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4000 - Advisory Opinions

Preferential Bank Stock Loans in Correspondence Relationship


December 17, 1979

Pamela E. F. LeCren, Attorney

Your letter to Dallas Regional Counsel, Charles M. Pickett, dated October 22, 1979 has been forwarded to the FDIC Legal Division in Washington, D.C. for reply. According to your letter, *** entered into certain bank stock loans in September of 1977. The loans are evidenced by six-month promissory notes. Correspondence between the loan officer and the borrowers indicates that the interest rate on the loans will be either at Dallas prime or 8-1/4; percent. If the latter rate is taken, the rate is to last for the life of the loan. It is also indicated that the individual loans will be renewable on a six-month basis and a reduction program that will amortize the loan over a ten-year period will be followed. You further state that the loans have been renewed at the 8-1/4 percent interest rate. Prime in the Dallas area was 7-1/4 percent when the loans were made.

You have requested an opinion as to whether or not the above factual circumstance constitutes a violation of Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRIRCA"). Title VIII generally prohibits a bank from making a preferential extension of credit to directors, officers, or principal shareholders of one of its correspondent banks. I will presume for the purposes of this opinion that the subject loans were made to such persons.

Title VIII does not prohibit the continuation of a correspondent relationship where a preferential loan was extended prior to March 10, 1979. Nor does the statute prohibit the maintenance of a preferential extension of credit and payment according to the terms of the contract when the contract was entered into prior to March 10, 1979. In short, whether or not the fact situation you present involves a violation of Title VIII will depend initially upon whether *** can be said to have made an extension of credit after March 10, 1979. The fact that the loans are evidenced by six-month promissory notes that are renewed indicates a new extension of credit is being made every six months.1 The additional correspondence setting up an amortization schedule is only relevant if under *** law the correspondence forms part of the loan contract. If such is the case and the loans are considered under state law to be installment loans payable over a ten-year period, there has been no new extension of credit. If the result of including the correspondence in the contract is to obligate *** to renew the loans at 8-1/4 percent every six months for 10 years, there has been, in our opinion, no new extension of credit. When a bank is bound by a contract predating the effective date of Title VIII to renew an extension of credit at specified terms and has no power to vary those terms so that they would not be preferential, that renewal is not an extension of credit within the meaning of that term as used in Title VIII. It is the intention of the FDIC to follow the above interpretation except in cases where the parties entered into the contract in contemplation of Title VIII and in order to avoid its prohibitions.

Assuming that there has been a new extension of credit, the next question is whether or not a current bank stock loan to a director, officer or principal shareholder of a correspondent bank at 8-1/4 percent is preferential. If *** is currently making bank stock loans to persons not associated with its correspondent banks at higher interest rates, then the loans would be preferential under Title VIII.

1 Extension of credit is defined for the purposes of Title VIII in the same manner as the term is defined in Federal Reserve Board Regulation O (12 C.F.R. Part 215). That definition includes the renewal of a loan as an extension of credit. Go back to Text

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