Each depositor insured to at least $250,000 per insured bank

Dealer's Bank Agreement Conforms to 12 CFR 337.2 Definition of Standby Letter of Credit

FDIC-85-1

January 9, 1985

Jules Bernard, Senior Attorney

Thank you for your letters of March 21, June 29, and November 5, 1984. I regret that the FDIC has not answered you sooner. Please accept my apology on behalf of the agency.

In your letter of March 21, 1984, you enclosed a copy of an agreement that *** asks its dealers' banks to execute. The agreement authorizes *** (the beneficiary of the arrangement) to ship equipment to its dealers, and to present the invoices directly to the bank; the bank agrees to make payment to *** on behalf of the dealer.

I note that the agreement contains several safeguards for the bank. Before *** ships any equipment to its dealer in accordance with the agreement, *** must contact the bank and receive the bank's approval for the shipment. In addition, the bank may terminate the authorization upon twenty-four hours' notice.

You posed the following question:

The issue specifically presented is whether or not the attached Letter of Guaranty violates the provisions of 12 CFR Section 332.1, which generally prohibits a state non-member bank from assuming the power "to guaranty or become surety upon the obligations of others".

In my view, the agreement conforms to the definition of a "standby letter of credit" set forth in section 337.2(a) of the FDIC's regulations, 12 C.F.R. § 337.2(a). Accordingly, the prohibition expressed in Part 332 does not bar the use of the agreement.