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4000 - Advisory Opinions

Purchase of Low Quality Assets in Credit Card System


August 2, 1988

Gerald J. Gervino, Senior Attorney

In her letter of July 5, 1988, Judith K. Sinclair, Regional Counsel in our Dallas, Texas office, indicated to you that she would seek an opinion from Washington with respect to an issue concerning participations sold in connection with the credit card system of the ***. This letter is intended to answer that question.

The *** maintains the credit card system, RMBCS. It sells participations in a pool of receivables to other banks including *** one of its affiliates. In accordance with the terms of the participation agreement dated November 1, 1981, *** purchases its participant's percentage interest in the outstandings (the balance of receivables in the entire aggregate pool) for a period of one year and shares in the monthly revolving credit (earnings generated in connection with the outstandings after charge-offs.

Our examiner noted that the purchase included receivables which were "past due" or otherwise fit the definition of a "low quality asset" under § 23A(b)(10) of the Federal Reserve Act, 12 U.S.C. § 371c(b)(10)(1982).

The question was raised as to whether the "grandfather" provisions of section 410(c) of Title IV of Public Law 97-320 would "grandfather" the purchase of this participation since the arrangement has been carried on since 1981 (prior to the Bank Affiliates Act of 1982, Pub. L. 97-320). The answer to this question is negative because the loans making up the pool are being made continuously and the amounts that fall into the "low quality asset" category by becoming past due or otherwise uncollectible are changing constantly. Thus for "grandfathering" purposes, any question of "grandfathering" ended very soon after the effective date of the Bank Affiliates Act of 1982.

The purchase of the undivided interest is viewed as a purchase of each extension of credit in the pool, including those that are in a condition which would bring them within the definition of "low quality assets". As long as "low quality assets" are being purchased from the affiliate as part of an undivided interest in the pool of receivables, the bank is purchasing a "low quality asset" subject to the prohibition of section 23A(a)(3) of the Federal Reserve Act, 12 U.S.C. § 371c(a)(3)(1982).

We have spoken with the staff of the Board of Governors of the Federal Reserve System who agree with this conclusion. It appears impossible to come to any other conclusion as long as the pool contains those receivables that become past due or are otherwise within the definition of "low quality assets".

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