Source: https://www.fdic.gov/regulations/laws/rules/4000-2860.html
Timestamp: 2019-04-19 04:42:21+00:00

Document:
We are writing you with respect to issues raised in your October 12, 1987 letter to Mr. Donald L. Pfeiffer, Assistant Regional Director in our San Francisco Office. In your letter, you dispute the mention of a loan to *** as a violation of § 23A of the Federal Reserve Act, 12 USC § 371c (1982)("§ 23A''), in a recent report of examination of the Bank.
It is undisputed that *** gave the Bank a deed in lieu of foreclosure on the real estate securing participations originated at ***, and participated to the ***, all affiliates. As the originating bank, *** repaid the participants and booked the collateral as other real estate. Our examiner feels that this transaction constitutes the repurchase of a low quality asset in violation of § 23A.
You have enclosed copies of the participation certificates with the three affiliated participants. You highlighted language on these certificates which states that "the selling bank (*** ) shall apply all remaining collections on the loan, whether from customer, any guarantor, proceeds of collateral or otherwise to the pro rata repayment of all indebtedness represented by the participated interest of participants other than selling bank . . ." You feel that since the value of the property received by the bank as a result of the deed in lieu of foreclosure exceeded the value of the participations of the three affiliated participants, the actions taken by the bank in repaying the participants from the appraised value of the repossessed real estate was not only consistent with the participation certificate, but required by it. Thus, you believe that the transaction does not constitute a violation of § 23A as cited by our examiner.
We feel that our examiner is correct since the Bank has taken collateral and used it to favor affiliates at the expense of itself. Thus, the Bank has eliminated any risks the affiliates may have had and transferred such risks to itself. In our view, this constitutes a purchase of a low quality asset within the meaning of § 23A(a)(3). We note that the participations provide an express exception for cases of default and further provide that collections after default shall be applied to the pro rata repayment of indebtedness represented by the participating interests of the participants. Thus, the participation certificate, does not provide any priority for nonselling bank participants in the case of a default. While "default" is not defined in the participation agreement, it seems obvious that a release of collateral in lieu of foreclosure should constitute default in any agreement where "default" is not defined. In any case, the terms of the participation certificate would not preclude a violation of § 23A if they allowed a repurchase of a low quality asset from an affiliate. The statute would simply preclude the agreed provision from being followed.
Under the facts presented to us, it appears that the examiner's citation of the transaction mentioned above as a violation of § 23A of the Federal Reserve Act appears correct.

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