|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
How the "attribution rule" of the Federal Reserve Act
applies to certain Credit transactions.
FDIC--04--09
June 9, 2004
Michael B. Phillips, Counsel
For the purposes of the current FDIC examination of X
(Bank), you have asked the FDIC how the "attribution rule" in
section 23A(a)(2) of the Federal Reserve Act applies to certain credit
transactions by the Bank with customers of independent auto dealerships
that have received floor plan financing from an affiliate of the Bank.
In particular, this letter addresses the application of the attribution
rule to situations in which the Bank purchases
{{6-30-05 p.4984.104}}retail installment sales contracts
(RISCs) from independent *** dealerships that have a floor plan
arrangement with the Bank's parent company, *** (***
affiliate). 1
Attribution Rule under Section 23A
Originally enacted as part of the Banking Act of
1933, 2
section 23A is designed to prevent adverse impacts on a bank's
financial resources through transactions with its affiliates. Section
23A prohibits a bank from engaging in "covered
transactions" 3
with an "affiliate" 4
unless the bank limits the aggregate amount of those transactions with
a single affiliate to 10 percent of its "capital stock and
surplus" 5
and with all its affiliates to 20 percent of its capital stock and
surplus. Under the attribution rule in section 23A(a)(2), any
transaction by a bank with a third party is deemed to be a transaction
with an affiliate to the extent that "the proceeds of that
transaction are used for the benefit of or transferred to the
affiliate." 6
In December, 2002, the Board of Governors of the Federal Reserve
System (FRB) published its Regulation W, which implements the statutory
restrictions under section 23A and 23B covering transactions between a
state member bank and its affiliates, as clarified through FRB
interpretations and
exemptions. 7
Regarding the attribution rule in section 23A, the FRB stated in its
preamble to Regulation W that its purpose includes "to prevent a
member bank from evading the restrictions in the section by using
intermediaries and to limit the exposure that a member bank has to
customers of affiliates of the
bank." 8
In its consideration of possible exemptions from the attribution rule,
the FRB rejected a proposal for an exemption for banks if they did not
have actual or constructive knowledge that the proceeds of their
transaction with a third party are transferred to or used for the
benefit of an affiliate. The current exemption categories from the
attribution rule that the FRB has promulgated in Regulation W include
(1) certain riskless principal transactions; (2) brokerage commissions,
agency fees, and riskless principal mark-ups; (3) preexisting lines of
credit; and (4) general purpose credit card
transactions, 9
in addition to certain agency
transactions. 10
At present, there is no exemption category from the attribution rule
in Regulation W that would exclude the application of the attribution
rule to the floor plan financing arrangement between the *** affiliate
and the independent dealerships, and the Bank's purchasing of RISCs
from those independent dealerships. Consistent with this treatment
under Regulation W, according to recent discussions with attorneys in
the FRB's Legal Division, the FRB General Counsel has concluded
generally that where such floor plan financing arrangements exist
between a bank affiliate and independent dealerships, bank loans to
finance the purchase of floor planned vehicles constitute covered
transactions with an affiliate under the attribution rule.
Implementation of the Attribution Rule to Floor Plan Financing
Arrangements
Sections 23A and 23B of the Federal Reserve Act apply to the Bank by
virtue of Section 18(j) of the Federal Deposit Insurance Act which
extends sections 23A and 23B to state nonmember banks "in the same
manner and to the same extent" as if a state
{{6-30-06 p.4984.105}}nonmember bank were a state member
bank. 11
We have determined that the purchase by the Bank of a RISC from an
independent dealership that has received floor plan financing from the
*** affiliate, which financing was secured by the vehicle purchased
through the RISC, would be covered by the attribution rule under
section 23A(a)(2). However, we have determined that the attribution
rule's application should be limited to those RISCs that are used to
purchase vehicles that are acquired by the independent dealerships as a
direct result of the floor plan financing from the *** affiliate. In
this manner, the application of the attribution rule would be limited
to the specific subset of the vehicle inventory in the independent
dealerships for which floor plan financing from the affiliate is
provided.
This interpretation is based on our understanding that under floor
plan financing arrangements, (1) the dealership obtains financing to
purchase vehicles from the manufacturer or an affiliate of the
manufacturer; (2) the floor plan financer holds a perfected security
interest in the vehicle while it is unsold and part of the
dealership's inventory; and (3) in practice, the dealer is obligated
to pay off the loan on the specific vehicles or replace the collateral
upon the dealer's sale of the vehicles. Under this arrangement, the
Bank's purchasing of RISCs from the dealerships will directly
facilitate consumers' purchase of the specific vehicles covered by the
floor plan financing from the Bank affiliate. The dealer will take the
proceeds from these RISC transactions and either (1) transfer those
proceeds (net of the dealer's profits) to the *** affiliate in order
to pay off its floor plan financing obligations to that affiliate or
(2) use those proceeds to replace the collateral.
For purposes of the Bank's delineation of the specific RISC
purchases that would be covered by the attribution rule, it is
important that the Bank be able to determine which RISCs cover vehicles
on which the respective dealership had obtained floor plan financing
from the *** affiliate.
We would consider, in conjunction with the FRB, any exemption
request from the Bank under section 23A regarding the facts and
circumstances involving the floor plan financing arrangements described
in this letter. If you have any questions regarding this letter or the
procedures for an exemption request under section 23A, please contact
me at (202) 898-3581.
1 In prior communications with the FDIC, the Bank has
acknowledged that the restrictions on "covered transactions"
under section 23A would apply to (1) the Bank's purchase of RISCs from
*** dealerships that are owned by Parent Company and (2) direct lending
to consumers of *** dealerships to finance the purchase of their leased
vehicles for which the *** affiliate is the owner. Go Back to Text
2 12 U.S.C. § 371c. As
originally enacted, section 23A covered only state member banks. In
1966, Congress amended section 18(j) of the Federal Deposit Insurance
Act, 12 U.S.C. § 1828(j), to extend the coverage of section 23A to
include insured state nonmember banks "in the same manner and to the
same extent" as member banks are covered. See
69
Fed. Reg. 12,571, 12,572 (March 17, 2004). Go Back to Text
3 See 12 U.S.C. §371c(a)(7). Go Back to Text
4 See 12 U.S.C. § 371c(a)(1). Go Back to Text
5 The term "capital and surplus" is defined in the
FRB's Regulation W at 12 C.F.R.
§ 223.3(d), to include a member bank's tier 1 and tier 2
capital under its risk-based capital rules. Go Back to Text
6 12 U.S.C. § 371c(a)(2). Go Back to Text
7 See 67 Fed. Reg. 76,560 (December 12, 2002). Go Back to Text
8 See 67 Fed. Reg. 76,576 (December 12, 2002). Go Back to Text
9 12 CFR
§ 223.16(c)(1)--(4). Go Back to Text
10 12 CFR § 223.16(b). Go Back to Text
11 12 U.S.C.
§ 1828(j)(1).
Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
