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F e d er a l R e s e r v e Ba n k




Circular No. 80-151
August 5, 1980

Disposition of Property Acquired in
Satisfaction of Debts Previously Contracted
The Board of Governors of the Federal Reserve System has issued an
interpretation concerning the disposition of assets acquired by bank holding
companies and their banking and nonbanking subsidiaries, in satisfaction of debts
previously contracted. The Board's Order, as submitted to the Federal Register,
is printed on the following pages.
Any questions concerning the interpretation should be directed to the
Attorney's Section of our Holding Company Supervision Department, Ext. 6182.
Additional copies of the document will be furnished upon request to the Bank and
Public Information Department of this Bank, Ext. 6266.
Sincerely yours,
Robert H. Boykin
First Vice President

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

12 CFR Part 225
[Reg Y. Docket No. R-0319]
Part 225
Disposition of property acquired in satisfaction
of debts previously contracted


Board of Governors of the Federal Reserve System.


Final Interpretation.

This interpretation delineates the conditions governing the
holding and disposition of assets acquired by bank holding companies
and their banking or nonbanking subsidiaries in satisfaction of debts
previously contracted.

July 22, 1980.

Bronwen M. Mason, Senior Attorney
(202/452-3564), or Jennifer J. Johnson, Senior Attorney (202/452-3584),
Legal Division, Board of Governors of the Federal Reserve System, Wash­
ington, D.C.
Supplementary Information:
Pursuant to the Board's authority under
sections 4(c)(1)(D), 4(c)(2), 4(c)(8) and 5(b) of the Bank Holding
Company Act (12 USC §§ 1843(c)(1)(D), (c)(2), (c)(8), and 1844(b)),
and section 8 of the Financial Institutions Supervisory Act (12 USC
§ 1818) 12 CFR Part 225 is amended by adding a new section 225.140
to read as follows:
225. 140 Disposition of property acquired in satisfaction
of debts previously contracted.
The Board recently considered the permissibility, under section 4
of the Bank Holding Company Act, of a subsidiary of a bank holding company
acquiring and holding assets acquired in satisfaction of a debt previously
contracted in good faith (a "dpc" acquisition). In the situation presented,
a lending subsidiary of a bank holding company made a "dpc" acquisition
of assets and transferred them to a wholly-owned subsidiary of the bank
holding company for the purpose of effecting an orderly divestiture.
The question presented was whether such "dpc" assets could be held in­
definitely by a bank holding company subsidiary as incidental to its
permissible lending activity.


While the Board believes that "dpc" acquisitions may be re­
garded as normal, necessary and incidental to the business of lending,
the Board does not believe that the holding of assets acquired "dpc"
without any time restrictions is appropriate from the standpoint of
prudent banking and in light of the prohibitions in section 4 of the
Act against engaging in nonbank activities.
If a nonbanking subsidiary
of a bank holding company were permitted, either directly or through
a subsidiary, to hold "dpc" assets of substantial amount over an extended
period of time, the holding of such property could result in an unsafe
or unsound banking practice or in the holding company engaging in an
impermissible activity in connection with the assets, rather than liqui­
dating them.
The Board notes that section 4 ( c ) (2) of the Bank Holding
Company Act provides an exemption from the prohibitions of section 4
of the Act for bank holding company subsidiaries to acquire shares
It also provides that such "dpc" shares may be held for a period
of two years, subject to the Board's authority to grant three one-year
extensions up to a maximum of five years.—
Viewed in light of the
Congressional policy evidenced by section 4(c)(2), the Board believes
that a lending subsidiary of a bank holding company or the holding
company itself, should be permitted, as am incident to permissible
lending activities, to make acquisitions of "dpc" a s s et s . Consistent
with the principles underlying the provisions of section 4 ( c ) (2) of
the Act and as a matter of prudent banking practice, such assets may
be held for no longer than five years from the date of acquisition.
Within the divestiture period it is expected that the company will make
good faith efforts to dispose of "dpc" shares or assets at the earliest
practicable date.
While no specific authorization is necessary to hold
such assets for the five-year period, after two years from the date
of acquisition of such assets, the holding company should report annually
on its efforts to accomplish divestiture to its Reserve Bank.
The Reserve
Bank will monitor the efforts of the company to effect an orderly divestiture,
and may order divestiture before the end of the five-year period if
supervisory concerns warrant such action.
The Board recognizes that there are instances where a company
may encounter particular difficulty in attempting to effect an orderly
divestiture of "dpc" real estate holdings within the divestiture period,
notwithstanding its persistent good faith efforts to dispose of such

1/ The Board notes that where the dpc shares or other similar interests
represent less than 5 per cent of the total of such interests outstanding,
they may be retained on the basis of section 4 ( c ) (6), even if originally
acquired dpc.


In the Depository Institutions Deregulation and Monetary
Control Act of 1980, (P.L. 96-221) Congress, recognizing that real
estate possesses unusual characteristics, amended the National Banking
Act to permit national banks to hold real estate for five years and
for an additional five-year period subject to certain conditions.
sistent with the policy underlying the recent Congressional enactment,
and as a matter of supervisory policy, a bank holding company may be
permitted to hold real estate acquired "dpc" beyond the initial fiveyear period provided that the value of the real estate on the books
of the company has been written down to fair market value, the carrying
costs are not significant in relation to the overall financial position
of the company, and the company has made good faith efforts to effect
Companies holding real estate for this extended period
are expected to make active efforts to dispose of it, and should keep
the Reserve Bank advised on a regular basis concerning their ongoing
Fair market value should be derived from appraisals, comparable
sales or some other reasonable method.
In any case, "dpc" real estate
would not be permitted to be held beyond 10 years from the date of its
With respect to the transfer by a subsidiary of other "dpc"
shares or assets to
another company in the holding company system,
including a section
4(c)(1)(D) liquidating subsidiary,
or to the holding
company itself, such transfers would not alter the original divestiture
period applicable to such shares or assets at the time
of their acquisi­
Moreover, to
ensure that assets are not carried
at inflated values
for extended periods of time, the Board expects, in the case of all
such intracompany transfers, that the shares or assets will be trans­
ferred at a value no greater than the fair market value at the time
of transfer and that the transfer will be made in a normal arms-length
With regard to "dpc" assets acquired by a banking subsidiary
of a holding company, so long as the assets continue to be held by the
bank itself, the Board will regard them as being solely within the
regulatory authority of the primary supervisor of the bank.
By order of the Board of Governors of the Federal Reserve
System effective July 22, 1980.

Cathy L. Petryshyn

Cathy L. Petryshyn
Assistant Secretary of the Board

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102