Alert September 02, 2014

OCC Releases Interpretive Letter Regarding National Bank’s Authority to Engage in Railcar Leasing and Meet the OCC’s ‘Net Lease’ Requirement

The OCC released an interpretive letter (“Letter #1142”) in which it concluded that a national bank’s proposal to arrange for third-party repair and maintenance service providers to service on-lease railcars and act as an intermediary between railcar lessees and third-party service providers is permissible and meets the OCC’s requirements (including the “net lease” requirement) under 12 C.F.R. Part 23, the OCC’s property leasing regulations.

The OCC authorizes national banks under 12 U.S.C. § 24 (Seventh) to engage in personal property leasing because such leases, generally, are the functional equivalent of a secured loan.  Under Section 23.3(a) of the OCC’s regulations, however, to be permissible, a personal property lease must be a “net lease,” i.e., a lease “ under which the national bank will not, directly or indirectly, provide or be obligated to provide for…servicing, repair or maintenance of the leased property during the leased term.”  An exception to this requirement is provided by the OCC in Section 23.3(b)(3), which allows a national bank to arrange for third parties to provide servicing, repair and maintenance of the property, provided that the costs of the services are to be borne by the lessee rather than the national bank.  In Letter #1142, the OCC concluded that the national bank that made the inquiry satisfied the requirements of Part 23 because the bank’s role would be limited to:

  • arranging for the service and maintenance;
  • establishing and maintaining a segregated cash account for the expected repair and maintenance costs;
  • collecting additional rent charges from the lessees to cover expected expenses; and
  • seeing that the balance of the segregated account is high enough to cover one month’s anticipated maintenance and repair expenses (plus a reasonable cushion).

Finally, the OCC also stated that it was reaching its conclusion in Letter #1142 with the expectation that the bank making the inquiry would conduct its lending business in a safe and sound manner.