Ahmed-OCC-Interpretive-Ltr-re-Ijara-10-7-11 - Comptroller...

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Comptroller of the Currency Administrator of National Banks Northeastern District Office of the District Counsel 1114 Avenue of the Americas, Suite 3900 Voice (212) 790-4010 New York, New York 10036-7780 Facsimile (212) 790-4058 October 17, 1997 Interpretive Letter #806 December 1997 Mr. Steven T. Thomas 12 U.S.C. 24 (7) General Manager 12 U.S.C. 371 United Bank of Kuwait Tower 56 126 East 56th Street New York, New York 10022 Dear Mr. Thomas: This responds to your letter and subsequent telephone discussions requesting our opinion regarding whether the National Bank Act permits The United Bank of Kuwait PLC (“UBK” or “Branch”), a Federal branch located in New York, New York, to offer a residential Net Lease home finance product as part of the business of banking, pursuant to 12 U.S.C. § 24(Seventh) and 12 U.S.C. § 371. The Branch currently has an active mortgage lending business and wishes to have the flexibility to offer Net Leases to meet the special needs of its customers who adhere to the principles of Islam. The religious prescriptions of Islam or other faiths prohibit home purchasers from borrowing money where the lender charges interest and, therefore, effectively prohibit such individuals from purchasing homes by executing standard mortgages. The Branch proposes an alternative arrangement to help Islamic customers purchase residential real estate. The Branch will finance the home purchase contingent upon the Branch and the customer executing a Net Lease and Purchase Agreement. UBK argues that the economic substance of the Net Lease will be functionally equivalent to secured real estate lending. UBK further represents that its proposal satisfies accounting requirements so that the Net Lease will be characterized as financing rather than leasing. UBK anticipates that the Internal Revenue Service (“IRS”) will treat its proposal as financing rather than leasing. As discussed below, we conclude that UBK may conduct the activity based upon the facts and circumstances described herein. I. UBK’s Proposal UBK will structure the residential home financing arrangement as follows. The Lessee will contract with the Seller to buy a single family residence and will tender a down payment toward such purchase. Before funding the remainder of the purchase price, UBK and the Lessee will simultaneously enter into a Net Lease Agreement and a Purchase Agreement (collectively “the Agreements”). The Lessee will accept the property “as is” and UBK, as lessor, will make no
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2 representations or warranties regarding the property or its suitability. Then, UBK will supply the remainder of the funds to purchase the property from the Seller under the sales contract. UBK will have “legal title” to the property. UBK will record its interest in the property in the same manner as it would record a traditional mortgage. UBK will not purchase or maintain an inventory of properties to sell to customers.
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Ahmed-OCC-Interpretive-Ltr-re-Ijara-10-7-11 - Comptroller...

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