SECTION 12.10. Nonconforming Loans

(a) A loan or extension of credit, within a bank's legal lending limit when made, will not be considered a violation of the applicable lending limit but will be cited as nonconforming if the loan no longer complies with the bank's legal lending limit because:

(1) the bank's Tier 1 capital has declined;

(2) borrowers have merged or otherwise become affiliated in such a way as to invoke aggregation under §12.9 of this title (relating to Aggregation and Attribution);

(3) the bank has merged with another depository institution or the bank has purchased all or substantially all of the assets of a failed depository institution from the Federal Deposit Insurance Corporation as receiver of such institution on or shortly after the date of its closing;

(4) the lending limit or capital definitions or standards have changed after the date the loan or extension of credit was originated;

(5) in the case of a credit exposure arising from a transaction identified in §12.12(a) of this title (relating to Credit Exposure Arising from Derivative and Securities Financing Transactions) and measured by the model method specified in §12.12(b)(1)(A) or (c)(1)(A), the current exposure method specified in §12.12(b)(1)(C), or the Basel collateral haircut method specified in §12.12(c)(1)(C), an increase in the credit exposure subject to the lending limits of Finance Code, §34.201, or this subchapter after execution of the transaction; or

(6) collateral securing the loan or extension of credit to satisfy the requirements of a special lending limit or lending limit exception has declined in value.

(b) A bank must exercise reasonable efforts to bring a loan or extension of credit that is nonconforming as a result of circumstances described in subsection (a)(1) - (5) of this section into conformity with the legal lending limit, consistent with safe and sound banking practices. As a last resort, a bank may renew or restructure an existing, nonconforming loan or extension of credit as a new, nonconforming loan or extension of credit without violating the Finance Code or this subchapter, unless:

(1) additional funds are advanced by the bank to the borrower, except as permitted by §12.4(b) of this title (relating to Loan Commitments);

(2) the original borrower is replaced by a new borrower; or

(3) the banking commissioner determines that the renewal or restructuring of the loan or extension of credit is designed to evade the bank's lending limit.

(c) A bank must bring a loan or extension of credit that is nonconforming as a result of the circumstance described in subsection (a)(5) of this section into conformity with the legal lending limit on or before the 31st day after the nonconformity is discovered unless judicial proceedings, regulatory action, or other extraordinary circumstances beyond the bank's control prevent the bank from taking action.

Source Note: The provisions of this §12.10 adopted to be effective March 1, 1996, 21 TexReg 1383; amended to be effective September 6, 2007, 32 TexReg 5655; amended to be effective May 10, 2012, 37 TexReg 3395; amended to be effective January 3, 2013, 37 TexReg 10195; amended to be effective November 7, 2013, 38 TexReg 7685