[Federal Register Volume 63, Number 181 (Friday, September 18, 1998)]
[Proposed Rules]
[Pages 49874-49877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25022]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 63, No. 181 / Friday, September 18, 1998 / 
Proposed Rules  

[[Page 49874]]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 560

[No. 98-92]
RIN 1550-AB21


Letters of Credit, Suretyship and Guaranty

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to amend 
its regulations to clarify that a Federal savings association may act 
as guarantor and may issue letters of credit. Additionally, the 
proposed rule would impose restrictions, based on safety and soundness, 
on suretyship and guaranty agreements issued by Federal and state-
chartered savings associations. The OTS is also requesting comment on 
whether it should adopt a regulation addressing the escrow authority of 
Federal savings associations.

DATES: Comments must be received on or before November 17, 1998.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, N.W., Washington, DC 20552, Attention Docket No. 98-92. These 
submissions may be hand-delivered to 1700 G Street, N.W., from 9:00 
a.m. to 5:00 p.m. on business days; they may be sent by facsimile 
transmission to FAX Number (202) 906-7755; or they may be sent by e-
mail: [email protected]. Those commenting by e-mail should 
include their name and telephone number. Comments will be available for 
inspection at 1700 G Street, N.W., from 9:00 a.m. until 4:00 p.m. on 
business days.

FOR FURTHER INFORMATION CONTACT: William J. Magrini, Senior Project 
Manager, (202) 906-5744, Supervision Policy; Raynette Gutrick, 
Attorney, (202) 906-6265, Regulations and Legislation Division or Karen 
Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations and 
Legislation Division, Chief Counsel's Office, Office of Thrift 
Supervision, 1700 G Street N.W., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION: The OTS is proposing this rule to clarify a 
Federal savings association's authority to act as guarantor and to 
issue letters of credit. Additionally, the proposed rule would impose 
restrictions, based on safety and soundness, on suretyships and 
guaranty agreements issued by Federal and state-chartered savings 
associations. The OTS also is seeking comment on whether it should 
adopt a regulation to address the escrow authority of Federal savings 
associations.

I. Suretyship and Guaranty

    Section 5(b)(2) of the Home Owners' Loan Act (the ``HOLA'') 
provides ``[t]o such extent as the Director may authorize in writing, a 
Federal savings association * * * may be surety as defined by the 
Director * * *'' 1 The OTS's current regulations at 12 CFR 
545.103 authorize Federal savings associations to act as surety subject 
to several requirements.
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    \1\ 12 U.S.C.A. 1464(b)(2) (West 1998).
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    The OTS is proposing to make several modifications to the surety 
regulation. Initially, the OTS would move this regulation from part 
545, which governs the general operations of Federal savings 
associations, to Part 560, subpart A, which addresses the lending and 
investment powers of Federal thrifts. See proposed Sec. 560.45.
    Neither HOLA nor the current OTS regulations specifically address a 
Federal savings association's authority to issue a guaranty. Under a 
suretyship agreement, the surety is bound with its principal to pay or 
perform an obligation to a third party.2 Under a guaranty 
agreement, on the other hand, the guarantor agrees to satisfy the 
obligation of the principal to another only if the principal fails to 
pay or perform.3 While both a surety and guarantor agree to 
be bound for the principal, there are other differences between the two 
types of agreements. A surety is usually bound with the principal by 
the same instrument, which is executed simultaneously.4 On 
the other hand, a guarantor usually enters into a separate agreement 
with the third party in which the principal does not join.5 
The guaranty agreement is usually entered into before or after that of 
the principal, and is often founded on a separate consideration from 
that supporting the contract of the principal.6
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    \2\ Black's Law Dictionary 1441-42 (6th ed. 1990).
    \3\ Id. at 705.
    \4\ Id. at 1441-42.
    \5\ Id.
    \6\ Id. Suretyship and guaranty agreements are similar to 
letters of credit to the extent that they are used for a common 
purpose--ensuring against the obligor's nonperformance. Under a 
letter of credit, however, the savings association's obligation to 
honor depends on the presentation of specified documents and not 
upon non-documentary conditions or resolutions of questions of law 
or fact at issue between the account party and the beneficiary. See 
12 CFR 560.120(a) (1998).
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    The OTS and its predecessor, the Federal Home Loan Bank Board 
(``FHLBB''), have long recognized that the authority of a Federal 
savings association to act as guarantor is subsumed within section 
5(b)(2) of the HOLA.7 To clarify this point, proposed 
Sec. 560.45 would specifically state that a Federal savings association 
is also authorized to act as guarantor.
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    \7\ See e.g., 48 FR 23032, 23043 (May 23, 1983) (stating that 
section 5(b)(2) of the HOLA empowers the FHLBB to authorize by 
regulation the issuance of suretyship devices by Federal savings 
associations for the purpose of guaranteeing the obligations of 
others); FHLBB Op. Assoc. Gen Counsel (July 5, 1983) (permitting the 
association to act as surety or guarantor under section 5(b)(2) of 
the HOLA). See also 12 CFR 545.16(a)(3) (1998) (``surety'' means 
surety under real and/or personal suretyship, and includes 
guarantor).
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    Currently, Sec. 545.103 contains various provisions designed to 
ensure the safety and soundness of surety agreements by Federal savings 
associations. These safety and soundness concerns are the same for 
suretyship and guaranty agreements by state-chartered savings 
associations. Accordingly, the OTS proposes to incorporate these 
requirements in part 560, subpart B, which contains the safety and 
soundness-based lending and investment restrictions applicable to all 
savings associations. Proposed Sec. 560.115(a) would state that to the 
extent that a savings association has the legal authority to do so, it 
may enter into an agreement to act as surety or guarantor, if the 
agreement meets stated requirements. Proposed section 560.115(b) is a 
new provision, which explains the terms ``suretyship and guaranty 
agreement.''

[[Page 49875]]

    Proposed Sec. 560.115(c) would contain four restrictions on surety 
and guaranty agreements. The first restriction is new. It would require 
that the association's obligation under the suretyship or guaranty 
agreement be limited to a fixed amount and limited in duration. Without 
a restriction limiting the amount and duration of the agreement, a 
Federal savings association may take on more risk than it bargained for 
in the agreement. The remaining three restrictions are based on the 
current rule on suretyship agreements at Sec. 545.103. Under the 
proposed rule, a savings association may enter into an agreement only 
if its performance under the agreement (e.g., the payment of the 
obligation on behalf of the principal) would create a loan or other 
investment that is authorized for the association under applicable law. 
Additionally, the savings association's obligation under the agreement 
would be treated as a contractual commitment to advance funds to the 
principal under the loans-to-one-borrower limits and loans to insider 
restrictions. Finally, the savings association must take and maintain a 
perfected security interest in collateral sufficient to cover its 
obligation under the agreement.
    The proposed rule would modify the collateral requirements 
currently imposed under existing Sec. 545.103. Under the current rule, 
a Federal savings association must take and maintain a security 
interest in real estate or marketable securities equal to 110 percent 
of its obligation under the agreement.8 If the collateral is 
real estate, the Federal savings association must establish the value 
of the property by a signed appraisal consistent with 12 CFR part 564. 
If the collateral is marketable securities, the Federal savings 
association must be authorized to invest in the securities and must 
ensure that the value of the securities is equal to 110 percent of the 
obligation at all times. These requirements are retained for all 
savings associations at proposed Sec. 560.45(d)(1).
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    \8\ 12 CFR 545.103(b) (1998).
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    The proposed rule, however, would permit a savings association to 
hold collateral of a lesser amount under certain circumstances. This 
new provision is modeled on the Office of Comptroller of the Currency's 
(OCC) rule on suretyship and guaranty agreements.9 Under 
proposed Sec. 560.45(d)(2), a savings association would be permitted to 
maintain a security interest equal to 100 percent of the obligation, if 
the collateral is cash, obligations of the United States or its 
agencies, obligations fully guaranteed by the United States or its 
agencies as to principal and interest, or notes, drafts, or bills of 
exchange or bankers' acceptances that are eligible for rediscount or 
purchase by a Federal Reserve Bank.10
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    \9\ 12 CFR 7.1017 (1998).
    \10\ Certain provisions of existing Sec. 545.103 have not been 
retained. For example, current Sec. 545.103(c) addresses what 
happens if a Federal savings association is required to perform 
under the suretyship agreement. This section states that a Federal 
savings association would be required to treat the amount advanced 
as an extension of credit, subject to investment limits and other 
restrictions applicable to such an extension of credit. The OTS has 
not retained this paragraph because it duplicates existing 
Sec. 560.31(a).
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    The OTS requests comment on whether there are other suretyship, 
guaranty, or similar arrangements that the OTS should permit either by 
rule or through an approval process. For example, the OCC has 
determined that an arrangement whereby a national bank holds out to the 
public that it will honor checks drawn on it up to a certain amount, is 
essentially an agreement by the bank to extend credit to the depositor 
and is a permissible activity.11 The OTS requests comment on 
whether the final rule should clarify how it will treat such 
arrangements.
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    \11\ See 12 CFR 7.7015 (1996).
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II. Letters of Credit and Other Independent Undertakings

    Under existing OTS and FHLBB precedent, Federal savings 
associations are authorized to issue letters of credit. Although the 
HOLA does not explicitly confer the authority to issue letters of 
credit, both agencies determined that the express authority to invest 
in or make loans necessarily includes the authority to make loan 
commitments and to issue letters of credit.12
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    \12\ 61 FR 50951, 50958 (September 30, 1996). This authority was 
first recognized in 1983 by the FHLBB, which determined that this 
power was implicit under new lending authority in the Garn-
St.Germain Depository Institutions Act of 1982 (DIA), Pub. L. No. 
97-320, 96 Stat. 1469 (1982). This lending authority included the 
authority to make secured or unsecured loans for commercial, 
corporate, business, or agricultural purposes (currently 12 U.S.C. 
1464(c)(2)(A)), and the authority to make loans on the security of 
liens upon nonresidential real property (currently 12 U.S.C. 
1464(c)(2)(B)). The FHLBB reasoned that the DIA was intended to give 
Federal savings associations competitive parity with national banks 
with respect to credit services provided to business customers. 
Because the authority to issue commercial and standby letters of 
credit was a well-established incidental power of national banks, 
the FHLBB determined that this authority was also conferred on 
Federal savings associations. 48 FR 23032, 23043 (May 23, 1983). The 
FHLBB also noted that 12 U.S.C. 1464(b)(2), which authorizes Federal 
associations to act as surety, supported this determination.
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    Until recently, the OTS regulations specifically authorized Federal 
savings associations to issue commercial and standby letters of 
credit.13 In the recent rule on lending and investment, the 
OTS proposed to include an express authorization for letters of credit 
in the lending and investment chart at 12 CFR 560.30. However, the OTS 
deleted this authorizing provision in the final rule ``because issuing 
a letter of credit is not in and of itself a loan or investment.'' The 
OTS, nonetheless, included prudent standards for the issuance of 
letters of credit and other approved independent undertakings by all 
savings associations at 12 CFR 560.120. These standards, however, apply 
only to the extent that a savings association has legal power to issue 
and commit to issue letters of credit and other approved independent 
undertakings.
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    \13\ 12 CFR 545.48 (1996), removed 61 FR 50951 (September 30, 
1996).
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    The deletion of Sec. 545.48 has inadvertently created confusion as 
to whether Federal savings associations continue to hold authority to 
issue letters of credit and other approved independent undertakings. To 
clarify this point, the OTS is proposing to add a new section to part 
560, subpart A, which addresses the lending and investment powers of 
Federal saving associations. While a letter of credit technically is 
neither a loan nor an investment, once funds are advanced under a 
letter of credit, the advance is treated as an extension of credit and 
is subject to investment limits and other restrictions on lending. See 
Sec. 560.31(a). Accordingly, the OTS believes it is appropriate to 
place this new provision in part 560.
    Proposed Sec. 560.50 would state that a Federal savings association 
may issue letters of credit and such other independent undertakings as 
are approved by the OTS, subject to the restrictions of Sec. 560.120. 
Like existing Sec. 560.120, the new section uses the phrase ``letters 
of credit and other independent undertakings.'' The OTS has used this 
phrase to encompass letters of credit as well as all commitments where 
the Federal savings association's obligation to honor the commitment is 
dependent solely on the proper presentation of specified documents 
regardless of extrinsic factors (except fraud, forgery, or an 
overriding public policy issue). The term covers a broad array of 
transactions including commercial letters of credit, standby letter of 
credit, and other undertakings that are functionally identical or 
equivalent to letters of credit.
    In the thrift context, the broad scope of the term ``independent 
undertakings'' and its recent evolution require close

[[Page 49876]]

supervision and review when such undertakings fall outside the more 
traditional activities generally known as letters of credit. 
Accordingly, OTS believes that allowing Federal savings associations to 
issue independent undertakings of a type specifically approved by OTS 
strikes the appropriate balance between allowing a Federal savings 
association the flexibility to engage in such transactions and, at the 
same time, ensuring that thrifts have properly evaluated the risks 
posed by a particular transaction consistent with prudent banking 
practice. OTS anticipates that its approval may take the form of legal 
opinions, general guidance, or case-by-case approvals, depending upon 
how the undertakings are presented to the agency.14
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    \14\ See 61 FR 50951, 50958 (September 30, 1996).
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III. Escrow Accounts

    Although the HOLA does not expressly address escrow accounts, the 
OTS and the FHLBB have authorized Federal savings associations to 
provide escrow services in several instances. For example, the FHLBB, 
in 1959 issued a policy statement permitting Federal savings 
associations to provide escrow services in connection with real estate 
loans. This policy statement provided:

    A Federal savings association may not act generally as an agent 
for the public in handling escrows. It may, however, handle escrows 
relating to real estate loans it makes and, to the extent reasonably 
incidental to accomplishing its express purposes, may handle escrows 
for others involving the type of real estate transactions common to 
the savings association business.15
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    \15\ 12 CFR 556.2 (1996).

This policy statement remained substantively unchanged until 1996 when 
OTS removed it because the ``authority to establish escrow accounts is 
subsumed within the authority of Federal savings associations to make 
loans and does not need to be specifically identified in the CFR.'' 
16
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    \16\ 61 FR 50951, 50961 (September 30, 1996).
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    Some questions have been raised concerning the scope of Federal 
savings associations' authority to handle escrow accounts that are not 
related to loans. For example, even while the policy statement was 
effective, the OTS indicated that fiduciary activities involving non-
discretionary activities such as escrow or safekeeping services, or 
acting as a custodian or paying agent are implicit in the express 
powers of Federal savings associations, including deposit 
powers.17
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    \17\ OTS Regulatory Handbook: Trust Activities, Sec. 140 (1992) 
and Op. Chief Counsel (October 17, 1995) (The authority to engage in 
these basic banking activities is derived from the incidental powers 
doctrine, not from section 5(n) of the HOLA. Thus, a Federal savings 
association is not required to obtain trust powers ``to perform 
limited duties and responsibilities such as escrow, safekeeping, or 
custodian services, even though the performance of such duties 
requires a degree of trust and care.'')
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    More recently, the OTS issued an opinion stating that a Federal 
savings association may hold an account that would escrow funds 
representing down-payments on vacations for its customer, a vacation 
organizer.18 The OTS concluded that the activity fell within 
the incidental powers of Federal savings associations.19 The 
OTS reasoned that the proposed escrow service would allow the savings 
association to provide its customer with more convenient access to 
needed financial services and is, thus, consistent with Congress' 
intent that Federal savings associations meet the needs of their 
business customers. Moreover, the OTS found that the proposed escrow 
service is similar to deposit taking and other escrow, safekeeping and 
document custodian services that Federal savings associations are 
already authorized to conduct. Further, the OTS noted that the proposed 
escrow activities would support funds intermediation by facilitating 
the conduct of financial transactions and would permit thrifts to 
compete more equally with commercial banks, which are permitted to 
provide such services.20
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    \18\ OTS Op. Chief Counsel (August 19, 1998).
    \19\ See OTS Op. Acting Chief Counsel (March 25, 1994) at 7-8 
and (October 17, 1994) at 4-5, which set forth the factors that OTS 
considers in its incidental powers analysis.
    \20\ In a OCC Letter No. 86-11 (1986), the OCC did not object to 
an impound arrangement where the bank without trust powers would 
receive as deposits the funds submitted by subscribers to a limited 
partnership.
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    While the OTS has not proposed any new regulatory text on escrow 
accounts in today's rulemaking, it requests comment whether it should 
issue a rule clarifying the scope of escrow authority of Federal 
savings associations. Commenters are also specifically asked to address 
whether the OTS should place any restrictions on the exercise of the 
escrow authority.

IV. Executive Order 12866

    The Director of the OTS has determined that this proposed 
regulation does not constitute a ``significant regulatory action'' for 
the purpose of Executive Order 12866.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this proposed regulation will not have a significant 
economic impact on a substantial number of small entities. Today's 
proposed rule would not impose any additional burdens or requirements 
on small entities. Rather, the proposed rule simply clarifies the 
authority of Federal savings associations to act as guarantor and issue 
letters of credit. While the proposed rule also restricts the 
circumstances under which Federal and state-chartered savings 
associations may enter into surety and guaranty agreements, the 
proposed restrictions are the minimum necessary for safe and sound 
operations and should not impose a significant burden on small savings 
associations.

VI. Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. The OTS has determined that 
the proposed rule will not result in expenditures by state, local, or 
tribal governments or by the private sector of $100 million or more. 
Accordingly, this rulemaking is not subject to section 202 of the 
Unfunded Mandates Act.

List of Subjects

12 CFR Part 545

    Consumer protection, Credit, Electronic funds transfers, 
Investments, Manufactured homes, Mortgages, Reporting and recordkeeping 
requirements, Savings associations.

12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

    Accordingly, the Office of Thrift Supervision amends chapter V, 
title 12, Code of Federal Regulations as set forth below:

PART 545--[AMENDED]

PART 560--LENDING AND INVESTMENT

    1. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806; 42 U.S.C. 4106.

[[Page 49877]]

Sec. 545.103  [Redesignated as Sec. 560.115]

    2. Section 545.103 is redesignated as Sec. 560.115 and revised to 
read as follows:


Sec. 560.115  Suretyship and guaranty.

    (a) May a savings association act as surety or guarantor? To the 
extent that a savings association has legal authority to do so, it may 
enter into an agreement to act as surety or guarantor if the agreement 
meets the requirements of this section.
    (b) What is a suretyship or guaranty agreement? Under a suretyship 
or guaranty agreement, a savings association is bound with its 
principal to pay or perform an obligation to a third person. Under a 
guaranty agreement, a savings association agrees to satisfy the 
obligation of the principal only if the principal fails to pay or 
perform.
    (c) What requirements apply to these agreements? A savings 
association may enter into a suretyship or guaranty agreement if the 
agreement meets each of the following requirements:
    (1) The savings association's obligations under the agreement are 
limited to a fixed dollar amount and are limited in duration.
    (2) The savings association's performance under the agreement would 
create a loan or other investment that is authorized under applicable 
law.
    (3) The savings association's obligation under the agreement is 
treated as a contractual commitment to advance funds to the principal 
under Sec. 560.93 of this part and Sec. 563.43 of this chapter.
    (4) The savings association must take and maintain a perfected 
security interest in collateral sufficient to cover its total 
obligation under the agreement.
    (d) What collateral is sufficient?
    (1) The savings association must take and maintain a perfected 
security interest in real estate or marketable securities equal to at 
least 110 percent of its obligation under the agreement, except as 
provided in paragraph (d)(2) of this section.
    (i) If the collateral is real estate, the savings association must 
establish the value by a signed appraisal consistent with part 564 of 
this chapter. The savings association must consider the value of prior 
mortgages, liens or other encumbrances on the property, except those 
held by the principal to the suretyship or guaranty agreement.
    (ii) If the collateral is marketable securities, the savings 
association must be authorized to invest in that security taken as 
collateral. The savings association must ensure that the value of the 
security is 110 percent of the obligation at all times during the term 
of agreement.
    (2) The savings association may take and maintain a perfected 
security interest in collateral which is at all times equal to at least 
100 percent of its obligation, if the collateral is:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iv) Notes, drafts, or bills of exchange or bankers' acceptances 
that are eligible for rediscount or purchase by a Federal Reserve Bank.
    3. Section 560.45 is added to subpart A to read as follows:


Sec. 560.45  Suretyship and guaranty authority.

    A Federal savings association is authorized to enter into an 
agreement to act as surety or guaranty, subject to the restrictions in 
Sec. 560.115 of this part.
    4. Section 560.50 is added to subpart A to read as follows:


Sec. 560.50  Letters of credit and other independent undertakings--
authority.

    A Federal savings association is authorized to issue letters of 
credit and may issue such other independent undertakings as are 
approved by the OTS, subject to the restrictions in Sec. 560.120 of 
this part.

    Dated: September 14, 1998.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-25022 Filed 9-17-98; 8:45 am]
BILLING CODE 6720-01-P