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4000 - Advisory Opinions

Insured Nonmember Bank Receiving and Disbursing Foreign Bank Loan Proceeds


October 7, 1982

Thomas A. Brooks, General Counsel

This is in response to your July 7 letter regarding a proposal by *** that was the subject of our June 8 letter and earlier correspondence with ***.

As we understand it, *** proposal would involve a state nonmember insured bank receiving $20 million, representing the proceeds of a loan from anonymous foreign lenders bearing interest at 10.5% per annum and maturing in 1991. Since current market interest rates are well above 10.5%, the bank, as trustee, would be able to purchase $20 million of U.S. government securities at a cost of, say, $15 million (assuming a 14% market rate). These securities would mature in 1991 providing the $20 million for the bank to repay the loan and in the meantime would accrue interest at 10.5% (or higher) to pay annual interest due on the loan. After paying about $1.3 million in fees and commissions to foreign intermediaries, the bank would have about $3.7 million left to disburse to *** and his associates.

Our June 8 letter stated that "it would not seem appropriate for us to be giving advance approval to promotional arrangements of this type unless a state nonmember insured bank is seriously considering participation therein." Accordingly, we suggested in that letter "that the way to resolve this matter would be for an interested bank to submit all relevant facts and documentation to the appropriate FDIC regional office (which would be our Memphis Office in the case of a Louisiana bank) for any necessary clearances."

We continue to be of the opinion that this would be the proper way to seek a resolution of this matter. Nevertheless, we have reviewed the materials which have been provided to us and offer the following comments concerning the proposed transaction.

The bank's functions involve receiving and disbursing the loan proceeds, disbursing certain fees, purchasing at discount from a part of the loan proceeds certain U.S. Treasury obligations and holding them for safekeeping, collecting interest on the Treasury obligations, redeeming those obligations at maturity and disbursing the proceeds (both principal and interest) to the lenders. In addition, the bank will endorse the notes as part of the transaction and thereby incur potential liability for repayment of the loan.

This endorsement constitutes a guaranty of the obligation of another party and would appear to be a violation of section 332.2 of FDIC regulations (12 C.F.R. § 332.2).

The trustee bank's guaranty also extends to "all of the terms, conditions and requirements of the promissory note instrument . . .". The note represents that it is free of deductions for or on account of any taxes, imposts, levies, or duties. The endorsement may be construed as imposing liability for payment of such sums on the bank in the event they were not paid by the borrower. This obligation would also constitute a guarantee of the payment of the obligation of a third party and would be in violation of 12 C.F.R. § 332.2.

It should also be pointed out that the exception from the prohibition against issuing guarantees in § 332.1(d) of our regulations covering endorsements issued in the usual course of the banking business would not seem to exempt the endorsement of notes issued by the foreign lenders' trust in this case, since such endorsement would be an accommodation endorsement in the nature of a guarantee of payment without any benefit flowing directly to the bank as a result thereof (other than its fee). An example of an endorsement issued in the usual course of the banking business would be a bank's endorsement on paper it discounts with the Federal Reserve or a correspondent bank or in the normal course of its check clearing function. The endorsements contemplated by *** would not appear, on the basis of the information we have available, to meet the standards of this exemptive language.

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