New York Codes, Rules and Regulations › Title 3 - BANKING › Legal Interpretations › LI 1 - Banks and Trust Companies › Section LI 1.10 - Applicability of section 103(1)(a)'s loan limits to letters of credit issued to the commodity credit corporation

Current through Register Vol. 46, No. 28, July 10, 2024
The Department was asked whether Section 1488.5 of the
				  Regulations of the Commodity Credit Corporation ("CCC") would remove the
				  portion of a letter of credit which was issued to CCC by a foreign bank and
				  which was confirmed by a domestic bank from the loan limitations of Section 103 (1)(a)  of the Banking
				  Law. Section 103 limits unsecured loans to individuals and private corporations
				  to 10% of the capital stock, surplus fund and undivided profits of the lending
				  bank or trust company. The section requires any extension of credit to a person
				  by means of the issue or confirmation of an irrevocable sight letter of credit
				  upon the responsibility of such person to be deemed a loan to such
				  person.
Subdivision 1(a) of Section 103  of the Banking Law excludes certain
				  loans from the limitations on loans. The exclusion includes loans for which an
				  agency or instrumentality of the United States, as designated by the Banking
				  Board, "has agreed to pay the principal and interest thereof, or has guaranteed
				  payment (by guaranty or commitment to purchase or otherwise) of such principal
				  and interest, or is committed to supply, by loan, subsidy or otherwise, funds
				  sufficient to pay such principal and interest, or has otherwise pledged its
				  faith and credit for the payment of such principal and interest________"
The Banking Board, by General Regulation section 28, §
									28.1(a)(3),
				  has implemented Section 103(1)(a) by designating CCC as an instrumentality or
				  agency of the United States for the purposes of Section 103(1)(a), but only to
				  the extent that "a loan or extension of credit is secured by a guaranty, or by
				  a commitment or agreement to take over or to purchase, made by such
				  corporation, and such guaranty, agreement or commitment is unconditional and
				  must be performed by payment of cash or its equivalent within 60 days after
				  demand."
Section 1488.5 of the CCC's regulations permits a United
				  States bank to request a refund of the amounts paid under the confirmed portion
				  of the letter of credit if the bank certifies that it is "unable to recover
				  funds from the foreign bank due to a stipulated political risk which existed on
				  the date payment was made to CCC under the draft. On approval by CCC of such
				  request, the refund shall be promptly made, together with
				  interest________"
Section 1488.2(s)(4) of the regulations defines "political
				  risk" to include "failure of the foreign bank to make payment for any reason if
				  it is an instrumentality of or is wholly owned by the foreign
				  government."
The department observed that the CCC's regulations
				  characterize the application for a refund as a "request" and that they appear
				  to permit CCC to review the facts and circumstances surrounding the foreign
				  bank's failure to make the payment required by the letter of credit and the
				  other remedies available to the domestic bank before determining whether to
				  grant the bank's request for a refund. In addition, the regulations do not
				  require the approval to be given within the 60-day period mandated by General
				  Regulation, section
				  28.1(a)(3).
The department also observed that CCC owns the entire letter
				  of credit and does not assume or purchase the confirmed portion of the letter
				  of credit or agree to supply funds to the foreign bank to pay the confirmed
				  portion of the letter of credit within the meaning of the Banking Board's
				  Regulation. In light of the foregoing, the department concluded that the remedy
				  available to the banks under Section 1488.5 of CCC's regulation does not
				  constitute an "unconditional guaranty" or other undertaking within the meaning
				  of Section 103  of the Banking Law and section
				  28.1(a)(3) 
				  of the General Regulations of the Banking Board.
DATED: July 6, 1976