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

June 22, 2000 **Interpretive Letter #895**

**October 2000**

**12 USC 84c3**

**12 CFR 32.3(b)(1)(iv)(B)**

Subject: Lending Limits/Warehouse Receipts/12 C.F.R. § 32.3(b)(1)(iv)(B)

Dear **\[ \]**:

This is in reference to our several recent telephone conversations
regarding an issue raised in a letter originally submitted to Kit G.
Sugiyama, Assistant Deputy Comptroller of the OCC's Denver Field Office,
by your predecessor, **\[ \]**, former president of the **\[ \]**,
**\[** *City, State* **\]** ("Bank"). **\[ \]** noted in his letter that
he planned to retire shortly and that all correspondence should be
directed to you.

**\[ \]**'s letter requested that the OCC clarify a provision in its
lending limit regulation issued pursuant to 12 U.S.C. § 84. His inquiry
focused on the lending limitations applicable to grain warehouse receipt
transactions under 12 C.F.R. § 32.3(b)(1)(iv)(B). He asked what
conditions must be satisfied in order for the Bank to take advantage of
the special lending limits available under that provision.

#### Statute

All loans and extensions of credit made by national banks are subject to
statutory legal lending limits. Generally, the total loans and
extensions of credit to any one borrower may not exceed 15 percent of
the bank's total unimpaired capital and unimpaired surplus. 12 U.S.C.
§ 84(a). The statute "is intended to prevent one individual, or a
relatively small group, from borrowing an unduly large amount of the
bank's deposits for the use of the particular enterprises in which they
are engaged." OCC Interpretive Letter No. 15 (January 10, 1978)
*reprinted in* \[Transfer Binder 1978-79\] Fed. Banking L. Rep. (CCH) ¶
85,090. OCC regulations promulgated pursuant to section 84 describe the
purposes of the lending limits as "protect\[ing\] the safety and
soundness of national banks by preventing excessive loans to one person,
or to related persons that are financially dependent, and \[promoting\]
diversification of loans and equitable access to banking services."
12 C.F.R. § 32.1(b).

The statute provides that these general lending limits are subject to
certain exceptions. Under 12 U.S.C. § 84(c)(3), loans and extensions of
credit "secured by bills of lading, warehouse receipts, or similar
documents transferring or securing title to readily marketable staples"
are subject to a lending limit of 35 percent of capital and surplus in
addition to the general limits if the market value of the staples
securing each loan or extension of credit at all times equals or exceeds
115 percent of the outstanding loan or credit balance. In addition, the
staples must be fully covered by insurance "whenever it is customary to
insure such staples." In instances where this additional lending limit
is available, a bank might therefore have up to 50 percent of its
capital and surplus outstanding to one borrower.

#### OCC Regulation

The OCC's regulation implementing the statutory lending limits is found
at 12 C.F.R. Part 32. In 12 C.F.R. § 32.3(b)(1), the OCC provides
guidance and specifies certain requirements, pursuant to 12 U.S.C.
§ 84(c)(3), for those circumstances where a national bank qualifies for
increased lending limits for loans secured by shipping documents and
warehouse receipts covering readily marketable staples. Subsection (iv)
of that section, 12 C.F.R. § 32.3(b)(1)(iv), provides, in pertinent
part:

The holder of the warehouse receipts, order bills of lading, documents
qualifying as documents of title under the Uniform Commercial Code, or
other similar documents, must have control and be able to obtain
immediate possession of the staple so that the bank is able to sell the
underlying staples and promptly transfer title and possession to a
purchaser if default should occur on a loan secured by such
documents\....

The Bank's inquiry focuses on 12 C.F.R. § 32.3(b)(1)(iv)(B), which
provides that:

> Warehouse receipts issued by the borrower-owner that is a grain
> elevator or warehouse company, duly-bonded and licensed and regularly
> inspected by state or Federal authorities, may be considered eligible
> collateral under this provision only when the receipts are registered
> with an independent registrar whose consent is required before the
> staples may be withdrawn from the warehouse.

#### Discussion

The Bank has a loan customer who is in the business of operating a grain
elevator and warehouse ("Customer"). The Customer is bonded and
inspected by appropriate federal authorities. At present, the Bank
maintains the stricter lending limits of 12 U.S.C. § 84(a) with respect
to this credit, participating out to another lender any loan portion
that would exceed those limits. The Bank would derive increased income
if it could take advantage of the higher lending limits allowed in
12 U.S.C. § 84(c)(3) and 12 C.F.R. § 32.3(b)(1). The Bank has therefore
asked whether the requirements of 12 C.F.R. § 32.3(b)(1)(iv)(B) would be
satisfied if the Customer registered the relevant warehouse receipts
with a trustworthy and independent third party, who would in no way be
affiliated with or under the control or influence of the Customer, and
whose consent would be required before the staples could be withdrawn
from the Customer's warehouse.

Such an arrangement would not be sufficient to satisfy the requirements
of the OCC's regulation as long as the staples themselves remained in
storage in the Customer's warehouse or elevator. The special lending
limits of 12 C.F.R. § 32.3(b)(1) are only available when all
requirements of the regulation are satisfied. Your proposal for
registration of warehouse receipts with a trustworthy and independent
third party, intended to comply with the requirements of subsection
(b)(1)(iv)(B), does not address and would not be sufficient to comply
with section (b)(1)(iv), which requires that the holder of the receipts
"must have *control* and be able to obtain immediate possession of the
staple\..." (emphasis added). The third party custodian you describe
would hold the warehouse receipts but would not have control of the
underlying staples, which would remain in the possession and under the
control of the borrower Customer.

The important characteristic of warehouse receipts and order bills of
lading is that the holder of such a document has control of the
commodity pledged to secure the loan and can obtain immediate
possession. In the event of default on a loan secured by such documents,
the bank would be in a position to sell the underlying commodity and
promptly transfer title and possession to the purchaser, thus being able
to protect itself without extended litigation. This exception to the
legal lending limits is therefore based on the assumption that the
warehouse receipt is issued by a person who has no interest in the
commodity he or she is holding and would have no reason to deny delivery
of those goods upon presentation of the receipts. This is not the case
where the issuer of the receipts is also the owner and possessor of the
goods. In such an instance, the borrower would be put in the position of
acting as the bailee of the collateral for his own loan. Should his own
interests later prompt him to deny delivery of the goods upon
presentment, it would be inadequate protection to the bank to have the
receipts themselves held by a third party, no matter how independent and
trustworthy the latter.

The primary situation contemplated by 12 C.F.R. § 32.3(b)(1)(iv) is that
where the borrower is the farmer/grower of the crop. In that instance,
the borrower consigns the staples to the control and custody of a grain
elevator or warehouse, who issues receipts which are held by the lending
bank or its agent. The regulatory requirements for the increased lending
limits of 12 U.S.C. § 84(c)(3) are satisfied because the bank may obtain
delivery of the goods from the warehouse by presenting the receipts if
circumstances make it necessary.

However, where the borrower is the grain elevator or warehouse company
itself, a conflict of interest arises. Accordingly, the regulation
imposes additional, rather than alternate, requirements to ensure the
protection of the collateral. In order to take advantage of the special
lending limits of 12 U.S.C. § 84(c)(3), it is still necessary to comply
with the requirement of 12 C.F.R. § 32.3(b)(1)(iv) that the holder of
the warehouse receipts be in a position to control the staples and able
to deliver them to the lending bank on presentation of those receipts.
While subsection (b)(1)(iv)(B) provides that the receipts in such a
situation must be held by an independent third party, it does not
obviate the control requirement.

The OCC has considered this issue before. In 1975, the OCC stated that
the special lending limits under the predecessor regulation to 12 C.F.R.
§ 32.3(b)(1)[^1] were available in a situation where a third party
company, acting as agent/trustee for the lending bank, held the
warehouse receipts issued by the borrower/grain elevator AND kept a
bonded agent at the grain elevator at all times to ensure control of the
collateral.[^2] By contrast, the OCC in 1973 explicitly rejected as
adequate compliance with the same regulation an arrangement whereby the
borrower/grain elevator would register the receipts with a third party
but retain control of the underlying staples. In that letter, the OCC
stated its concern

> about the legal status of warehouse receipts issued by a warehouseman
> to himself as owner of grain stored in his own warehouse, which are
> used as collateral for a loan to the warehouseman by a national bank.
> In the event of default on such a loan, the bank would be placed in
> the position of foreclosing on the collateral which has remained in
> the hands of the borrower. The relationship is therefore the same as
> that existing in any usual borrowing transaction for which the law
> makes no special exception.[^3]
>
> Where the borrower is the grain elevator or warehouse, the requirement
> that the staples be in the control of an independent party who is able
> to deliver them to the lending bank on presentation of the receipts
> may be satisfied in various ways. In the 1975 letter cited above (n.
> 2, *supra*), the grain remained in the elevator owned by the borrower,
> but the third party company holding the receipts also maintained an
> agent on the premises. Another possibility would be for the
> borrower/warehouse owner to consign the staples to the custody and
> control of a second, unaffiliated warehouse. The OCC will consider
> other alternatives that are designed to fulfill the goal of protecting
> the collateral in order to safeguard the lending bank's exposure.
>
> **\[ \]**'s letter focused primarily on what documentation would be
> necessary to satisfy the requirement for an "independent registrar" in
> 12 C.F.R. § 32.3(b)(1)(iv)(B), and included a draft contract that he
> suggested the OCC might review. He did not address the issue of
> control of the staples themselves. Since the special lending limit for
> loans secured by warehouse receipts transferring title to readily
> marketable staples is available only where the control requirement of
> 12 C.F.R. § 32.3(b)(1)(iv) is satisfied, the question of the
> qualifications of an independent registrar need not be resolved at
> this time.
>
> **Conclusion**
>
> Under 12 U.S.C. § 84(c)(3) and 12 C.F.R. § 32.3(b)(1), special lending
> limits apply to loans secured by warehouse receipts or other documents
> transferring title to readily marketable staples. Under section
> (b)(1)(iv) of that regulation, the holder of the receipts must have
> control of the staples and be in a position to transfer them to the
> lending bank. Where the borrower is someone other than the owner of
> the elevator or warehouse, this requirement is satisfied if the
> warehouse owner holds the staples and issues receipts to the bank,
> since the bank may obtain delivery of the staples by presenting the
> receipts. However, where the borrower is the owner of the elevator or
> warehouse, as contemplated in 12 C.F.R. § 32.3(b)(1)(iv)(B), then
> there is a conflict of interest that precludes the borrower from
> acting as the repository\--the bailee\--of the collateral for his own
> loan.
>
> Accordingly, the Bank may not qualify its loan to the Customer for the
> increased lending limits of 12 U.S.C. § 84(c)(3) and 12 C.F.R. §
> 32.3(b)(1) merely by entrusting the warehouse receipts to an
> independent third party.
>
> Please do not hesitate to contact me at (202) 874-5300 if I may be of
> further assistance.
>
> Sincerely,
>
> **-signed-**
>
> Sue E. Auerbach
>
> Senior Attorney
>
> Bank Activities & Structure Division

[^1]: The regulatory provision applicable to the special lending limits
    of 12 U.S.C. § 84 for readily marketable staples was formerly
    codified at 12 C.F.R. §  7.1560(a)(5) (1960). In response to the
    passage of the Garn-St Germain Depository Institutions Act of 1982,
    P.L. 97-320 (which also raised the general lending limit from 10
    percent to 15 percent), the OCC amended its lending limit regulation
    in 1983 by creating a new Part 32 in Title 12 of the Code of Federal
    Regulations which replaced and restructured existing interpretive
    rulings previously found at 12 C.F.R. Part 7. 48 F.R. 15844 (April
    12, 1983). The OCC further amended its lending limit regulation in
    1995. 60 F.R. 8526 (March 17, 1995.) The superceded regulatory
    provision at 12 C.F.R. § 1560(a)(5) was substantially similar to
    current 12 C.F.R. §  32.3(b)(1).

[^2]: Unpublished letter from Thomas G. DeShazo, Deputy Comptroller of
    the Currency (January 28, 1975).

[^3]: Unpublished letter from Thomas G. DeShazo, Deputy Comptroller of
    the Currency (July 19, 1973).