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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

**Interpretive Letter #1061**

**May 2006**

**12 USC 84**

April 28, 2006 **12 CFR 32**

Subject: Applicability of the Lending Limit to Loans secured by
Certificates of Deposit

Dear **\[ \]**:

This letter is in response to your inquiry in which **\[ \]** (Bank)
seeks a legal opinion as to the treatment under the lending limit,
12 U.S.C. § 84 and 12 C.F.R. part 32, of loans secured by insured
non-negotiable certificates of deposit (CDs) issued by other
institutions. In my opinion, such loans are subject to the lending
limit. As described in further detail below, the loans do not qualify
for the exception for loans secured by certain other loans in 12 C.F.R.
§ 32.3(c)(3)(i)(B) nor for the additional lending limit described in
12 C.F.R. § 32.3(a) for loans secured by readily marketable collateral.

The Bank would like to make loans to customers that are secured by
non-negotiable CDs issued by other institutions and suggests that the
loans would be exempt from the lending limit based on the availability
of Federal Deposit Insurance Corporation (FDIC) insurance for the
collateral CDs.

One lending limit exception cited by the Bank is set forth at 12 C.F.R.
§ 32.3(c)(3) as follows:

(i) Loans or extensions of credit, or portions thereof, to the extent
    fully secured by the current market value of ...(B)\[l\]oans to the
    extent guaranteed as to repayment of principal by the full faith and
    credit of the U.S. government, as set forth in paragraph
    (c)(4)(ii)[^1] of this section.

(ii) To qualify under this paragraph, the bank must perfect a security
     interest in the collateral under applicable law.

Section 32.3(c)(3)(i)(B) thus excepts from the lending limit loans that
are fully secured by a perfected security interest in the current market
value of other loans, provided that (i) those collateralizing loans are
guaranteed as to repayment of principal by the full faith and credit of
the U.S. government; and (ii) the guarantee is payable in cash or
equivalent within 60 days after demand and is unconditional.[^2]

For purposes of this exception, a bank is unable to fully secure loans
with a perfected security interest in CDs issued by other institutions
for three reasons. First, the rights of recoupment and set-off that
those other institutions may possess are an impediment to obtaining a
conforming security interest for purposes of the lending limit
exception. For example, it is common for loan documents to provide for
an explicit right of set-off and the right of set-off can also exist
implicitly.[^3] If the institution issuing the CD could establish such
right of set-off, the lending bank's loan collateralized by the CD would
not be fully secured by a perfected security interest for the purposes
of the lending limit exception.

Second, Article 9 of the Uniform Commercial Code adopted in all states
generally provides that a security interest in a deposit account held by
an institution with which the deposit account is maintained has priority
over a conflicting security interest held by another secured party, even
if the security interest of the other secured party was perfected
earlier. The other secured party has to take extraordinary steps to
defeat the interests of the depositary. The other secured party must
either become the issuing institution's customer on the deposit or
obtain a subordination of the depositary's interest in the account, if
possible.[^4]

A third impediment to the applicability of the exception derives from
the FDIC deposit insurance limits. If the borrower were to have or make
another deposit in the same ownership capacity at the institution
issuing the CD, such deposit would be added to the borrower's
collateralizing CD for purposes of computing the available federal
deposit insurance[^5] and the CD would only be insured, if at all, in
the aggregate with those other deposits up to the deposit insurance
limit.

While a bank could seek to guard contractually against the risks
described above (*e.g.*, the borrower could agree not to make other
deposits with the institution issuing the CD and that institution could
purport to subordinate any right of set-off and security interests),
such contractual protection would not constitute a security interest for
the purposes of section 32.3(c)(3). If the contracts were breached or
did not have the intended purpose, the lending bank would only have a
contract claim at best which would not be covered by a government
guarantee.

We conclude, therefore, that the protection afforded the Bank by a
collateralizing CD is inferior than when it makes a loan secured by a
traditional loan that is guaranteed by a government agency.[^6] The
Bank's loan cannot be fully secured by a perfected security interest for
the purposes of the lending limit exception.[^7] Accordingly, the
lending limit exception in section 32.3(c)(3)(i)(B) is not
available.[^8]

Lastly, the loans do not qualify for the additional lending limit for
loans secured by readily marketable collateral. The lending limit
regulation provides that only CDs that are negotiable qualify as readily
marketable collateral.[^9]

I trust this is responsive to your inquiry.

Sincerely,

/s/

Jonathan Fink

Special Counsel

Bank Activities & Structure

[^1]: Section 32.3(c)(4)(ii) provides that the guarantee must be payable
    in cash or equivalent within 60 days after demand and be
    unconditional.

[^2]: A different exception is set forth in 12 U.S.C. § 84(c)(4), as
    implemented by paragraph (A) of 12 C.F.R. § 32.3(c)(3)(i)
    (Government Securities Exception). Subject to certain requirements,
    section 84(c)(4) excepts from the lending limit loans to the extent
    fully secured by the current market value of bonds, notes,
    certificates of indebtedness, or Treasury bills of the United States
    or "by other such obligations fully guaranteed as to principal and
    interest by the United States." A CD is not an "other such" (or
    "similar," the adjective used in the regulation) obligation for this
    purpose and thus this exception is inapplicable. Under the *eiusdem
    generis* rule of statutory construction, when general words are
    preceded by specific words, the general words are construed so as to
    apply only to items of the same general class as those specifically
    mentioned. The "other such obligations" include only the same types
    of obligations previously and specifically mentioned, all of which
    are government-issued obligations. Accordingly, the OCC has
    interpreted the Government Securities Exception as being applicable
    only to obligations fully secured by either issues of the United
    States, or issues of agencies of the United States that are fully
    guaranteed as to principal and interest by the United States. *See*,
    *e.g.*, letter of P. Stacy Powers, Senior Attorney, 1989 WL 418913
    (O.C.C.) (Mar. 27, 1989). It is because the Government Securities
    Exception only applies to loans secured by government-issued
    obligations that the OCC needed in 1995 to promulgate the new
    exception in 12 C.F.R. § 32.3(c)(3)(i)(B) in order to except loans
    secured by certain obligations not issued by the government.

[^3]: Indeed, in the sample loan documentation that you provided for our
    review, the lender provides explicitly for a right of setoff in all
    accounts the borrower holds at the lender including accounts the
    borrower may open in the future. The borrower authorizes the lender,
    to the extent permitted by applicable law, to charge or setoff all
    sums owing on the loan against any and all such accounts.

[^4]: *See* UCC § 9-327 and Official Comment 4 ("A rule of this kind
    enables banks to extend credit to their depositors without the need
    to examine either the public record or their own records to
    determine whether another party might have a security interest in
    the deposit account.")

[^5]: *See* 12 C.F.R. Part 330; *see also* letter of Joseph A. DiNuzzo,
    Counsel, FDIC (Jul. 29, 2003) (Insurance Letter) at
    <http://www.fdic.gov/regulations/laws/rules/4000-1200.html>.

[^6]: The examples given in the preamble to the lending limit rulemaking
    in which the exception in section 32.3(c)(3)(i)(B) was adopted are
    loans secured by qualifying Small Business Administration-, Federal
    Housing Administration-, and Veterans Administration-guaranteed
    loans. *See* 60 Fed. Reg. 8526, 8530 (Feb. 15, 1995).

[^7]: The Bank participates in a deposit placement program intended to
    allow a financial institution (Relationship Bank) to place a
    depositor's funds in excess of the deposit insurance limit with one
    or more other financial institutions (Issuing Bank(s)) and obtain
    full FDIC insurance coverage for the depositor. *See* Insurance
    Letter. This program contains some mitigants to the risks to a
    Relationship Bank posed by the impediments described above if the
    Relationship Bank should make a loan secured by a CD from an Issuing
    Bank. Under the program, the Issuing Bank issues a CD to an agent
    institution acting on behalf of the Relationship Bank acting on
    behalf of a depositor. Thus, the Issuing Bank would not ordinarily
    know the identity of the depositor and may not ordinarily be in a
    position to exercise a right of set-off or take a security interest.
    Nevertheless, the depositor could reveal his identity, or the
    Issuing Bank could take steps to ascertain whether a party that owed
    it an obligation was a party to which it had issued a CD under the
    program, and thus the risks to the Relationship Bank posed by those
    impediments may still exist. Further, the program does not avoid the
    risk posed to insurance coverage by the depositor making other
    deposits at the Issuing Bank. Under the program, depositors can
    require that certain institutions be excluded from the list of
    institutions that can issue CDs to the depositor and some other
    protections exist to help the depositor avoid losing insurance
    coverage by making other deposits at the Issuing Bank. However,
    ultimately the depositor retains the power to place other deposits
    at an Issuing Bank. Thus, the fact that the CD is issued under the
    deposit placement program does not change the analysis of the
    applicability of section 32.3(c)(3)(i)(B).

[^8]: In light of the analysis in this letter, it is not necessary to
    consider whether a loan secured by an insured CD is a loan secured
    by a "loan" that is guaranteed as to repayment by the "full faith
    and credit" of the U.S. government and whether the insurance
    proceeds are payable on an unconditional basis in cash or equivalent
    within 60 days after demand. It is also not necessary to consider
    whether FDIC *insurance*, the proceeds of which are only payable
    upon failure of the issuing bank and not upon other events of
    default, is a "guarantee."

[^9]: *See* 12 C.F.R. § 32.2(n) and 32.2(j). The fact that a
    non-negotiable CD is issued under the deposit placement program
    discussed in note 7 above does not change this analysis.