FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Application of Section 23A of the Federal Reserve Act and the Application of Florida Statutes to Loans Secured by Stock of BHC
March 23, 1994
Richard M. Fraher, Regional Attorney
This responds to your letter dated April 28, 1993, which was addressed to Regional Director Lyle V. Helgerson. Your letter has been referred to me for response. I apologize for the delay in answering your letter.
Two separate issues were addressed in your letter. The first issue concerns the application of Florida Statutes section 658.48 to certain loans which were secured by stock of [BANK HOLDING COMPANY (BHC)]. The second concerns the application of section 23A of the Federal Reserve Act to certain credits which *** Bank, Miami, Florida (the "Bank") extended to Mr. [X] and Mr. [Y].
A. Apparent Violation of State Law
The question of whether the Bank violated section 658.48 of the Florida Statutes by accepting the stock of [BHC] as collateral for certain loans has been resolved by the appropriate state authority. The Florida State Banking Department cited the Bank for apparent violations of section 658.48 in the state's report of examination of the Bank as of December 31, 1992. You are reminded that violations of law by the Bank and its institution-affiliated parties are not acceptable to the FDIC and may result in administrative enforcement actions.
B. Apparent Violation of Section 23A
Your second inquiry concerned certain loans which the Bank extended to Mr. [X] and Mr. [Y]. The question is whether these loans violated subparagraph (c) of section 23A of the Federal Reserve Act ("section 23A"), 12 U.S.C. § 371c(c). The relevant facts are as follows:
On June 27, 1992, the Bank made two loans, one in the amount of $150,000 and the other for $350,000, to Mr. [X] President and Chief Executive Officer of *** Bank of California, to finance 100 percent of the purchase price of original issue preferred stock of *** Bank of California. In June 1992, *** Bank of California was an affiliate of the Bank within the meaning of section 23A, because they were both controlled by [*** family]. The loans to Mr. [X] were secured by an undesignated number of shares of preferred stock of *** Bank of California that Mr. [X] purchased with the loan obtained from the Bank.
In June 1992, the Bank extended a loan to Mr. [Y] in the amount of $350,000. The proceeds were used to finance 50 percent of the purchase price of 150,000 newly issued common shares of *** Bank, N.A., Washington, D.C. The loan to Mr. [Y] was secured by the common stock of *** Bank, N.A. that Mr. [Y] purchased. *** Bank, N.A. and the Bank are affiliates within the meaning of section 23A by virtue of their common control by [*** family].
By letter dated April 7, 1993, the FDIC informed the Bank that the loans to Messrs. [X] and [Y] appeared to have been granted in violation of sections 23A(c)(1) and (c)(4). On April 28, 1993, the Bank responded by submitting an opinion of its legal counsel presenting legal arguments to the effect that the loans to Messrs. [X] and [Y] did not violate section 23A.
In response, the FDIC has obtained a written opinion from the general counsel of The Board of Governors of the Federal Reserve System (the "Fed"), dated March 4, 1994. Briefly stated, it is the opinion of the Fed that section 23A prohibits the Bank from accepting the securities of its affiliates as collateral for extensions of credit to third parties when the proceeds of such extensions of credit are transferred to the Bank's affiliates.
2. Legal Analysis
Section 23A regulates transactions between federally insured banks and their affiliates. Section 23A(a)(1) imposes certain quantitative limits on "covered transactions" between insured banks and their affiliates. Section 23A(a)(2) states that "any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate." Section 23A(c)(1) requires insured banks to obtain certain kinds and quantities of collateral when extending credit to their affiliates. Section 23A(c)(4) states that securities issued by a bank's affiliate are not acceptable as collateral for an extension of credit to that affiliate or any other affiliate of the lending bank.
The question presented by the [X] and [Y] loans is whether section 23A(c) prohibits the Bank from accepting the securities of an affiliate as collateral for a loan which the Bank extends to a non-affiliated third party who transfers the loan proceeds to the affiliate in order to purchase those securities. The Bank's counsel has stated that loans made by a bank to an unaffiliated party are subject to the quantitative limitations of section 23A(a)(1) but not the collateral requirements of section 23A(c). In support of this interpretation, the Bank's counsel has relied on Fed Staff Opinion Number 3--1199, dated March 19, 1984. That opinion states, in pertinent part, that:
[T]he acceptance by a member bank of the securities of an affiliate as collateral for a loan by the member bank to an unaffiliated party is a covered transaction under Section 23A (12 U.S.C. § 371(b)(7)(D)). Such a transaction is subject to the quantitative limitations, but not the collateral requirements, of the statute (12 U.S.C. § 371c(a)(1) and (c)(1)).
In previous advisory opinions the FDIC's legal staff has adopted the general language of Fed Staff Opinion Number 3--1199 and has applied that language specifically to situations in which a nonmember bank made loans to unaffiliated third parties who used the loan proceeds to purchase stock of an affiliate of the lending bank and pledged that affiliate's stock as collateral for the loans. FDIC Advisory Opinion Number 88--61, dated September 13, 1988, indicates that the FDIC would follow the opinion of the Fed Staff regarding the application of section 23A to such loans. The FDIC advisory letter went on to infer that the so-called "attribution rule," does not apply in cases where a bank extends credit to "occasional borrowers" who present securities of the lending bank's affiliates as collateral. According to FDIC Advisory Opinion Number 88--61, such loans would not be deemed to be extensions of credit to affiliates of the lending bank, and the collateral requirements of section 23A(c) would not apply.
In FDIC Advisory Opinion Number 92--4, dated January 15, 1992, a nonmember bank had made several loans to individuals. The proceeds of the loans were used to purchase subordinated capital notes of the bank's holding company, and the loans were collateralized by those subordinated capital notes. In applying section 23A to such loans, FDIC Advisory Opinion Number 92-4 stated that the FDIC would follow Fed Staff Opinion Number 3--1199 in instances in which a bank accepts its affiliates' securities as collateral for loans to occasional third party borrowers, and would accordingly subject the loans to the quantitative restrictions of section 23A(a)(1) but would not apply the attribution rule of section 23A(a)(2). According to FDIC Staff Advisory Opinion 92--4, the collateral requirements of section 23A(c) would not apply to such transactions.
The recent opinion letter from the general counsel of the Fed spells out an important clarification regarding the significance of Fed Staff Opinion Number 3--1199. The interpretation contained in Fed Staff Opinion Number 3--1199 is applicable only to extensions of credit in which the proceeds are not transferred to a bank affiliate. In circumstances such as those of the [X] and [Y] loans, where the proceeds of loans from a bank to third parties are transferred to the lending bank's affiliates, such loans would be viewed as loans from the lending bank to its affiliates. Thus, the loans would be subject to the quantitative limitations of section 23(a)(1) and the collateral requirements of section 23A(c). Accordingly, because the proceeds of the [X] and [Y] loans were transferred to the Bank's affiliates, and the loans were secured by the securities of such affiliates, they each violated section 23A(c).
3. Effect on Previous FDIC Advisory Opinions
In situations calling for interpretation and application of section 23A, the FDIC is guided by the Fed's interpretation of the Federal Reserve Act. The Washington Office of the FDIC has informed this office that, insofar as the March 4, 1994, letter from the general counsel of the Fed conflicts with FDIC Advisory Opinions Number 88--61 and 92--4, those advisory opinions no longer reflect the opinion of the FDIC's legal staff. Accordingly, FDIC Advisory Opinions Number 88--61 and 92--4 should not henceforth be employed for guidance regarding the interpretation of section 23A.
4. Application to the [X] and [Y] Loans
The foregoing legal analysis, as applied to the [X] and [Y] loans, supports the following conclusions:
1) The loans from the Bank to Messrs. [X] and [Y] are deemed, pursuant to section 23A(a)(2), to have been made by the Bank to its affiliates, because the proceeds of those loans were transferred to *** Bank of California and *** Bank, N.A., the Bank's affiliates;
2) Because the [X] and [Y] credits were loans by the Bank to its affiliates, the loans were required to be collateralized pursuant to section 23A(c)(1);
3) Because securities issued by the Bank's affiliates are not acceptable as collateral for any extension of credit to an affiliate of the Bank pursuant to section 23A(c)(4), the stock of *** Bank of California and *** Bank, N.A. did not satisfy the collateral requirements of section 23A(c)(1) as applied to the [X] and [Y] loans; and
4) Failure to collateralize the [X] and [Y] loans with acceptable collateral violated section 23A(c).
The analysis, opinions, and conclusions contained in this letter are those of this office and are based on the specific facts and information contained in your letter of April 28, 1993, and its attachments. These opinions and conclusions do not represent an official determination by the FDIC regarding the issues addressed herein and are not binding upon the FDIC.
I trust that this is fully responsive to your inquiry. If you have any further questions regarding these matters, please do not hesitate to contact this office.