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4000 - Advisory Opinions

After December 19, 1992, Insured State Banks May Not Invest in Tax Certificates Without FDIC's Consent


November 17, 1992

Pamela E.F. LeCren, Counsel

Your October 14, 1992 letter to Alfred Byrne, General Counsel, FDIC, was forwarded to me for response. Your letter takes issue with a determination by the FDIC's Atlanta Regional Office that it constitutes an unsafe or unsound banking practice for [Bank] to invest in tax certificates as provided for by Florida law. The tax certificates are legal documents representing unpaid delinquent real property taxes, related costs, and charges issued in accordance with Florida law against a specific parcel of real property. The tax certificates are sold at auction. The regional office reached its conclusion based on the fact that the purchases by the bank of the tax certificates represent extensions of funds predicated solely on the value of the underlying real property, the certificates lack definitive repayment terms, the bank does not maintain financial information on the owners of the underlying property, and no appraisals are maintained on the underlying property. Your letter concedes that any investment, including an investment expressly authorized by the state, may constitute an unsafe and unsound practice depending upon the facts, however, you express your belief that the bank has developed adequate policies and procedures governing these investments. You furthermore characterize the Atlanta Regional Office as unjustly evaluating these investments based upon real estate loan criteria when the tax certificates should be considered to be investments and judged on their return and default history.

I have reviewed the Florida Statutes governing tax certificates as well as the copy of the bank's policy governing its investments in those certificates which was enclosed along with your correspondence. Based upon that review, I find no reason to over turn the Atlanta Regional Office conclusion regardless of whether the purchase of the tax certificates is considered to be a loan or an investment. It is clear from a reading of the applicable provisions of chapter 197 of the Florida Statutes that a holder of a tax certificate must look to the underlying real property owner, and ultimately the real property itself, in order to recover its principal and earn interest. The certificate holder has no apparent recourse against the taxing authority. Recovery depends entirely upon the property owner's ability to redeem the certificate and the liquidation of the property at tax sale if the certificates is not redeemed. In view thereof, the investment could be characterized as speculative.

The bank should also be aware that effective December 19, 1992 no insured state bank may make any investment that is not permissible for a national bank unless the bank meets the applicable capital standards and the FDIC determines that the investment does not pose a significant risk to the deposit insurance fund. (§ 24 of the FDI Act, 12 U.S.C. 1831a(a)). It is our understanding that the Office of the Comptroller of the Currency does not permit national banks to invest in tax certificates. Therefore, no insured state bank may do so after December 19, 1992 unless the FDIC consents. In view of the FDIC's position that investing in tax certificates constitutes an unsafe or unsound banking practice, it is unlikely that the FDIC would consent to the purchase.

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