BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON. D.C. 20551

J VIRGIL MATTINGLY. JR

GENERAL COUNSEL .

August 6, 1993

Richard Lasner, Esq.

Assistant General Counsel

U.S. Department of Housing and Urban Development

Room 9254

451 7th Street, S.W.

Washington, D.C. 20410

Dear Mr. Lasner:

Thank you for meeting with my staff and the staffs of

the Office of the Comptroller of the Currency ("OCC"), the

Federal Deposit Insurance Corporation, ("FDIC"), and the Office

of Thrift Supervision ("OTS"), regarding the ability of insured

depository institutions that issue securities that are guaranteed

by the Government National Mortgage Association ("GNMA") to enter

into cross-default agreements on behalf of their affiliates that

also issue GNMA securities.

It is my understanding that GNMA requires GNMA issuers

that are related entities to enter into cross-default agreements

whereby the default by one GNMA issuer constitutes a default by

all related GNMA issuers. In the case of a default, GNMA and the

defaulted issuer generally enter into negotiations to correct the

default through an interim moratorium or other arrangements that

are mutually agreeable to each party. Under the cross-default

agreement, however, GNMA also is permitted to perfect its rights

in the pooled mortgages and custodial accounts of the defaulted

issuer and as well as related issuers. In addition, GNMA can

pursue other remedies against the defaulted issuer and the

related issuers. The Board and other federal regulatory banking

agencies believe that a cross-default agreement whereby an

insured depository institution guarantees the performance of an

uninsured affiliate and the insured depository institution's

assets are permitted to be used to support the obligations of an

uninsured affiliate is subject to the limitations imposed by

section 23A of the Federal Reserve Act.1/

1/ 12 U.S.C. § 371c. In general, transactions between

affiliated banks are exempt from section 23A. 12 U.S.C.

§ 371c(d)(1). Transactions between most affiliated savings
Section 23A seeks to protect insured depository

institutions from abuses that the statute presumes may result

from affiliation by restricting, and in some cases prohibiting,

financial transactions between insured depository institutions

and their affiliates.2/ In general, section 23A provides that

certain transactions between an insured depository institution

and a single affiliate are limited to 10 percent of the

institution's capital and surplus, and transactions between an

insured depository institution and all of its affiliates are

limited to 20 percent of the institution's capital and

surplus.3/ In addition, certain transactions, such as

guarantees or letters of credit issued on behalf of an affiliate,

must be secured by collateral having a market value equal to

between 100 and 130 percent of the dollar amount of that

transaction, depending on the type of collateral used as

security.4/

Board staff believes that the execution of a crossdefault agreement by an insured depository institution on behalf

of its affiliate coupled with the cross-collateralization

provisions present here is the equivalent of the issuance of a

guarantee that is subject to the quantitative and collateral

requirements of section 23A. Accordingly, insured depository

institutions may not enter such cross-default agreements with

respect to an uninsured related entity where the potential

liability of the agreement would exceed the insured institution's

quantitative limits that are imposed by section 23A. In

addition, any such cross-default agreement by an insured

depository institution on behalf of an affiliate would need to be

secured by collateral in the amounts set forth in the statute.

The guarantee also may be a problem for some insured depository

associations are subject to the limitations imposed by

section 23A, however, until 1995. 12 U.S.C. § 1968(a)(2)(A).

2/ In general, an "affiliate" is a company that controls

the insured depository institution, a company that is controlled

by a company that controls the insured depository institution, or

a company that is controlled by shareholders that control

25 percent or more of the insured depository institution and the

company. 12 U.S.C. § 371c(b)(1).

3/ 12 U.S.C. § 371c(a)(1). Although section 23A, by its

literal terms, only applies to member banks (including national

banks), the Federal Deposit Insurance Act and the Home Owners'

Loan Act apply section 23A to state chartered nonmember banks and

thrift institutions. See 12 U.S.C. §§ 1828(j) and 1468.

4/ 12 U.S.C. § 371c(c).
institutions inasmuch as insured depository institutions may be

prohibited in certain circumstances from guaranteeing the

obligations of others.

The staffs of the Board, FDIC, OCC and OTS recognize

GNMA's concerns regarding its needs to protect its resources

against losses that result when an institution defaults on its

obligations, and the agencies are willing to work with GNMA in

order to ensure that the institutions under each agency's

supervision are operating consistent with safe and sound banking

practices and in compliance with applicable law and regulation.

The agencies are also willing to cooperate with GNMA and the

insured institutions to help identify contractual arrangements

dealing with default situations that create problems under

section 23A and to help resolve problems that may result from the

default of a related entity.

The staff of the agencies are available to discuss

these matters with your staff at anytime. Please feel free to

contact Ms. Pamela G. Nardolilli (202/452-3289) of my staff if

you have further questions.

Sincerely,

(signed)

J. Virgil Mattingly, Jr.

cc: Ms. Aline Henderson, OTS

Ms. Peggy Hesse, OCC

Ms. Pamela LeCren, FDIC