| August 10, 2001 |
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Lawrence A. Melsheimer Dear Mr. Melsheimer: This is in response to your letter dated August 6, 2001, on behalf of Iberville Bank, Plaquemine, Louisiana ("Bank"), requesting clarification as to whether section 23A of the Federal Reserve Act, 12 U.S.C. §371c, and the Board's proposed Regulation W would apply to loans by Bank to unaffiliated customers who use the loan proceeds to purchase real estate developed and sold as principal by an affiliate of Bank. The attribution rule of section 23A states that "any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate." 12 U.S.C. §371c(a)(2). In the transactions described in your letter, the proceeds of Bank's mortgage loans are "transferred to" an affiliate of Bank. Moreover, it appears that the Bank would be aware that the proceeds of its loans would be transferred to an affiliate, and this knowledge could provide an incentive to Bank to ease its credit standards with respect to the loans. Accordingly, based on the limited facts you have provided, Bank's loans to unaffiliated customers who use the loan proceeds to purchase real estate from an affiliate of Bank acting in a principal capacity are transactions subject to the attribution rule of section 23A. The loans, therefore, are "covered transactions" for purposes of section 23A, and are subject to the statute's quantitative limits and collateral requirements. Staff reached the same conclusion in a similar case in 1996 involving a bank's loans to unaffiliated customers who used the loan proceeds to produce crops on farmland that the customers leased from an affiliate of the bank. My letter addressing that matter is attached. I note that the loans described in your letter also would be considered covered transactions under the proposed Regulation W, which restates section 23A's attribution rule in section 223.7(a). You also inquire as to whether, in the situation where Bank finances an unaffiliated customer's purchase of a home on a lot purchased from Bank's affiliate, the entire amount of such a loan would be subject to section 23A even if the lot sale represents only a portion of the cost of the finished home. I am unable to provide you with an opinion on this aspect of your request because your letter does not provide enough detail on how these transactions are structured. Your letter has been made a part of the record of the Regulation W rulemaking and will be carefully considered by the Board as it evaluates the proposed rule. If you have any additional questions, please contact Mark E. Van Der Weide of my staff at 202/452-2263.
Sincerely,
[signed] J. Virgil Mattingly General Counsel
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Attachment cc: Douglas H. Jones, Federal Deposit Insurance Corporation
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