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4000 - Advisory Opinions


Application of § 23A of the Federal Reserve Act to Purchase of Loans, Mortgages or Leases by De Novo Bank from Affiliated Institutions

FDIC 91-26 April 5, 1991 Gerald J. Gervino, Senior Attorney

BACKGROUND:

*** ("Bank") is a subsidiary of *** ("BHC" or "Holding Company"). BHC owns ***, *** and *** ("Mortgage and Leasing Subsidiaries").

BHC wanted to capitalize the proposed bank solely with the stock of its mortgage and leasing subsidiaries. You had asked whether this transaction would be subject to the coverage of § 23A of the Federal Reserve Act, 12 U.S.C. § 371c (1988) ("§ 23A''). We answered in the affirmative.

The proponents have materially revised their application. You now ask for our opinion concerning the application of § 23A to the facts and proposals set forth in the revised application.

Unlike the initial application of the proponents, the revised application calls for a $*** million capital contribution in cash and no longer includes the contribution of the stock of two affiliated lending companies. This change substantially addresses the questions we had earlier raised with respect to the original proposal.

In response to your specific inquiry with respect to the group's future plans to transfer loans from the *** bank to the proposed bank, we note that § 23A(d)(6) provides an exemption for the proposed bank's purchase of loans on a nonrecourse basis from affiliated banks.   This does not extend to the purchase of low-quality assets or to transactions on terms and conditions that are not consistent with safe and sound banking practices.

You also indicate that the proposed bank may later purchase a limited amount of mortgages or leases from its affiliated mortgage and leasing companies. These transactions would be subject to the limitations of § 23A for covered transactions.


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