We have a request for a line of credit that would exceed our lending limit, since it would equal about 50% of our unimpaired capital and unimpaired surplus. However, we would not make any advances on the line of credit before obtaining grain warehouse receipts collateralizing at least 90% of the amount of each advance. Would that violate our lending limit? We also are considering participations for half of the line amount.

We believe that the proposed loan could comply with your bank’s lending limit under the Illinois Banking Act, since the advances secured by warehouse receipts would be subject to a higher lending limit: 50% of your unimpaired capital and unimpaired surplus (rather than 25%).

In general, the Illinois Banking Act limits your bank’s outstanding liabilities to any one borrower to 25% of your unimpaired capital and unimpaired surplus. However, that limit is raised to 50% for loans secured by warehouse receipts for “readily marketable staples,” such as grain.

The Illinois Banking Act does not require a loan to be fully secured by warehouse receipts to qualify for this exception. Only the amount of outstanding liabilities exceeding 20% of your unimpaired capital and unimpaired surplus must be secured by warehouse receipts. (For example, if the borrower fully draws the line to an amount equaling 50% of your unimpaired capital and unimpaired surplus, your bank would be required to hold warehouse receipts equaling 30% of your unimpaired capital and unimpaired surplus.) And the Act does not require the full amount of the line to be secured. Only the amounts actually drawn by the borrower must be secured.

By holding warehouse receipts that almost fully secure each advance on the line of credit, you likely will have more than enough warehouse receipts to comply with the collateral requirements for this exception to the Illinois Banking Act’s lending limits. In the alternative, selling portions of the loan that exceed your 25% lending limit also could prevent a violation of the Illinois Banking Act (although your bank still may require the borrower to provide collateral for other reasons, such as safety and soundness concerns).

For resources related to our guidance, please see:

IDFPR Interpretive Letter 08-03 (June 9, 2008) (“Under Section 34(6), a state bank may make a loan on readily marketable staples in an amount not to exceed 50% of the bank’s unimpaired capital and unimpaired surplus, provided that the amount above 20% of the bank’s unimpaired capital and unimpaired surplus is and will remain secured by accompanying documents of title. As such, the limit on loans collateralized by grain warehouse receipts is 50% of the bank’s unimpaired capital and unimpaired surplus, provided that an amount equal to at least 30% of the bank’s unimpaired capital and unimpaired surplus is and will remain secured by a warehouse receipt.”)

Illinois Banking Act, 205 ILCS 5/34(6) (“The limitations in Sections 32, 33, and 35.1 of this Act upon the liabilities of any one person . . . shall not apply: . . . (6) To the acceptance of drafts or bills of exchange . . . provided documents of title covering the goods secure the acceptances at the time of acceptance; or that are secured at the time of acceptances by documents of title covering readily marketable staples; but the aggregate amount of these acceptances by any State bank on behalf of any one person at any one time outstanding shall not exceed 20% of the unimpaired capital and unimpaired surplus of the bank unless the part thereof in excess of that percentum of unimpaired capital and unimpaired surplus is and will remain secured by accompanying documents of title or proceeds thereof growing out of the same transaction or by substituted security of similar character; provided further, however, that the aggregate amount of the acceptances on behalf of any one person outstanding at any one time shall not exceed 50% of the amount of unimpaired capital and unimpaired surplus of the bank. The provisions of this paragraph (6) apply to the acceptances by a State bank on behalf of any one person and not to the purchase by a State bank of other banks' acceptances. A State bank may purchase acceptances from other banks in amounts not to exceed 50% of the State bank's unimpaired capital and unimpaired surplus from any one bank.”)

IDFPR Interpretive Letter 01-05 (September 17, 2001) (“Section 32 prohibits the Bank from maintaining outstanding liabilities in excess of the limit. The $2,000,000 proposed line of credit to Corporation 1 would only constitute an outstanding liability to the extent to which it is drawn upon.”)

IDFPR Policy Statement 2001 — Eliminating Violations of Law Pertaining to Lending, Investment, and Lease Limits (“A violation of Section 32 (pertaining to money borrowed) of the Illinois Banking Act (‘Act’) will cease to exist if the liabilities to a state bank of a person no longer exceed 25% of the unimpaired capital and unimpaired surplus as determined in accordance with the Act at the time the liabilities were incurred (‘Statutory Limit’). This may occur in any of the following manners: . . . Such liabilities are reduced to an amount that is less than or equal to the applicable limit by selling part or all of the liabilities to a third party without recourse; . . .”)