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4000 - Advisory Opinions

Interests of Bondholders in CDs Issued by Thrifts Prior to July 29, 1990 Continue To Be Insured Pursuant to FSLIC Insurance Regulations Until First Maturity Date


June 30, 1992

Mark A. Mellon, Attorney

This is in response to your letter of June 5, 1992 to the Memphis Regional Office of the FDIC. It has been referred to me for handling.

Based on your letter and a conversation with your counsel, Mr. ***, it is my understanding that your institution, *** ("[Bank]" acts as trustee for bond indentures issued by the [State] Public Facilities Authority (the "Authority")). Pursuant to the terms of the indentures, the Authority has sold series of revenue bonds to the general public. The proceeds of these sales were placed in certificates of deposit ("CDs") of savings and loan associations ("thrifts"). The thrifts then loaned funds to assist in the financing of multifamily residential rental developments. The CDs are the sole security for repayment of the revenue bonds.

You request information as to the amount of insurance coverage available for these CDs. You wish to ascertain whether the terms of the agreements entered into by the Authority and the thrifts remain in force if a thrift either defaults or is put into conservatorship by the RTC. You also request our opinion as to whether the fact that the deposits were originally made by a different bank acting as trustee which was subsequently merged into [Bank] might have any effect on deposit insurance coverage.

Under the insurance regulations of the now-defunct Federal Savings and Loan Insurance Corporation (the "FSLIC"), the interests of bondholders in CDs issued by thrifts to secure repayments of the bonds were insured as trust estates if the bonds were issued pursuant to a trust indenture which created an irrevocable express trust for the benefit of a bondholder which was valid under state law. 12 C.F.R. § 564.10, redesignated as 12 C.F.R. § 386.10. If the recordkeeping requirements of 12 C.F.R. § 564.2, redesignated as 12 C.F.R. § 386.2, were complied with, the interest of each bondholder in the CDs was separately insured by the FSLIC as a trust estate up to $100,000.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the "FIRREA") abolished the FSLIC and made the FDIC the insurer of thrift deposits. Pursuant to section 402(c)(3) of the FIRREA, the FDIC promulgated uniform deposit insurance regulations for deposits in all insured depository institutions, including thrifts which were formerly FSLIC-insured. The effective date for these regulations was July 29, 1990. The new regulations provide that any time deposits issued by an insured depository institution on or before the effective date of the new regulations are entitled to the insurance protection provided by the regulations which previously applied until the first maturity date of those time deposits. 12 C.F.R. § 330.16(b). This means that the interests of the bondholders in CDs issued by thrifts prior to July 29, 1990 will continue to be insured pursuant to the FSLIC insurance regulations until the first maturity date of the CDs.

With regard to your second question, if an operating thrift has been put directly under Resolution Trust Corporation ("RTC") conservatorship and there has been no prior default and receivership of an insured depository institution, the terms of the agreement between the thrift and the Authority should still continue in effect since the parties to the contract still exist and are bound to observe their contractual obligations. In the event of a receivership, however, one of the parties to the contract, the thrift, will be extinguished. Another party, for example, a thrift, may agree to assume the CDs pursuant to the same terms and rates agreed to be the defaulted thrift. What is more likely to occur, however, is that deposit insurance will be made available to the bondholders by means of an insured deposit transfer through a thrift acting as agent for the RTC. The obligation of the thrift in that case is only to provide funds to bondholders up to the insured limit. This may result in default under the terms of your trust indenture.

Turning to your last question, under the FSLIC insurance regulations, before a claim for deposit insurance based on a fiduciary relationship can be made, the relationship must be disclosed in the account records of the defaulted insured thrift. 12 C.F.R. § 564.2(b)(1) redesignated as 12 C.F.R. § 386.2(b)(1). If this disclosure requirement is met, the details of the relationship and the interests of the other parties in the account may then be ascertained either from the records of the insured thrift or from the records of the nominal accountholder. 12 C.F.R. § 564.2(b)(2) redesignated as 12 C.F.R. § 386.2(b)(2).

You state that the records of the thrifts disclose that the previous bank which was merged into [Bank] holds the bond proceed funds as a trustee for the Authority. It is my opinion that this is sufficient to meet the FSLIC disclosure standard. Therefore, in the event that it becomes necessary to make an insurance determination for such deposits, it will be permissible under FSLIC insurance regulations for [Bank] to offer documentation which proves that it is the successor in interest to the previous bank and the proper party to provide information on the interests of the bondholders. If new CDs were issued listing [Bank] as trustee, however, the insurance determination could probably be carried out more quickly.

I hope that this letter is responsive to your inquiry. Please do not hesitate to contact me if you should have any questions about this or any other matter.

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