Each depositor insured to at least $250,000 per insured bank

Apparent Violation of Section 332.1 of FDIC Regulations

FDIC-82-17

September 7, 1982

Rae Schupack, Regional Counsel

In the July 9, 1982 FDIC Report of Examination of *** Examiner, *** cited the bank for apparently violating section 332.1 of FDIC regulations. Section 332.1 prohibits the bank from guaranteeing or becoming surety upon the obligations of others. The bank was so cited because it guaranteed a $17,600 debt owed by ***, a bank customer, to the Small Business Administration, in order to facilitate the refinancing of $140,000 of *** debt. Examiner *** related all of the circumstances to me, and he asked met to determine, whether under the circumstances, a violation really exists and the bank might be required to take some corrective action.

The Legal Division of FDIC has long recognized an implied exception to the prohibitions of section 332.1. Where a bank has a "substantial interest" in the performance of an obligation, independent of the guaranty or surety, then the bank may act as guarantor or surety of that performance.

In my opinion, this exception applies to the bank's guarantee of Mr. *** $17,600 debt to the SBA. In making this guarantee, the bank was able to move a problem credit of significant size out of the bank and to limit the bank's potential loss to a maximum of $17,600. In addition, Mr. *** was able to obtain long-term, lower monthly payment financing which made him better able to service all his debts, including the $17,600 debt the bank guaranteed.

Accordingly, the bank will not be deemed to have violation section 332.1 of FDIC regulations, and no corrective action will be required.

If you have any further questions about this matter, please do not hesitate to give me a call.