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4000 - Advisory Opinions

Attribution Rule and Collateral Requirements of § 23A of the Federal Reserve Act Apply to Loan Secured by Parent Holding Company's Subordinated Capital Notes


January 15, 1992

Gerald J. Gervino

Senior Attorney

You have asked for an interpretation or clarification of our Advisory Opinion No. 88-61 in the context of the factual situation surrounding discussions and correspondence with counsel for a nonmember bank ("bank") in your region.

The bank made several loans to individuals, the proceeds of which were used to purchase subordinated capital notes of the bank's parent holding company. The holding company notes were used to collateralize the loans of the noteholders. Counsel indicates that $1,500,000 of the notes were sold by the holding company in conjunction with the sale of $1,000,000 of the holding company's common stock between 1987 and 1989. Our examiner indicates that $300,000 of these securities were pledged by unaffiliated noteholders to the bank. It is the loans, so collateralized, that are in question.

In FDIC Advisory Opinion No. 88-61 (September 13, 1988), we indicated that we would follow the staff opinion of the Board of Governors of the Federal Reserve System No. 3-1199 (March 19, 1984) in instances where a bank accepted securities issued by its affiliate as security for a loan or extension of credit to occasional third party borrowers. In line with the Federal Reserve opinion, we would subject those loans or extensions of credit to the amount restrictions of § 23A(a)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(a)(1) ("§ 23A''), but would not apply the attribution rule of § 23A(a)(2).

In our opinion, we also indicated, that if a bank is actively promoting or otherwise involved in a program to attract loans secured by an affiliate's obligations, we would consider the provisions of the attribution rule applicable. Under those circumstances, the collateral requirements of § 23A(c) would apply.

Under the facts presented here, approximately 20% of the note issue was taken by noteholders financing at the bank with affiliate collateral. This amount suggests that the borrowings by purchasers of the affiliate notes were more than occasional. An investigation of the facts surrounding the issuer and the secured financing might lead to the conclusion that the attribution rule should be applied. If the attribution rule were applied, the collateral requirements of § 23A would apply.

If you have any further questions or would like further explanation of our letter, please write or call us.

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