4000 - Advisory Opinions
Applicability of Federal Reserve Act § 23A to Bank's Purchase of Receivables From Affiliate Credit Card Company's Customers' Credit Card Accounts
January 4, 1994
Gerald J. Gervino, Senior Attorney
You have written on behalf of a client insured non-member State bank ("Bank"). You solicit our advice concerning the applicability of § 23A of the Federal Reserve Act, 12 U.S.C. § 371c, to a proposed business arrangement which your client is presently considering.
Your client is affiliated by common ownership (§ 23A(b)(1)(C)(i)) with a foreign credit card company ("Affiliate''), which is one of the major issuers of two international credit cards in two foreign countries.
The Bank is interested in purchasing receivables from certain of the credit card accounts of the Affiliate's credit cardholders. Under the proposed arrangement, the Bank would be offered the right to purchase without recourse receivables generated under specific cardholders' accounts selected from one of several portfolios of credit card accounts owned by the Affiliate. The only receivables purchased by the Bank would be U.S. dollar denominated transactions arising from purchases made by the cardholders or cash advances made in U.S. dollars.
To the extent possible, based upon the information made available to the Bank by the Affiliate and any current credit report which the Bank is able to obtain, prior to purchasing any credit card receivables, the Bank will make its own evaluation of the individual credit worthiness of each credit cardholder to be included in the group of card accounts from which the Bank will make purchases. The Bank will seek to obtain and review with respect to each included cardholder (i) each original application and supporting documentation, as updated, (ii) a recent credit report for the minority of cardholders who have a U.S. social security number, and (iii) the previous year's actual payment history. The Bank will make an evaluation of the Affiliate's credit analysis and decision-making systems for opening credit card accounts.
If the Bank determines that a cardholder satisfies its credit standards, it may purchase future receivables of that cardholder from the Affiliate at face value. Any contractual terms with the Affiliate will be on terms and conditions which are no more favorable to the affiliate than those which the Bank would be willing to offer unrelated parties. The Bank could, by giving advance notice, terminate future purchases of a cardholder's receivables.
You suggest that the primary question raised by the proposed arrangement is whether the proposed purchase should be subject to the amount limitations of § 23A(a)(1). You feel that the purchases should be excluded from the amount limitations as if they were direct loans to the cardholders, rather than "covered transactions," a term which, by definition, includes a purchase of assets (§ 23A(b)(7)(C)).
You rely upon a Federal Reserve interpretation, "Applicability of section 23A of the Federal Reserve Act to a member State bank's purchase of, or participation in, a loan originated by a mortgage banking affiliate." 39 FR 28975 (August 13, 1974), 12 CFR § 250.250 (1993).
As you correctly indicate that opinion took the position that a purchase by a member State bank of a mortgage note from a mortgage banking affiliate would involve a loan or extension of credit to the affiliate if the latter had either made, or committed itself to make, the loan or extension of credit evidenced by the note prior to the time when the member bank first obligated itself, by commitment or otherwise, to purchase the loan or a participation therein.
The opinion went on to state that there would be no loan or extension of credit by the member bank to its mortgage banking affiliate if the member bank's commitment to purchase the loan, or a participation therein, is obtained by the affiliate within the context of a proposed transaction, or series of proposed transactions, in anticipation of the affiliate's commitment to make such loan(s), and is based upon the bank's independent evaluation of the credit worthiness of the mortgagor(s).
You concentrate upon the meanings of the above mentioned terms "commitment" and "independent evaluation of the credit worthiness." You feel that the issuance of a credit card to a customer does not constitute a commitment to extend credit. You indicate that in your opinion no commitment exists until the authorization for a purchase or cash advance is given by the Affiliate with respect to the specific transaction.
We disagree. We consider the issuance of a credit card to be an extension of credit to a customer. Further, we consider the purchase of existing credit card accounts (even confined to future charges) to be a purchase of an asset (the customer relationship). In the case you have presented, the Affiliate has already obligated itself as the issuer of its credit cards, regardless of any authorization requirements it may impose in whatever circumstances it chooses. At the very least, establishing the credit card customer account is itself a commitment on the part of the Affiliate. Purchasing these credit card accounts can be a way of providing working capital to the Affiliate.
We would not follow 12 CFR § 250.250 under the facts that you have presented. Thus, the transactions which you have outlined appear to be covered transactions subject to the amount restrictions and collateral requirements of § 23A. We have informally spoken with the staff of the Board of Governors of the Federal Reserve System, who agree with our opinion.
If you have any further questions, please write or call me at (202)898-3723. My Fax number is (202)898-3715.