TO THE CHIEF EXECUTIVE OFFICER OF THE STATE CHARTERED BANK ADDRESSED:
Re: Grain Warehouse BorrowingRecently there has been some confusion on the issue of whether grain warehouses qualify for the extra borrowing privilege granted under Iowa Code Section 524.904(2)(a)(1) (1989). The Iowa law allows a state bank to lend a customer 20 percent of the bank's capital and surplus for any purpose and an additional 20 percent of capital and surplus if at least all of the amounts in excess of the first 20 percent are secured by warehouse receipts which have a market value at all times not less than 120 percent of the face amount of the loan. Approximately two years ago, we instructed our staff to no longer grant grain warehouses the extra borrowing privilege for warehouse receipts which they issue to themselves securing grain they own and store in their own facilities. Our interpretation was based upon our belief that allowing warehouses the extra borrowing privilege merely resulted in a 40 percent of capital and surplus grain inventory loan.
Needless to say, while our interpretation was based upon the tenet of safety and soundness, it was not a popular decision with a number of bankers and borrowers. We have since reassessed our position on the issue and agree that the law does not specifically prohibit state banks from lending funds to grain warehouses up to 40 percent of a state bank's capital and surplus if those funds, in excess of the first 20 percent, are properly secured by borrower issued warehouse receipts. However, this change of position will necessitate state banks performing a basic due diligence review of grain warehouses before extending funds secured by borrower issued warehouse receipts. With the assistance of representatives of the Iowa Grain and Feed Association and the Grain Warehouse Bureau, we have developed a checklist of items we strongly recommend state banks have on file to document and support the extension of additional credit to warehouses secured by borrower issued warehouse receipts. The documentation that we believe demonstrates prudence includes, at a minimum:1. Documentation to indicate whether the warehouse is licensed by the state or federal government. Federally licensed warehouses are required to post a bond based upon storage capacity; however, the maximum bond required is only $500,000. For state banks lending to large capacity federal warehouses, this maximum bond amount may represent a small fraction of the potential exposure that exists in the event of insolvency. It would appear prudent for banks to have knowledge of the posted bond amount of federally licensed grain warehouses, as well as the capacity level of the warehouses. State licensed warehouses are covered by the Grain Depositors' and Sellers' Indemnification Fund and thus are not required to post a bond. The fund has been established by assessing all licensed grain dealers and state licensed grain warehouses an annual fee and a per-bushel fee on assessable grain. It is our understanding that the fund presently approximates $7.5 million. In the event of insolvency, the fund is to pay claimants on the basis of 90 cents per dollar of loss, up to a maximum claim of $150,000. Thus, it would appear banks that lend monies secured by borrower issued warehouse receipts in excess of $150,000 could also be greatly exposed.
2. It is imperative that banks have on file the original warehouse receipt and not a copy of the receipt. Warehouse receipts may either be negotiable or non-negotiable. Non-negotiable receipts allow for partial grain withdrawals which are noted on the back of the instrument. Negotiable receipts must be reissued in the event a grain withdrawal is made.3. Banks should ask to review the most recent inspection report of grain warehouses. We have been advised by representatives of the Grain Warehouse Bureau that these inspection reports are public documents. Iowa law requires state licensed grain warehouses (of which there are approximately 600) to be inspected once in every twelve month-period by the Grain Warehouse Bureau. We understand that federally licensed warehouses have similar inspection intervals. We also understand some grain warehouses contract with third party individuals to make inspections of facilities. These third party inspectors who perform this service are often former state or federal warehouse personnel.
4. Banks should ask to review the grain warehouses' daily position records and the long and short report. Also, if futures programs are utilized by warehouses, documentation should be on file that the owned grain is properly hedged.In summary, we strongly recommend state banks that lend to grain warehouses based upon borrower issued warehouse receipts should document the prudence of that action by following, at a minimum, the aforementioned checklist.
Most sincerely, Robert R. Rigler
Superintendent
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