FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Collateral Requirement of Federal Reserve Act Section 23A on Loans to Unaffiliated Third Party
September 13, 1988
Gerald J. Gervino, Senior Attorney
In your memorandum of August 18, 1988 you raised a question concerning the application of collateral requirements under subsection (c) of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c (1982). ["Section 23A"].
The facts of the situation with which you are concerned involve a non-member bank lending to unaffiliated third parties who use the proceeds to purchase stock in an affiliate and pledge that stock as collateral for a loan. Examiners in your region have used section (a)(2) of Section 23A ("Attribution Rule") to find transactions of this nature subject to the collateral requirements (subsection (c) of Section 23A). However, they have been confronted with a staff opinion of the Board of Governors of the Federal Reserve System which is published as the Board's staff opinion of March 19, 1984, 3-1199. The opinion states that a member bank's acceptance of the securities of an affiliate as collateral for a loan by the member bank to an unaffiliated party is a transaction subject to the quantitative limitations, but not the collateral requirements, of Section 23A.
We would follow this opinion of the staff of the Board of Governors of the Federal Reserve System in cases where the bank had extended credit to occasional borrowers who had presented affiliate securities as collateral. This is because we would be reluctant to overrule the obvious lack of coverage under the collateral requirements of subsection (c) for "covered transactions" under subsection (b)(7)(d). The latter provision covers the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to a third party. However, if the bank is actively promoting or otherwise involved in a program to attract loans secured by the affiliate's obligations, we would consider the provisions of the attribution rule applicable. If the attribution rule applies, it would bring into play the collateral requirements of Section 23A.
Under the latter circumstances, you ask if a subsection (c)(4) violation would supercede a (c)(1)(d) violation in the absence of any additional collateral or if a bank may be cited for two violations in one transaction.
Technically it would appear to be two transactions, although there would only be one remedy for the overlapping part of the violation. A bank exceeding the lending limits of (a)(1) would be in violation of that statute under coverage obtained through (b)(7)(d) or through (a)(2). Violation of the collateral provision of subsection (c) would only arise because of the use of the attribution rule. Thus, the only technical double violation here would be of the lending limits contained in subsection (a)(1).