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

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4000 - Advisory Opinions

Bank Guarantees of Customer Obligations are Prohibited


May 27, 1986

Clare N. Long, Regional Attorney

Your memorandum to Paul M. Rooney, Regional Director, dated April 2, 1986, called attention to a possible violation of Part 332 arising from the subject bank's guarantee of an obligation of its customer. Specifically, the bank agreed to guaranty payment in an amount up to $20,000.00 to anyone concerned for any purchases made in the name of *** or for any checks drawn on the *** account.

Part 332 of the FDIC rules and regulations (12 C.F.R. § 332) provides that a state nonmember insured bank may not guaranty or become surety upon the obligations of others, however, this limitation does not include acceptances, endorsements, or letters of credit made or issued in the usual course of the banking business. Although Part 332 of the Corporation's rules and regulations generally prohibits an insured state nonmember bank from acting as a guarantor upon the obligations of others, an implied exception has been allowed in situations where a bank has a "substantial interest" in the performance of the obligations. Where, for example, the bank that issued the guaranty was the creditor, it would have a substantial interest in the transaction. It does not appear that the bank is a creditor in the given situation, however, if the subject guaranty relates in any way to other obligations due to the bank from ***, perhaps the substantial interest exception might apply. The guaranty agreement also does not appear to be a letter of credit as defined by the Kentucky Revised Statutes. Pursuant to K.R.S. § 355.5-102(c), a credit issued by a bank which does not require a documentary draft or a documentary demand for payment must state conspicuously on its face that it is a letter of credit. The subject guaranty does not state that it is a letter of credit.

Accordingly, it appears that the subject guaranty agreement violates Part 332 of the FDIC rules and regulations, unless information is obtained which would cause it to fall within the substantial interest exception to the regulations.

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