4000 - Advisory Opinions
How the "attribution rule" of the Federal Reserve Act applies to certain Credit transactions.
June 9, 2004
Michael B. Phillips, Counsel
For the purposes of the current FDIC examination of X (Bank), you have asked the FDIC how the "attribution rule" in section 23A(a)(2) of the Federal Reserve Act applies to certain credit transactions by the Bank with customers of independent auto dealerships that have received floor plan financing from an affiliate of the Bank. In particular, this letter addresses the application of the attribution rule to situations in which the Bank purchases retail installment sales contracts (RISCs) from independent *** dealerships that have a floor plan arrangement with the Bank's parent company, *** (*** affiliate).1
Attribution Rule under Section 23A
Originally enacted as part of the Banking Act of 1933,2 section 23A is designed to prevent adverse impacts on a bank's financial resources through transactions with its affiliates. Section 23A prohibits a bank from engaging in "covered transactions"3 with an "affiliate"4 unless the bank limits the aggregate amount of those transactions with a single affiliate to 10 percent of its "capital stock and surplus"5 and with all its affiliates to 20 percent of its capital stock and surplus. Under the attribution rule in section 23A(a)(2), any transaction by a bank with a third party is deemed to be a transaction with an affiliate to the extent that "the proceeds of that transaction are used for the benefit of or transferred to the affiliate."6
In December, 2002, the Board of Governors of the Federal Reserve System (FRB) published its Regulation W, which implements the statutory restrictions under section 23A and 23B covering transactions between a state member bank and its affiliates, as clarified through FRB interpretations and exemptions.7 Regarding the attribution rule in section 23A, the FRB stated in its preamble to Regulation W that its purpose includes "to prevent a member bank from evading the restrictions in the section by using intermediaries and to limit the exposure that a member bank has to customers of affiliates of the bank."8 In its consideration of possible exemptions from the attribution rule, the FRB rejected a proposal for an exemption for banks if they did not have actual or constructive knowledge that the proceeds of their transaction with a third party are transferred to or used for the benefit of an affiliate. The current exemption categories from the attribution rule that the FRB has promulgated in Regulation W include (1) certain riskless principal transactions; (2) brokerage commissions, agency fees, and riskless principal mark-ups; (3) preexisting lines of credit; and (4) general purpose credit card transactions,9 in addition to certain agency transactions.10
At present, there is no exemption category from the attribution rule in Regulation W that would exclude the application of the attribution rule to the floor plan financing arrangement between the *** affiliate and the independent dealerships, and the Bank's purchasing of RISCs from those independent dealerships. Consistent with this treatment under Regulation W, according to recent discussions with attorneys in the FRB's Legal Division, the FRB General Counsel has concluded generally that where such floor plan financing arrangements exist between a bank affiliate and independent dealerships, bank loans to finance the purchase of floor planned vehicles constitute covered transactions with an affiliate under the attribution rule.
Implementation of the Attribution Rule to Floor Plan Financing Arrangements
Sections 23A and 23B of the Federal Reserve Act apply to the Bank by virtue of Section 18(j) of the Federal Deposit Insurance Act which extends sections 23A and 23B to state nonmember banks "in the same manner and to the same extent" as if a state nonmember bank were a state member bank.11 We have determined that the purchase by the Bank of a RISC from an independent dealership that has received floor plan financing from the *** affiliate, which financing was secured by the vehicle purchased through the RISC, would be covered by the attribution rule under section 23A(a)(2). However, we have determined that the attribution rule's application should be limited to those RISCs that are used to purchase vehicles that are acquired by the independent dealerships as a direct result of the floor plan financing from the *** affiliate. In this manner, the application of the attribution rule would be limited to the specific subset of the vehicle inventory in the independent dealerships for which floor plan financing from the affiliate is provided.
This interpretation is based on our understanding that under floor plan financing arrangements, (1) the dealership obtains financing to purchase vehicles from the manufacturer or an affiliate of the manufacturer; (2) the floor plan financer holds a perfected security interest in the vehicle while it is unsold and part of the dealership's inventory; and (3) in practice, the dealer is obligated to pay off the loan on the specific vehicles or replace the collateral upon the dealer's sale of the vehicles. Under this arrangement, the Bank's purchasing of RISCs from the dealerships will directly facilitate consumers' purchase of the specific vehicles covered by the floor plan financing from the Bank affiliate. The dealer will take the proceeds from these RISC transactions and either (1) transfer those proceeds (net of the dealer's profits) to the *** affiliate in order to pay off its floor plan financing obligations to that affiliate or (2) use those proceeds to replace the collateral.
For purposes of the Bank's delineation of the specific RISC purchases that would be covered by the attribution rule, it is important that the Bank be able to determine which RISCs cover vehicles on which the respective dealership had obtained floor plan financing from the *** affiliate.
We would consider, in conjunction with the FRB, any exemption request from the Bank under section 23A regarding the facts and circumstances involving the floor plan financing arrangements described in this letter. If you have any questions regarding this letter or the procedures for an exemption request under section 23A, please contact me at (202) 898-3581.