The government issued an alert Wednesday to institutions that originate loans and plan to sell off the entire credit.
Guidelines from the four banking and thrift agencies are aimed at the handful of large commercial banks that engage in 100% loan participations, short-term loans that the originating bank retains no recourse and no further interest in.
The regulators explained how these banks can avoid the inadvertent classification of 100% loan participations as securities, which would trigger a host of regulatory requirements.
"This is helpful guidance, but is not going to have a big effect on the practices of most banks," said Paul M. Dorfman, executive vice president of BankAmerica Corp. Most banks retain some portion of loans they sell off, added Mr. Dorfman, the incoming chairman of Robert Morris Associates, the trade group for bank loan and credit officers.
These loan participations could fall under securities rules unless banks meet four specific criteria, the guidelines said.
First, banks' written policies should clearly state that loan participants are not investing in a business enterprise. Second, banks should sell these participations only to investors with experience in this area.
Third, only loans to borrowers that meet the originating institution's credit requirements should be included in 100% loan participations.
Finally, the bank should allow potential buyers to review the borrower's credit information so that they can make informed decisions.
If a participation is considered a security, Mr. Dorfman said, banks face a number of additional requirements. "If a participation turns out to be a security, than you need to comply with the provisions of various securities rules, and that poses some additional duties and burdens," Mr. Dorfman said.
The guidelines were prompted by a 1992 court case, Banco Espanol de Credito v. Security Pacific National Bank. A federal court found that the 100% loan participations in question were not securities, and therefore were not subject to securities rules.
The court warned, however, that 100% loan participations that depart from the characteristics of those in the case could be defined as securities.
