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

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