February 6, 1974

Re: ________________: Loan Participations

Dear Mr. ____________:

This is in reply to your letter of January 31, 1974, and is a follow up to our letter of October 31, 1973.

The matter in question arose over several loan particpations which __ _________ (hereinafter “_______ _______” has purchased from _____________________ with recourse. Purchases of these participations, because they were with recourse, were considered as loans to _________________. These loans were classified in excess of legal lending limits.

______________ has proposed a novel procedure by which these transactions could be handled. _____________ proposes to purchase these participations without recourse but with a commitment to repurchase these participations at a future date, such commitments to be unconditional and irrevocable.

Initially, as pointed out in the above mentioned letter, there appears to be little qualitative difference between purchasing a participation with recourse and purchasing a participation with a repurchasing agreement. In fact, the case of Milana v. Credit Discount Company, 27 C.2d 35 (1945), may be read for the proposition that a transaction clothed as a purchase and sale agreement with a duty to repurchase constituted a loan rather than a sale. While the Milana case dealt with usury and the court might have been more inclined to find a loan because of the strong statutory sanctions against usury, the reasoning of the case appears persuasive. Therefore, we would conclude that even if these participations were set up in the alternative form submitted by your letter of October 2, 1973, they would still constitute loans subject to legal lending limits.

In your letter of October 2, you alluded to certain analogies in banking in which the transactions are not subject to loan limits, even though a repurchase agreement is involved. We acknowledge that there are certain transactions (such as the purchase of dealer paper, a new bank’s purchase of loans from its correspondent and dealing in Fed Funds) in which a repurchase agreement is involved and the loan is not subject to loan limits. However, we would point out that these are very limited situations and blanket exemptions are granted only under very special circumstances. We do not believe that the plan which you have set forth is of such magnitude. Therefore, we are compelled to conclude that the purchase of these loans with a repurchase agreement constitutes a loan which is subject to the legal lending limits.

If you have any further questions in regard to this matter, please do not hesitate to contact us.

Very truly yours,

Superintendent of Banks




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