Sec. 204.132 Treatment of Loan Strip Participations.
(a) Effective March 31, 1988, the glossary section of the instructions
for the Report of Condition and Income (FFIEC 031-034; OMB control number
7100-0036; available from a depository institution's primary federal regulator)
(Call Report) was amended to clarify that certain short-term loan participation
arrangements (sometimes known or styled as loan strips or strip participations)
are regarded as borrowings rather than sales for Call Report purposes in
certain circumstances. Through this interpretation, the Board is clarifying
that such transactions should be treated as deposits for purposes of Regulation
D.
(b) These transactions involve the sale (or placement) of a short-
term loan by a depository institution that has been made under a long-
term commitment of the depository institution to advance funds. For example,
a 90-day loan made under a five-year revolving line of credit may be sold
to or placed with a third party by the depository institution originating
the loan. The depository institution originating the loan is obligated
to renew the 90-day note itself (by advancing funds to its customer at
the end of the 90-day period) in the event the original participant does
not wish to renew the credit. Since, under these arrangements, the depository
institution is obligated to make another loan at the end of 90 days (absent
any event of default on the part of the borrower), the depository institution
selling the loan or participation in effect must buy back the loan or participation
at the maturity of the 90-day loan sold to or funded by the purchaser at
the option of the purchaser. Accordingly, these transactions bear the essential
characteristics of a repurchase agreement and, therefore, are reportable
and reservable under Regulation D.
(c) Because many of these transactions give rise to deposit liabilities
in the form of promissory notes, acknowledgments of advance or similar
obligations (written or oral) as described in Sec. 204.2(a)(1)(vii) of
Regulation D, the exemptions from the definition of deposit incorporated
in that section may apply to the liability incurred by a depository institution
when it offers or originates a loan strip facility. Thus, for example,
loan strips sold to domestic offices of other depository institutions are
exempt from Regulation D under Sec. 204.2(a)(1)(vii)(A)(1) because they
are obligations issued or undertaken and held for the account of a U.S.
office of another depository institution. Similarly, some of these transactions
result in Eurocurrency liabilities and are reportable and reservable as
such.
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