July 10, 1978

Dear Mr. ________ :

This is in response to your letter of February 27, 1978, and our telephone conversation of July 7, 1978. You have requested as opinion whether Set-Aside Agreement is a direct liability which must be included in the obligations of the borrower for loan limit purposes.

It is helpful to analyze the Set-Aside Agreement in light of all the circumstances surrounding the transaction. First, the borrower takes out a loan from the Bank for the amount to be set aside. The proceeds of the loan are then put into a special account, and disbursements from this account are made in accordance with the Set-Aside Agreement. The Set-Aside Agreement provides that disbursements will occur as costs are incurred and in accordance with a schedule as work is completed, subject to approval by the borrower, and with provision made for inspection by the beneficiary of the Agreement and the Bank. When the construction is completed and accepted by the beneficiary, any funds remaining in the account may be disbursed directly to the borrower. In the event of default, either the Bank will complete the contract to the extent that there are funds left in the account at the time of the default, or the beneficiary shall have the right to complete the improvements using the undisbursed loan funds for that purpose.

According to the Set-Aside Agreement, the Bank’s exposure is limited to the monies in the account. Since the Bank may not be held liable for a sum exceeding the sum remaining in the account at any time, there is no liability resulting from the Set-Aside Agreement itself, and it is not treated as an obligation for loan limits purposes. However, the amount of the underlying loan to the borrower is a direct obligation and must be treated as a loan to the borrower for loan limit purposes.

I hope this answers your question. If we can be of further assistance to you, please do not hesitate to contact us.

Very truly yours,

Superintendent of Banks




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