FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Loans to Affiliates: Section 23A
June 28, 1989
Gerald J. Gervino, Senior Attorney
In your letter of June 8, 1989, you write on behalf of your client, *** ("bank"), an FDIC insured industrial bank. You ask us to review certain proposed transactions between the bank and its parent, a corporation engaged in the business of financing installment contracts for durable goods.
The bank is interested in purchasing certain installment contracts for durable goods. It presently intends to obtain the contracts by purchasing them from its parent. The bank wishes to obtain certain of its parent's "high quality" assets i.e., installment contracts that obtain a higher score than the minimum acceptable credit score of its parent.
In order to ensure that its proposed transactions comply with Section 23A of the Federal Reserve Act, 12 U.S.C. 371c (Section 23A), your client intends to engage only in transactions that conform to the basic factual assumptions upon which the Board of Governors of the Federal Reserve System based its opinion entitled "Applicability of section 23A of the Federal Reserve Act to a member State bank's purchase of, or participation in, a loan originated by a mortgage banking affilliate." The opinion was reported at 39 FR 28975 (Aug. 13, 1974). The Code of Federal Regulations contains the opinion at 12 C.F.R. Part 250--Miscellaneous Interpretations of the Board of Governors of the Federal Reserve System.
In order to ensure that its proposed transactions comply with Section 23A, the bank will only purchase assets from its parent by using one or both of the methods described below.
An employee of the bank will make periodic visits to the parent's office(s) to evaluate potential installment contract purchases. At the time of the bank employee's visit, the parent may have pre-screened credit applications for review by the bank employee by obtaining a credit score using the parent's computerized credit scoring system and presenting only those applications receiving above a threshold score (pre-set by the bank) to the bank employee for his review. However, none of the pre-screened applications will provide the bank employee with the credit scores obtained from the parent's computerized system and credit information compiled by the parent about the applicants for credit. The bank's employee will review such credit information and decide whether to commit to purchase these assets. If the bank commits to purchase one or more of the installment
contracts, the parent will commit to purchase the underlying installment contract(s) between the customer and the dealer.
After the parent inputs credit data about credit applicants into its computerized credit scoring system and obtains credit scores for these applicants, applications scoring above a threshold score (pre-set by the bank) will be relayed to the bank by computer modem and stored in a temporary on-line file, which will contain both the credit scores and underlying credit data that is analyzed in determining such scores. Although the parent will transmit pre-screened applications for review by the bank, none of these applications will have been approved by the bank prior to the completion of the bank's credit review. The bank's credit review will involve a bank employee examining the credit data and deciding whether to commit to purchase the installment from the parent. If the bank commits to purchase one or more of the installment contracts, the parent will commit to purchase the underlying installment contract(s) between customer and dealer.
You also state that the contracts between the bank and its parent will enable the bank to opt out of any commitment that involved a contract which became lower quality between the time of the bank's commitment to purchase a contract and the parent's subsequent resale to the bank.
You ask that we confirm that your client bank's purchases of installment contracts from its parent as you have described in your letter would not be subject to Section 23A's restrictions.
We do not consider ourselves bound by the interpretation now appearing at 12 CFR 250.250 because it is not an interpretation of the FDIC, was made with respect to a statutory scheme that was repealed by Congress in 1982, and has not to our knowledge been formally affirmed by the Board of Governors of the Federal Reserve System under the Banking Affiliates Act of 1982, 96 Stat. 1515 (Jan. 12, 1982).
With one exception, we do not find anything objectionable in the procedures which you have stated in your letter insofar as Section 23A compliance is concerned. We are concerned with your statement that the bank may opt out of purchasing assets whose quality has deteriorated since the time of the bank's committment.
We understood that the Board of Governors of the Federal Reserve System opinion assumed that the loans for which a bank committed would be transferred to the bank soon after the committment in order to guard against the possibility of an affiliate using the committment as a kind of guarantee in the event that some of the loans eventually experienced deterioration.
We would consider the "warehousing" of loans by a parent for delayed sale to a bank as outside the scope of the 12 CFR 250.250 interpretation's intended coverage. Thus, if warehousing exists, we would view delayed sales as subject to the restrictions of Section 23A of the Federal Reserve Act.
If you have any further questions, please write or call me.