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May 14, 2004

James E. Scott, Esq.
Citigroup Inc.
425 Park Avenue
2nd Floor/Zone 2
New York, New York 10043

Dear Mr. Scott:

This is in response to the request by Citigroup Inc., New York, New York ("Citigroup"), on behalf of Citicorp Trust Bank, fsb, Newark, Delaware ("Citifsb"), for an exemption from section 23A of the Federal Reserve Act and the Board's Regulation W that would permit Citifsb to acquire all the shares of its affiliate, CitiFinancial Mortgage Company, Inc., Irving, Texas ("CitiFinancial Mortgage").1

Citigroup proposes to reorganize certain of its mortgage operations by transferring all the shares of CitiFinancial Mortgage, a nonbank subsidiary of Citigroup, to Citifsb, a federal savings bank subsidiary that is subject to section 23A. CitiFinancial Mortgage is principally engaged in the business of making and servicing subprime mortgage loans. Before Citifsb's proposed acquisition of CitiFinancial Mortgage, CitiFinancial Mortgage intends to transfer approximately $8 billion in low-quality assets to another affiliate. After Citigroup contributes all the shares of CitiFinancial Mortgage to Citifsb, CitiFinancial Mortgage would become an operating subsidiary of Citifsb.

Section 23A and Regulation W limit the amount of "covered transactions" between a bank (including a federal savings bank) and any single affiliate to 10 percent of the bank's capital stock and surplus and limit the amount of covered transactions between a bank and all its affiliates to 20 percent of the bank's capital stock and surplus. "Covered transactions" include a bank's purchase of assets from an affiliate and a bank's extension of credit to an affiliate. The statute and regulation also require a bank to secure its extensions of credit to, and certain other covered transactions with, affiliates with prescribed amounts of collateral. In addition, section 23A and Regulation W prohibit a bank from purchasing low-quality assets from an affiliate.

Regulation W provides that a bank's acquisition of a security issued by a company that was an affiliate of the bank before the acquisition is treated as a purchase of assets by the bank from an affiliate if: (i) the company becomes an operating subsidiary of the bank as a result of the transaction, and (ii) the company has liabilities at the time of the acquisition.2 CitiFinancial Mortgage is currently an affiliate of Citifsb; CitiFinancial Mortgage would be an operating subsidiary of Citifsb immediately after the reorganization; and CitiFinancial Mortgage would have liabilities at the time of the reorganization. Accordingly, Citigroup's transfer of all the shares of CitiFinancial Mortgage to Citifsb would be an asset purchase subject to the quantitative and qualitative limitations of section 23A and Regulation W. For purposes of Regulation W, the value of the covered transaction would be approximately [amount redacted] -- the total liabilities of CitiFinancial Mortgage at the time of the reorganization.3

To accomplish the reorganization, Citifsb has requested an exemption from section 23A and Regulation W to permit Citifsb to acquire all the shares of CitiFinancial Mortgage. Section 23A and Regulation W specifically authorize the Board to exempt, in its discretion, transactions or relationships from the requirements of the statute and regulation if the Board finds such exemptions to be in the public interest and consistent with the purposes of section 23A.4

The Board has approved exemptions under section 23A for one-time asset transfers that are part of a corporate reorganization and that are structured to ensure the quality of the transferred assets.5 As in previous cases, the proposed transaction in this case is part of a one-time corporate reorganization. Citigroup is consolidating its subprime mortgage and servicing business into Citifsb. According to Citigroup, this exemption is expected to enhance the efficiency of its lending programs and to contain or reduce their operating expenses.

Citigroup has made the following commitments, as part of this exemption request:

  1. None of the assets acquired by Citifsb will be "low-quality assets" within the meaning of section 23A and Regulation W.

  2. Citigroup commits, for a five-year period following the loan purchase, to make quarterly cash payments to Citifsb equal to the book value plus write-downs taken by Citifsb of any transferred assets that become low-quality assets during the quarter.

Citifsb's directors have reviewed and approved the transaction and have reviewed the transferred assets to ensure that the reorganization is consistent with safe and sound banking practices. In addition, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision have informed the Board that they have no objection to the proposal. In light of these considerations and all the facts you have presented, the reorganization transaction appears to be consistent with safe and sound banking practices and on terms that would ensure the quality of the assets transferred. Accordingly, the transaction appears to be consistent with the purposes of section 23A, and the Director of the Division of Banking Supervision and Regulation, pursuant to authority delegated by the Board, and with the concurrence of the General Counsel, hereby grants the requested exemption.

This determination is specifically conditioned on compliance by Citigroup, Citifsb, and CitiFinancial Mortgage with all the commitments and representations made in connection with the exemption request. These commitments and representations are deemed to be conditions imposed in writing in connection with granting the request and, as such, may be enforced in proceedings under applicable law. This determination is based on the specific facts and circumstances surrounding the proposed transaction and may be revoked in the event of material change in those facts and circumstances or failure by Citigroup, Citifsb, or CitiFinancial Mortgage to observe its commitments or representations. Granting this exemption does not represent a determination concerning the permissibility of any other transactions engaged in by Citigroup, Citifsb, or CitiFinancial Mortgage that are subject to section 23A or Regulation W.


(Signed) Robert deV. Frierson

Deputy Secretary of the Board

cc:Federal Reserve Bank of New York
 Federal Deposit Insurance Corporation
 Office of Thrift Supervision


1.  12 U.S.C. § 371c; 12 C.F.R. part 223. Return to text

2.  See 12 C.F.R. 223.31(a). Return to text

3.  See 12 C.F.R. 223.31(b). Return to text

4.  12 U.S.C. § 371c(f)(2); 12 C.F.R. 223.43(a). Return to text

5.  See, e.g., Letter dated January 8, 2001, from Robert deV. Frierson, Associate Secretary of the Board, to Bruce Moland (Wells Fargo & Company). Return to text

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