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4000 - Advisory Opinions

Exemption for Customer-Sponsored Credit Card Programs Under 12 C.F.R. § 332.3 Does Not Extend to Credit Cards Issued to Businesses

FDIC-91-67 August 1, 1991 Pamela E.F. LeCren, Counsel

The following is in response to your inquiry under Part 332 of the FDIC's regulations.

According to your May 20, 1991 letter to Mr. Roger Hood, Assistant General Counsel, FDIC, and your June 3, 1991 letter to me supplementing your earlier correspondence, *** ("[Bank]") proposes to make its credit cards available to small businesses that are existing customers of nonmember banks with which [Bank] is affiliated. The affiliated institutions will undertake to guarantee the indebtedness under the cards and will receive a referral fee for each customer whose credit card application is approved by [Bank]. The credit cards will be issued in the name of an employee, officer, partner, etc. of the business and are to be used by the holder for business expenses. In deciding whether to refer a customer to [Bank], the affiliated institutions will assess the creditworthiness of the business and not the individual to whom the card is issued. Likewise, [Bank] will assess the creditworthiness of the business customer in determining whether or not to issue the credit cards. Card statements are sent to the individuals in whose name the cards are issued. In some cases, the individual card holder may make payment directly to [Bank], in others the business will make the payments. In the former case, it is the business entity that is responsible for payment of the balance due if the individual does not make payment.

Lastly, according to your letter, [Bank] and its affiliates propose to enter into the above described arrangement in order to centralize the issuance of credit cards in the [Bank] family thus avoiding costly duplication of function and unnecessary diversion of the resources of the affiliated banks.

Part 332 of the FDIC's regulations prohibits any insured nonmember bank from, among other things, guaranteeing the obligations of another. The general prohibition is subject, however, to several express exceptions one of which provides that:

check guaranty card programs, customer-sponsored credit card programs, and similar arrangements in which a bank undertakes to guarantee the obligations of individuals who are its retail banking deposit customers are exempted from § 332.1 of this subchapter: Provided, however, that the bank should establish the creditworthiness of the individual before undertaking to guarantee his/her obligations and that any such arrangement to which a bank's principal shareholders, directors, or executive officers are a party be in compliance with applicable provisions of Federal Reserve Regulation (12 C.F.R. Part 215). [Emphasis added].

Your letter inquires as to whether the above exception would apply to the sponsorship of the business customers by [Bank]'s affiliated institutions in the above described credit card program and their guarantee of the indebtedness incurred thereunder. For the reasons set out below, our response is no. Therefore, if any of the affiliated banks undertake to guarantee the credit card indebtedness of any of its business customers to [Bank], that guarantee will violate section 332.1 of the FDIC's regulations.

As you can see from the language of the credit card program exception, the exception contemplated the guarantee by a bank of the credit card indebtedness of individual natural persons incurred under a credit card issued by another institution. There is nothing in the administrative record amassed during the consideration of the adoption of the exception to indicate that the exception was meant to cover cards issued to businesses (or employees thereof) for use in connection with the business. While we recognize that there may be some benefits to the affiliated banks in being able to sponsor their business customers into the program, the fact remains that the language of the exception does not allow for extending the exception to businesses.

We would like to bring to your attention in closing that guarantees structured in the form of a standby letter of credit do not violate section 332.1. Therefore, [Bank]'s affiliated institutions may be able to sponsor their business customers into the credit card program if, instead of issuing a guarantee of the customers' indebtedness, a standby letter of credit arrangement is entered into.

If you have any questions, please do not hesitate to contact me.

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