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4000 - Advisory Opinions

Applicability of § (a)(1)(2) ("Attribution Rule") to loans made by a bank which benefits an affiliate of the bank


March 12, 1996

Gerald J. Gervino, Senior Attorney

I am writing in response to your request for an opinion with respect to certain transactions entered by your client, ("Bank") and the ("Affiliate"), a company controlled by shareholders who own or control 51 percent of the Bank's parent, and which, therefore, is an affiliate of the Bank for purposes of Section 23A. This topic has been discussed in a conference with your colleague, X, my colleagues, Doug Jones, Pamela LeCren, and myself. You and I have since spoken by telephone, while you have submitted additional facts in your March 1, 1996 letter to me.

The Bank has been cited for violations of Section 23A by State examiners in their last two bank examinations. In addition, our Regional Director has directed the Bank to cease lending activities benefiting the affiliate and to reduce its loans of this sort to the limits established by Section 23A. The direction is to be accomplished by March 14.

Invoking the attribution rule of subsection (a)(2) of Section 23A, the state examiners have taken the position that the Bank is in violation of Section 23A. In your view, this is solely based upon the fact that the proceeds of loans made by the Bank were transferred to the affiliate. Thus, all of those loans should be deemed extensions of credit made directly to the affiliate, and therefore are subject to the quantitative limitations of subsection (a)(1) of the statute, and, presumably (although, to your knowledge, the examiners have not expressly so stated), to the collateral requirements of subsection (c).

From the facts that you have presented, it is clear that Section (a)(1)(2) ("Attribution Rule") of Section 23A would apply, in the absence of an exception or contrary interpretation. The loans to purchasers of the affiliate property both benefit the Affiliate and have been transferred to the Affiliate. The Affiliate receives a benefit when its property is sold to a purchaser, while it also receives the proceeds of the loan as the seller. We have conferred with staff of the Federal Reserve on this issue and were informed that that agency concurs with the above analysis.

You have suggested that the Federal Reserve interpretation found at 12 CFR § 250.250 might apply to the loans in question. We raised this issue with the staff of the Federal Reserve as well. Staff of the two agencies are in agreement that 12 CFR § 250.250 would not provide relief from the Attribution Rule. The fundamental reason for this is that 12 CFR § 250.250 assumes that the bank approves an asset for purchase prior to the affiliate acquiring an interest in the asset. Here, the Affiliate is interested in the transaction prior to the bank's approval.

In our meeting, you suggested that a rule of reason similar to that adopted by the Federal Reserve for purposes of Regulation O should also apply for purposes of Section 23A. In particular, you cited the provision of Regulation O which indicates that the attribution rule will not apply in the case of extensions of credit used for the purpose of acquiring goods, products or services from an insider or his/her related interest. We understand from the Federal Reserve staff that no similar exception is under consideration for Section 23A purposes. Section 18j of the FDI Act provides that Section 23A shall apply to state nonmember banks to the same extent as though they were state member banks. In view of the above, this office must concur with the February 13th letter sent to your client by the Atlanta Regional office. If you have any further questions, please write or call me at (202) 898--3723. My fax number is (202) 898--3715.

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