AL 2004-1
Advisory Letter

Subject:      Legal Lending Limits
Description:  Non-conforming Loans Due to Collateral Shortfalls 

Date:         January 23, 2004 

TO:  Chief Executive Officers of All National Banks, Federal Branches and 
     Agencies, Department and Division Heads, and All Examining Personnel

INTRODUCTION AND PURPOSE

On December 23, 2003, federal officials announced the first case of 
suspected Bovine Spongiform Encephalopathy (BSE), also known as Mad Cow 
disease, in a dairy cow located in the state of Washington.  Due to 
public perception of the issue, along with the almost immediate ban on 
imports of U.S. beef by other countries, live cattle prices and futures 
prices for cattle dropped in the range of 20 to 30 percent.  Market 
reports since January 2, 2004, however, indicate the decline in market 
value resulting from the BSE announcement may be a temporary market 
impairment because domestic demand appears to be holding, and supply is 
relatively low.  In addition, there is some expectation that export 
markets will reopen, should the disease prove isolated and controlled.

The Office of the Comptroller of the Currency (OCC) has received 
inquiries from bankers requesting guidance on legal lending limit 
compliance for loans where a decline in the collateral value of cattle 
that secures those loans has led to temporary collateral shortfalls for 
purposes of the legal lending limit calculations and whether such 
shortfalls may fall within the scope of the “extraordinary circumstances” 
provision of 12 CFR 32.6(c).


GUIDANCE 

Under 12 CFR 32.6(c), banks must bring a loan that is nonconforming as a 
result of a fall in collateral value into conformity with the lending 
limit within 30 calendar days, except, among other things, when 
extraordinary circumstances beyond the bank’s control prevent the bank 
from taking action.  The decline in market value of live cattle has been 
a systemic phenomenon and is not the result of action by a particular 
bank or borrower.  Given this, the OCC is advising its examiners to treat 
collateral shortfalls that arise from the BSE announcement as an 
“extraordinary circumstance” beyond the bank’s control for purposes of 
the nonconforming loan provisions of 12 CFR 32.6(c) for the next 180 
days, until July 21, 2004.

This interpretation applies only to monies already advanced on existing 
loans and does not apply to any new advances under existing facilities or 
new loans. As with other loans, the OCC expects bankers to address, 
thoroughly, each individual borrower's commodity risk management 
practices and encourages banks to take appropriate steps to mitigate or 
prevent loan losses. 

The OCC will continue to monitor this situation to assess whether 
additional supervisory measures may be needed.  Its supervisory offices 
in areas that may be affected by this event are contacting affected banks 
to evaluate the potential impact of the market drop in cattle prices and 
the controls that banks may have in place, such as hedging and out of 
money options, to mitigate this risk.  

For further information on this matter and the application of the legal 
lending limits, please contact your supervisory office, the Credit Risk 
Division at (202) 874-5170, or the Bank Activities & Structure Division 
at (202) 874-5300.




______________________________________
Barbara J. Grunkemeyer
Deputy Comptroller for Credit Risk