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4000 - Advisory Opinions

Bank May Establish Line of Credit For Purpose of Funding Mortgage Loans Originated by Mortgage Company Subsidiary Under Section 23A of the Federal Reserve Act


May 18, 1993

Gerald J. Gervino, Senior Attorney

You have requested our opinion as to whether or not [Bank] can establish a line of credit for the purpose of funding mortgage loans originated by *** ("Mortgage Company"). Your bank owns 65% of the mortgage company, while the [Affiliate Bank] owns the remaining 35%. Both your bank and the [Affiliate Bank] are wholly owned by *** ("Holding Company").

The line of credit would be secured by an assignment of all promissory notes and deeds of trust originated on loans closed by the holding company. The mortgage company will in turn sell the loans and use the proceeds to pay off the bank.

§ 23A of the Federal Reserve Act, 12 U.S.C. § 371c (1988) ("§ 23A") appears to be applicable in the circumstances which you have set forth. The mortgage company is considered a "subsidiary" of your bank under the definition set forth at paragraphs (b)(3)(A) and (b)(4) of § 23A. It appears to be a company, other than a bank, that is a subsidiary of your bank for the purposes of § 23A(d)(2)(A). Because of this, the mortgage company is not considered an "affiliate" of your bank for § 23A purposes. Under the circumstances as we understand them, transactions between your bank and the mortgage company would not be restricted by § 23A.

Covered transactions between the mortgage company and affiliates of the bank are aggregated with transactions between your bank and its affiliates for purposes of the lending limitations and the collateral requirements of §§ 23A(a) and (c) unless they qualify for an independent exemption.

The above opinion is confined to the question of whether or not § 23A of the Federal Reserve Act, 12 U.S.C. § 371c (1988) applies to the facts which you have presented. We have not considered other Federal statutes with which I may not have frequent contact. Nor have we considered any applicable State law. We suggest that you consult with local bank counsel with respect to any questions concerning State law or regulation.

If you have any further questions, please write or call me at (202)898-3723.

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