[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR250.250]

[Page 684-685]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.250  Applicability of section 23A of the Federal Reserve Act to a member State bank's purchase of, or participation in, a loan originated by a mortgage 
          banking affiliate.

    (a) A question has been raised as to whether a member bank's 
purchase, without recourse, and at face value, of any mortgage note, or 
participation therein, from a mortgage banking subsidiary of its parent 
bank holding company at the inception of the underlying mortgage loan 
involves a ``loan'' or ``extension of credit'' from the member bank to 
the affiliate within the meaning of section 23A of the Federal Reserve 
Act (12 U.S.C. 371c). In the given circumstances, the affiliate 
originated the mortgage loans at premises other than an office of the 
member bank and hence was not a company furnishing services to or 
performing services for the holding company or its banking subsidiaries 
within the meaning of section 4(c)(1)(C) of the Bank Holding Company Act 
(12 U.S.C. 1843(c)(1)(C)). Loans or extensions of credit to the 
affiliate were therefore not entitled to exemption from the provisions 
of section 23A by virtue of subsection (1) of the final paragraph 
thereof.
    (b) Paragraph 4 of section 23A provides that the term extension of 
credit shall be deemed to include the discount of promissory notes, 
bills of exchange, conditional sales contracts, or similar paper, 
whether with or without recourse, excepting the acquisition of such 
paper by a member bank from another bank without recourse. In previously 
interpreting the statutory provision from which this provision is 
derived (section 6 of the Bank Holding Company Act of 1956, repealed 
July 1, 1966), the Board concluded that discount in the context of the 
statute meant purchase and that the purchase of notes, bills of 
exchange, conditional sales contracts or similar paper from an affiliate 
was subject to the prohibitions of the statute. (1958 Federal Reserve 
Bulletin 260.) Further, the Board notes that the definition in section 
23A is illustrative rather than exclusive. The Board believes that the 
purposes of section 23A justify a broad construction of the definition 
of extension of credit to include certain purchases of obligations, even 
though the purchases are not made at a discount from face value. A 
bank's financing of the working capital needs of a mortgage banking 
affiliate may occur through outright purchases of obligations, and the 
types of abuses with which section 23A is concerned are likewise 
possible in such circumstances, since such transactions between 
affiliates could result in an undue risk to the financial condition of 
the purchasing bank.
    (c) The Board is of the opinion that the purchase by a member State 
bank of a mortgage note, or participation therein, from a mortgage 
banking affiliate would involve a loan or extension of credit to the 
affiliate if the latter had either made, or committed itself to make, 
the loan or extension of credit evidenced by the note prior to the time 
when the member bank first obligated itself, by commitment or otherwise, 
to purchase the loan or a participation therein. However, there would be 
no loan or extension of credit by the member bank to its mortgage 
banking affiliate if the member bank's commitment to purchase the loan, 
or a participation therein, is obtained by the affiliate within the 
context of a proposed transaction, or series of proposed transactions, 
in anticipation of the affiliate's commitment to make such loan(s), and 
is based upon the bank's independent evaluation of the credit worthiness 
of the mortgagor(s). In these latter circumstances, the member bank 
would be taking advantage of an investment opportunity rather than being 
impelled by any improper incentive to alleviate working capital needs of 
the affiliate that are directly attributable to excessive outstanding 
commitments.
    (d) The Board cautions, however, that it would regard a blanket 
advance commitment by a member State bank to purchase from its mortgage 
banking affiliate a stipulated amount of loans, or an amount thereof 
exceeding defined credit lines of the affiliate, that bears no reference 
to specific proposed transactions, as involving an unsound banking 
practice, unless the commitment is conditioned upon compliance of loans

[[Page 685]]

made thereunder with the requirements of section 23A. It would not 
suffice to condition such a commitment upon the bank's ultimate approval 
of the credit standing of the various mortgagors. That blanket 
commitment would have the inherent tendency, in the context of an 
affiliate relationship, to cause the bank to relax sound credit judgment 
concerning the individual loans involved when the affiliate was in need 
of bank financing, thereby resulting in an inappropriate risk to the 
soundness of the bank.

(Interprets and applies 12 U.S.C. 371c)

[39 FR 28975, Aug. 13, 1974]

    Effective Date Note: At 67 FR 76622, Dec. 12, 2002, Sec. 250.250 was 
removed, effective Apr. 1, 2003.