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4000 - Advisory Opinions


Preferential Loans on Bank Stocks Involving Correspondent Banks

FDIC-79-17

December 11, 1979

Pamela E.F. LeCren, Attorney

Earlier this fall you requested an opinion from Mr. Quinton Thompson, Regional Director, Dallas Region, regarding the FDIC's position on bank stock loans where correspondent banks are involved. Your request has been forwarded to the Legal Division in Washington, D.C. for reply.

I will presume for the purposes of this letter that your request essentially seeks an interpretation of the provisions of Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. In general Title VIII prohibits (1) preferential lending by a bank to executive officers, directors, and principal shareholders of another bank when there is a correspondent account relationship between the banks, or (2) the opening of a correspondent account relationship between banks when there is a preferential extension of credit by one of the banks to an executive officer, director, or principal shareholder of the other bank. A loan is preferential for the purposes of Title VIII if it is not made on substantially the same terms (including interest rate and collateral) as those prevailing at the time for comparable transactions with persons not covered by Title VIII; it involves more than the normal risk of repayment; or it presents other unfavorable features. In the case of bank stock loans, if bank A makes bank stock loans to persons not associated with correspondents and those loans are made on the same or similar terms as those made to persons who are associated with correspondents, the latter will not be considered preferential.

Title VIII is prospective in nature. The statute does not prohibit the continuation of a correspondent relationship where a preferential loan made prior to March 10, 1979 is outstanding nor does it prohibit the maintenance and payment of the preferential loan in accordance to the terms of the contract where the loan was extended prior to March 10, 1979. The initial question in determining whether or not a Title VIII violation has occurred is whether or not there has been an extension of credit after March 10, 1979. As a bank can be said to be making an extension of credit on every day for which a demand loan is outstanding, in the case of a preferential demand loan entered into prior to March 10, 1979, there is a violation if the bank fails to renegotiate the loan so that it is nonpreferential.


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