June 10, 1968
Dear [ ]:
Your letter of May 27, 1968, addressed to Deputy Superintendent and Counsel Schmidt, has been referred to me for attention.
You asked whether there is an extension of credit subject to the lending limits of Section 103(1) of the New York State Banking Law if a person deposits to his account in a New York bank an endorsed draft with investment securities attached, payable to his order drawn on an account of the maker, maintained at an out-of-town bank. The depository bank would credit the account of the payee of the draft before such draft was accepted or paid by the drawee bank.
Such transaction would give rise to an extension of credit subject to the lending limits of Section 103(1) of the New York Banking Law. The bank has extended credit to the depositor-payee from the time that he has the ability to withdraw from his account the proceeds of the draft until the draft is finally collected from the out-of-town bank.
We know of no exemption from the lending limits of Section 103 for the reason that the advance is secured by investment securities in transit. To the extent that the investment securities have a value as collateral of at least 15% more than the amount of the loan, the loan would be subject to the 25% limitation as provided in Section 103(1)(d).
Your third question was whether a draft of this nature could be considered to have been "drawn in good faith against actually existing values", and thus subject to the 25% limitation. This Department has followed the interpretation of the Federal Bank Supervisory Agencies of the analogous provision in the National Banking Act. The Federal Agencies have held that drafts are entitled to such exemption only if they are drawn by the seller of commodities upon the purchase and have been accepted either by the purchaser or by the purchaser's bank (see e.g., Comptroller of Currency Rulings Par. 1510). Drafts accompanied by investment securities have not been considered to be drafts drawn against actually existing values.
Depending upon the types of investment securities involved, there may be a question of compliance with Regulation U of the Board of Governors of the Federal Reserve System.
Very truly yours,
Gary J. Strum
First Assistant Counsel