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.. 420 \ s-:u; Reg. tl~l7 (Copies to be sent to all Federal reserve banks) July 15, 1957. Mr. , Vice President, Federal Reserve Bank of _ _ _ , ------~ -------· Dear Mr. _ _ _ _ _ : Reference is made to your letter of June 25,;1957, identified as "Inquir.y No.8 re.Regulation U," with whicb you !Dclosed copies of two letters received from certain banks in your district under date of June 8 and June l5, respect! vely, rai~.ng certain questions w1 th respect. to section 3(e) of Regulation U rolative to the transter of loans. 1. EssenY,al;S of tl:le ·Transret of a km• Section 3(e) of Regulation U provides in part as follows: 11 A bank may accept tbe transfer of a loan from another bank, or permit the transfer of a. loan between borr91ters, without following the requirements of' this regulation a.s to the making of a loan, provided the loan is not increased and the collateral for the loan is not changed; *'' ** The first question presented in connection with this provision is whether it should be considered that a bank accepts the transfer of a loan if it makes a loan to a customel" to enable him to reduce or retire existing indebtedness at another bank or to replace fluids which the borrower has used to reduce or retire indebtedness at another bank. It is the view of the Board that a transaction such as that described should not be considered to be the accepting of ~ transfer of a loan pursuant to section 5(e) • The provisions of' section· 5(e) apply only to a loan which is 'transferred by the proceS8 Of pqment by the transferee bank to the transferor bank against the receipt of the proper collateral, and a transaction such as that described above does not come within the provisions of the section. · 2. The Indebte4nes@ §Pd ColJ.steral to be Trnasferred. Questions also are rais~d as to the indebtedness and the collateral to be transferred.· In general, two different ~pes of cases arise in this connection, one relating to indebtedness incurred on or after May l, 1936, and the other to indebtedness incurred prior to tbat date. Since the S-16 421 Reg. cr-17 inquir,y did not present any question as to the requirements tl1at might affect the transferor bank, the two types of cases will be examined on.:cy with respect to the requirements that affect the transferee bank. Nonexpepted lQana JJW,de 'or tb&· de@i&AA't§d purpose on or after Ma,y :}; 1 1936. - The first type of case involves iDdebtedness that is for the purpose of purchasing or e~rr,ying stocks registered on a n&tional securities exchange, that is not excepted qy section 2 of the regulation, and that was incurred on or after May 1, 1936. Although the transferor ba.rtk may have treated certain portions of thio indebtedness as separate loans for certain purposes, the agreement between tho customer and the bank is such that all the collateral for aey of the described indebtedness secures all such indebtedness. In this connection, it is to be noted that the second paragraph of section 1 of Regulation U provides that: "* * * the entire indebtedness of 8XJ:1 borrower to arJ:¥ bank incurred on or after May 1, 1936, for tho purpose of purchasing or carr.ying stocks registered on a national securities excr~ge shall be considered· a single loan; and all the collateral securing such indebtedness shall be considered in determining whether or not the loan complies with thia regulation~" . In view of this provision, it is evident that the regulation contemplates that, in certain connections, the aggregate of the described indebtedness and all the collateral. tll,at secures that indebtedness should be considered a unit, regardless of whether or not the transferor bank. may have treated a portion of such indebtedness as a separate loan and assigned particular collateral to that portion. It is clear that. it would be permissible under section 3(•) tor a transferee bank to accept the transfer of the aggregate of such indebtedness accompanied b.Y the aggregate collateral, but there $e presentod tho additional question of whether it is permissible under section 3(e) to accept the transfer of a portion of this aggregate indebte~sa accompanied by a proportionate part of the aggregate collateral. It is the opinion of the Board that if a bank accepts a transfer of a portion of the aggregate indebtedness the bank may properly be considered to have accepted a transfer of a loan within the meaning of section 5(e,), and that if the transferred indebtedness is accompanied 'tv' its proper portion of the collateral so that the ratio of loan value to indebtedness is the same with the transferred portion of the indebtedness and transferred portion of the collateral as with the aggregate indebtedness and aggregate collateral, it should properly be considered tbat "tho collateral for the loan is not changed,u If e. transfer meets both these conditions and the ind~btedness is not increased, the transferee bank may,- ·pursuant to section 3($') of the regu.lation, accept the transfer "without following the requirements of this regulation as to tbe making of a loan." 422 C-15 Reg. U-17 ru. * sautat.ed Jloptxqeu.eq lpw 1141:• IIIDP" Mav 1. J:~56. -.The other type of cue uarolvea lD<I*tedDeaa· that is for the purpose of pu.rcmsing or carrying ~teNd· atocU, tbat is not excepted bV section 2 of the regulation, but tbtlt • • ;111~ prior to Mq 1, 1956. won It will be noted that the pi'Q'f'ilio# of seotioD l of the regulation quoted above w1 th respect. tp t:bJ .trea:ta,nt of aareeate indebtedness and aggregate collateral as a ulit does nDt 1appl.J to itldebtedness incurred prior to llq 1, liM. ID tbe CU$ ol. w.ch an old loan, therefore, identification ot the loan and the collaWral tb.erefor, all or part of which are to be transferred, should 1:lll't t~Wlde; qa tbe basis ot the practice which the transferor bank and the bo~r ·Nmit. consiatent]T followed in good tai th in dealing w1 th t.t.. loan.~ 1t1t ri.~Jdebtedfteae which has been treated as conat1tuting a single loan, t.Di coUatel'&l which bas been treated as having loan value tor the purpdMe ot tbat loan and as not having loan value tor other purposes, . shQUld ~ . cousil;lered as a unit, and they should be so considered w1 thout regard to a aUSt.,_H t agreement under which coll~teral for one loan secures another. It the entire amount of such an old loan thus identified is to be accepted b,y the transferee bank pursuant to section 3(•)- it should be accompanied b,y 1111 the collateral which, as indicated above, has been treated as having loan value for the purposes ot the loan and as not having loan value for other purposes. If a portion of such a loan is to be accepte4 'by the transferee bank pursuant to section 3(o), it should be accompanied by tha propor proportion of the collateral which has been so treated, so that tho collateral would not be changod, i.o., the ratio or loan value to indebtedness is tho same with iJbe transforrod portion o£ the indebtedness and transferred portion of the tollateral as with the indebtedness originallY treated as a single loan and t4e collateral treo.ted as having loan value only ~or the purposes or that loon. 3. Detef!Rinatiop ot Futl IE!Jal\9' ng . transfer of MoiP• A question is all() presented as to the method which a transferee bank may use to determine wbather or not tbe conditions neces&ar,J for the transfer of a loan pur~t to section 5(e) are beiQi followed. SpecificallJ, the question is raised whether the 'b'&nSferee bank may rely upon a siped statement of the bonower or the transferor bank which it accepts in good faith to determine these facts. As in the case of a number of otbsr facts that are relevant to opera,tions under the regalation, no epeoitie method of ·deterld.ning these facts is required. The requirement ie that the bank operate diligently and in entire good faith, and in doiD(C this it mll'1 utilize various methods for ascertaining the facts ,in particular cases. As one method of determining . . -423 S-15 P.t.:g; U-17 the facts in connection with the tr4Lnsfer of a -loan, a transferee ba.nk would be justified in re:cy-ing upon, a aia,ned statement of the borrower or the transferor bank which the trolUiferee~ bank accepts in good faith. Very- ( Signod) .• ' trulf y~, Chester Morrill Chester Morrill, Secretar.Y.
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