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4000 - Advisory Opinions

Bank's Purchase of Mortgage Servicing Rights from Affiliate


April 29, 1988

Gerald J. Gervino, Senior Attorney

We have received a copy of your March 24, 1988 opinion addressed to the ***. The opinion deals with the retention of servicing rights by the bank after the sale of a portfolio of real estate mortgage loans to a number of purchasers.

Your opinion was provided in response to criticism by bank examiners of the bank's purchase of mortgage servicing rights from its affiliate. The examiner indicated that this purchase of servicing rights was a "covered transaction" under section 23A of the Federal Reserve Act 12 USC 371(c)(1982) ("Section 23A") because it was a purchase of assets from an affiliate in excess of 10% of the bank's capital stock and surplus. Section 23A (a)(1)(A), (b)(17)(C).

In your opinion, you do not dispute that the amount of the transactions would be in excess of the applicable limits of Section 23(A)(a)(1), but contend that the "purchase of information and services" from an affiliate does not constitute a "purchase of assets".

We feel that this transaction does not involve the "purchase of information and services", since no information or service is being provided by the affiliate. What is being purchased is a right to receive income for servicing mortgages. This appears to be the same as any other contract right, which can be a valuable asset, and which is recognized as an intangible asset in our reports of condition. See the Report of Condition Item 10, Assets and Report of Condition memoranda, and items 6(a) and 6(d) FFIEC 034 (3/86). This classification of mortgage servicing rights as an asset would also apply to your bank if it were subject to the disclosure provisions of the Security Exchange Act of 1934, 15 U.S.C. 78a et seq. (1982).

You quote an excerpt from an opinion of the Controller of the Currency indicating that "purchase of assets" in section 23A was not meant to include the purchase of information or services. CCH Federal Banking Law Reporter #85,430 (83-84 Dec.) which you have highlighted. That letter dealt with the purchase of information and services from an affiliate. Here, no information or services are being purchased from any affiliate. Instead, a contract right to provide services (rather than receive services) for an established revenue is here involved. The cost of that contract is considered an asset by the FDIC and the other Federal Bank Regulatory Agencies.

You cited several tax opinions which you feel are relevant to this case. We do not take into consideration tax opinions with respect to our call reports or our disclosure requirements or any other purpose, because tax bookkeeping is entirely different from that used for banking purposes. For example, a U.S. Government security would not be a "capital asset" under some circumstances for tax purposes. Thus tax opinions would never be the standard for bank supervision purposes.

Mortgage servicing rights, in our view, are quite clearly encompassed within the range of assets which may be a "covered transaction" under Section 23A (b)(7) (1982) of the Federal Reserve Act.

Under certain circumstances, the purchase must meet the restrictions set forth in Section 23(A) of the Federal Reserve Act, including the restriction that a covered transaction must not exceed 10% of the capital stock and surplus of the bank.

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