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APPENDIX

1. CIT commits that it will contribute cash to Bank in the amount of the
book value of any low-quality assets that are transferred to Bank at the
time that Legal Entities are transferred to Bank. CIT also commits
that Bank will hold an amount of risk-based capital equal to the book
value of any low-quality assets that are transferred to Bank so long as
Bank retains ownership or control of the transferred assets. For
example, under this dollar-for-dollar capital requirement, the
risk-based capital charge for each transferred low-quality loan asset
would be 100 percent (equivalent to a 1250 percent risk weight),
rather than the 8 percent requirement (equivalent to a 100 percent risk
weight) that would apply to a similar defaulted loan asset that is not a
part of the transferred asset pool.”

2. CIT commits for a five-year period following the contribution of
Legal Entities to make either (i) a cash payment to Bank equal to the
book value at the end of each calendar quarter, plus write-downs
during that quarter by Bank, of any transferred assets (other than those
that were low-quality assets at the time of the initial transfer) that
were low-quality assets at the end of that quarter; or (ii) quarterly
purchases from Bank of any transferred assets (other than those that
were low-quality assets at the time of the initial transfer) that were
low-quality assets at the end of that quarter at a price equal to the
book value at the end of that quarter plus write-downs during that
quarter by Bank of any such transferred assets. CIT will make the
cash payment or will purchase the assets within 30 days after the end
of each calendar quarter. CIT also commits that Bank will hold an
amount of risk-based capital equal to the book value of any
transferred assets that become low-quality so long as Bank retains
ownership or control of the transferred assets as described in the
example above.'°

° Once the capital pool has been allocated to specific assets as described
above, the capital cannot be applied to other low-quality assets if the initial
low-quality asset returns to performing status. Bank can only apply the
allocated capital pool to new assets if the initial assets are fully paid or sold.

0 1g,


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In light of these considerations and all the facts of record, the
reorganization transaction appears to be consistent with safe and sound
banking practices and on terms that would ensure the quality of the assets
transferred. Accordingly, the transaction appears to be consistent with the
purposes of section 23A, and the Director of the Division of Banking
Supervision and Regulation, pursuant to authority delegated by the Board,
and with the concurrence of the General Counsel, hereby grants the
requested exemption.

This determination is specifically conditioned on compliance by CIT
and Bank with all the commitments and representations made to the Board
in connection with the exemption request. These commitments and
representations are deemed to be conditions imposed in writing in
connection with granting the exemption and, as such, may be enforced in
proceedings under applicable law. This determination also is based on the
specific facts and circumstances of the proposed transaction and may be
revoked if a material change in those facts or circumstances occurs or if CIT
or Bank fails to observe any of its commitments or representations.
Granting this exemption request does not represent a determination
concerning the permissibility of any other transactions engaged in by CIT or
Bank that are subject to section 23A or Regulation W.

Please notify the Federal Reserve Bank of New York in writing when
this transaction is completed.

Sincerely yours,

Nate. UY Turtr.—

Robert deV. Frierson
Deputy Secretary of the Board

Attachment
cc: Federal Reserve Bank of New York

Federal Deposit Insurance Corporation
Utah Department of Financial Institutions


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3. CIT commits for a five-year period following the contribution of
Legal Entities to make cash contributions to Bank equal to (i) any
amount that Bank is required to contribute to any securitization
vehicle that is transferred to Bank at the time that Legal Entities are
transferred to Bank to support the performance of that vehicle trust
and (ii) the amount of any write-down during each calendar quarter of
any transferred residual or retained interest in the vehicle. CIT will
make the cash contribution within 30 days after the end of each
calendar quarter. CIT also commits that Bank will hold an amount of
risk-based capital equal to the cash contributions so long as Bank
retains ownership or control of the exposures.

4. Before the purchase of assets is consummated, a majority of Bank’s
directors will review and approve the transaction.

5. Bank and CIT must remain well capitalized, as defined in the FDIC’s
prompt corrective action regulation and the Board’s Regulation Y,
respectively.'!

6. Bank commits to obtain FDIC approval prior to declaring or paying
dividends, for a time period to be determined by the FDIC.

"’ See 12 CFR 325.103 and 12 CFR 225.2(r).


BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 2055!

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

April 13, 2009

William J. Sweet, Jr., Esq.

Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.

Washington, D.C. 20005-2111

Dear Mr. Sweet:

This is in response to the request by CIT Group Inc. (“CIT”),
New York, New York, and its wholly owned subsidiary, CIT Bank
(“Bank”), Salt Lake City, Utah, for an exemption from section 23A of the
Federal Reserve Act and the Board’s Regulation W' to permit Bank to
acquire all the shares of three nonbank affiliates: (1) CIT Education Loan
Trust 2008-BBC (“Trust”), (2) Education Funding Resources III, LLC
(“EFR III”), and (3) Education Funding Resources, LLC (“EFR”)
(collectively, “Legal Entities”).

CIT is restructuring its business lines and is planning to move most of
its operations to Bank.” As part of this reorganization, Bank proposes to
acquire Legal Entities. Trust and EFR III are securitization entities that hold
loans that are 97 percent guaranteed by the U.S. Department of Education
under the Federal Family Education Loan Program. EFR is a corporation
that holds government-guaranteed student loans that are awaiting transfer to
a securitization vehicle or that will not be securitized.

Section 23A and Regulation W limit the amount of “covered
transactions” between a bank and any single affiliate to 10 percent of the
bank’s capital stock and surplus and limit the amount of covered transactions
between a bank and all its affiliates to 20 percent of the bank’s capital stock

' 12 U.S.C. §371c; 12 CFR part 223.

> On December 22, 2008, the Board approved CIT’s application to become
a bank holding company on conversion of CIT Bank from an industrial loan
company to a state bank.


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and surplus. “Covered transactions” include a bank’s purchase of assets
from an affiliate and a bank’s extension of credit to an affiliate. The statute
and regulation also require a bank to secure its extensions of credit to, and
certain other covered transactions with, affiliates with prescribed amounts of
collateral. In addition, section 23A and Regulation W prohibit a bank from
purchasing low-quality assets from an affiliate.

Legal Entities and Bank are affiliates for purposes of section 23A and
Regulation W because they are controlled by CIT. Regulation W provides
that a bank’s acquisition of a security issued by a company that was an
affiliate of the bank before the acquisition is treated as a purchase of assets
by the bank from an affiliate if (i) the company becomes an operating
subsidiary of the bank as a result of the transaction and (ii) the company has
liabilities at the time of the acquisition.? Legal Entities are currently
affiliates, and would become operating subsidiaries, of Bank immediately
after the reorganization. At the time of the restructuring, Legal Entities will
have outstanding liabilities. Accordingly, CIT’s transfer of all the capital
stock of Legal Entities to Bank would be an asset purchase subject to the
quantitative and qualitative limitations of section 23A and Regulation W.
The value of the covered transaction for purposes of Regulation W would be
approximately $5.66 billion — the total liabilities of Legal Entities at the time
of the reorganization.‘

To accomplish the reorganization, CIT has requested an exemption
from section 23A and Regulation W to permit Bank to acquire all the shares
of Legal Entities. Section 23A and Regulation W specifically authorize the
Board to exempt, in its discretion, transactions or relationships from the
requirements of the statute and rule if the Board finds such exemptions to be
in the public interest and consistent with the purposes of section 23A.°

The Board has approved exemptions under section 23A for one-time
asset transfers that are part of a corporate reorganization and that are
structured to ensure the quality of the transferred assets. As in previous
cases reviewed by the Board, the proposed transaction in this case is a
byproduct of a corporate reorganization that would proceed in stages. CIT is

3 See 12 CFR 223.31(a).
* See 12 CFR 223.31(b).
> 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a).


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transferring Legal Entities to Bank as part of a larger reorganization. CIT is
a leading provider of factoring services in the United States and a leading
lender in the Small Business Administration’s 7a programs. CIT has
represented that the exemption would provide a public benefit by allowing
CIT access to additional sources of financing to support its overall lending
programs.

The proposed transfer of Legal Entities from CIT to Bank would be
subject to the market-terms requirement of section 23B of the Federal
Reserve Act.® In light of the fact that the student loan portfolio is at least
97 percent guaranteed by an agency of the federal government and because
of the commitments made by CIT, the proposed transaction appears to pose
limited risk to Bank.

CIT and Bank have made the commitments listed in the appendix to
ensure that Bank is made whole if the quality of the assets purchased by the
bank deteriorates.’ CIT and Bank have committed to comply with these
commitments for five years, and the commitments are similar to
commitments relied on by the Board in previous internal corporate
reorganizations. These commitments require that the funds transferred by
CIT to Bank to support any of the low-quality assets will remain in the bank
to provide a cushion of additional capital in excess of Bank’s required
regulatory capital. The commitments ensure that these funds will remain
available to Bank and will not be returned to CIT through a dividend or a
return of capital.* In addition, a majority of Bank’s directors will review and
approve the transaction before the purchase of assets is consummated. The
Federal Deposit Insurance Corporation (“FDIC”) has reviewed the
transaction and informed the Board that it has no objection to the proposal.

® See 12 U.S.C. §371c-1(a)(1). Section 23B requires that the proposed
transaction be on terms that are substantially the same, or at least as
favorable to Bank, as those prevailing at the time for comparable
transactions with unaffiliated companies.

7 See 12 CFR 223.41(d).

8 See Board letter dated December 21, 2007, to Andres Navarette, Esq.
(Capital One Financial Corporation).