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4000 - Advisory Opinions

Dealer's Bank Agreement Conforms to 12 CFR 337.2 Definition of Standby Letter of Credit


January 9, 1985

Jules Bernard, Senior Attorney

Thank you for your letters of March 21, June 29, and November 5, 1984. I regret that the FDIC has not answered you sooner. Please accept my apology on behalf of the agency.

In your letter of March 21, 1984, you enclosed a copy of an agreement that *** asks its dealers' banks to execute. The agreement authorizes *** (the beneficiary of the arrangement) to ship equipment to its dealers, and to present the invoices directly to the bank; the bank agrees to make payment to *** on behalf of the dealer.

I note that the agreement contains several safeguards for the bank. Before *** ships any equipment to its dealer in accordance with the agreement, *** must contact the bank and receive the bank's approval for the shipment. In addition, the bank may terminate the authorization upon twenty-four hours' notice.

You posed the following question:

The issue specifically presented is whether or not the attached Letter of Guaranty violates the provisions of 12 CFR Section 332.1, which generally prohibits a state non-member bank from assuming the power "to guaranty or become surety upon the obligations of others".

In my view, the agreement conforms to the definition of a "standby letter of credit" set forth in section 337.2(a) of the FDIC's regulations, 12 C.F.R. § 337.2(a). Accordingly, the prohibition expressed in Part 332 does not bar the use of the agreement.

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