4000 - Advisory Opinions
Guaranteeing the Fidelity of Debtors to a Federal Agency
December 20, 1985
Timothy E. Divis, Regional Attorney
Recently, we received a letter from your client, ***, regarding their power to extend a guarantee for the benefit of ***, to the Department of Housing and Urban Development. The bank expressed concern that their extension of the guarantee would violate section 332.1 of the FDIC's rules and regulations (12 C.F.R. § 332.1) which prohibits banks from extending guarantees.
It is our understanding, that the bank extended the credit to *** with the expectation that the loan would be paid off when *** received a grant from HUD. The bank would grant HUD a guarantee to induce HUD to extend the grant to *** so that *** could repay the bank. In other words, the bank is extending the guarantee to HUD in order to protect the Bank's interest.
The position of the FDIC regarding the prohibition against extending guarantees in section 332.1 is that it prohibits a bank from engaging in the business of extending guarantees or operating a surety business. Furthermore, banks are generally not empowered to extend guarantees solely for the benefit of others. Since the guarantee to HUD is not being extended as part of an ongoing surety business and is primarily for the benefit of the bank, we do not feel that it would violate section 332.1.
We trust this is responsive to the bank's inquiry.