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4000 - Advisory Opinions

Application of CEBA Grandfather Provision on Thrift and Loan Affiliated with Mortgage Banking Company and Securities Broker-Dealer


December 15, 1987

Alan J. Kaplan, Counsel

This responds to your letter of October 30 requesting our position on the applicability of section 103 of the Competitive Equality Banking Act of 1987 ("CEBA") to an affiliation involving your client, ***.

According to your letter, ***, a *** thrift and loan, has for some time been affiliated with ***, a mortgage banking company, and ***, a securities broker-dealer, by virtue of their common ownership by ***. Both affiliations predate March 5, 1987. ***, which currently is not federally-insured, is required by *** law to obtain, and is in the process of seeking, FDIC insurance.

As part of its mortgage banking business, *** packages and issues various kinds of mortgage-backed securities, in amounts aggregating several billion dollars a year. *** also engages in similar activities, but on a much smaller scale. Although your letter does not expressly so state, it is my understanding that *** and *** have been engaged in these activities since well before March 5, 1987.

Assuming *** is successful in obtaining FDIC insurance, *** and *** wish to continue thereafter to engage in the same mortgage-backed securities activities in which they were engaged before March 5, 1987, and to engage in other such activities of the same generic type, but in which they were not specifically engaged prior to March 5, 1987. In particular, they wish to form "real estate mortgage investment conduits" ("REMICs"). As provided in the Tax Reform Act of 1986, a REMIC is an entity that is formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property and issuing multiple classes of interests therein to investors. The conference report accompanying the Tax Reform Act of 1986 indicates that REMICs, although treated as corporations for Federal income tax purposes, were intended to be the exclusive means of issuing multiple-class real estate mortgage-backed securities without the imposition of two levels of taxation (i.e., once at the corporate level and once at the investor level).

You have asked us to confirm that, once *** becomes FDIC-insured, (1) the "grandfather" provision of section 103 of CEBA would permit the continuation of the affiliation between *** and ***, and (2) the grandfather provision would permit *** and *** to deal in all types of mortgage-backed securities, including the formation of REMICs, even if they were not engaged in that specific type of mortgage-backed securities activity prior to March 5, 1987.

This is to advise you that, in our opinion, section 103 of CEBA would not prohibit the continuation of the affiliation between *** and *** once *** obtains FDIC insurance, nor would it prevent *** and *** from forming new entities (including REMICs) as a means of engaging in mortgage-backed securities activities of the same generic type as those in which they were engaged prior to March 5, 1987.

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