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4000 - Advisory Opinions

Bank Guaranty Not in Violation of Part 332 Due to Substantial Interest Exception


July 19, 1983

Fredric H. Karr, Attorney

This will reply to your letter of July 8, 1983 to Roger A. Hood. You state that you are counsel to the * * * Bank, which is a state-chartered (Pennsylvania) mutual savings bank. Further, you state that the * * * plans to engage in a transaction identical to that described in a letter of July 8, 1983 from Joseph A. DiNuzzo of the FDIC Legal Division.

You wish that we concur in writing the legality of your bank's proposed transaction. According to Mr. DiNuzzo's letter, the issue was whether an FDIC-insured savings bank in Massachusetts was allowed to sell to an investment banking firm ("Sponsor") a number of industrial revenue bonds it held in its investment portfolio. Before the Sponsor was to purchase the bonds, however, the bank agreed to fulfill many conditions. Mr. DiNuzzo stated that in general, Part 332 of the FDIC regulations ("Powers Inconsistent with Purposes of Federal Deposit Insurance Law") prohibited state nonmember insured banks to guarantee or become surety upon the obligations of others. However, he then pointed out that the FDIC recognizes an exception to this rule where the guarantor bank disposes of its own paper and/or has a "substantial interest" in the underlying transaction.

After reviewing the proposed transaction in that case, Mr. DiNuzzo concluded that a guaranty offered by the bank to the trust and the holders of interests therein would not be violative of Part 332 of the FDIC regulations. According to Mr. DiNuzzo, this would be so because as stated above, the bank would be guaranteeing obligations sold for its own account and because the bank would have a substantial interest in the overall transaction.

Assuming that your bank's proposed transaction is identical to the one described by Mr. DiNuzzo in his letter, then the FDIC Legal Division will confirm the legality of this transaction. We note that Part 332 of the FDIC regulations is geared toward insured nonmember banks, which includes mutual savings banks such as yours. Also, Mr. DiNuzzo concludes at the end of his letter that his opinion does not address any issues which may arise under the applicable laws and regulations of Massachusetts. On this note, we would state that the instant opinion does not address any issues which may arise under the applicable laws and regulations of Pennsylvania.

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