[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2005 Edition]
[From the U.S. Government Printing Office]



[[Page 1]]



          12


          Parts 200 to 219

                         Revised as of January 1, 2005


          Banks and Banking
          
          


________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2005
          With Ancillaries
                    Published by:
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 12:
          Chapter II--Federal Reserve System                         3
  Finding Aids:
      Table of CFR Titles and Chapters........................     437
      Alphabetical List of Agencies Appearing in the CFR......     455
      List of CFR Sections Affected...........................     465

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                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 12 CFR 201.1 refers 
                       to title 12, part 201, 
                       section 1.

                     ----------------------------

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                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

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HOW TO USE THE CODE OF FEDERAL REGULATIONS

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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
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requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
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[[Page vii]]

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                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

January 1, 2005.

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                               THIS TITLE

    Title 12--Banks and Banking is composed of seven volumes. The parts 
in these volumes are arranged in the following order: parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first 
volume containing parts 1-199 is comprised of chapter I--Comptroller of 
the Currency, Department of the Treasury. The second and third volumes 
containing parts 200-299 are comprised of chapter II--Federal Reserve 
System. The fourth volume containing parts 300-499 is comprised of 
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing 
parts 500-599 is comprised of chapter V--Office of Thrift Supervision, 
Department of the Treasury. The sixth volume containing parts 600-899 is 
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing 
Bank. The seventh volume containing part 900-end is comprised of chapter 
IX--Federal Housing Finance Board, chapter XI--Federal Financial 
Institutions Examination Council, chapter XIV--Farm Credit System 
Insurance Corporation, chapter XV--Department of the Treasury, chapter 
XVII--Office of Federal Housing Enterprise Oversight, Department of 
Housing and Urban Development and chapter XVIII--Community Development 
Financial Institutions Fund, Department of the Treasury. The contents of 
these volumes represent all of the current regulations codified under 
this title of the CFR as of January 1, 2005.

    For this volume, Elmer Barksdale was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Frances D. McDonald, assisted by Alomha S. Morris.

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                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 200 to 219)

  --------------------------------------------------------------------
                                                                    Part

chapter ii--Federal Reserve System..........................         201

Cross References: Farmers Home Administration: See Agriculture, 7 CFR, 
  chapter XVIII.

  Office of Assistant Secretary for Housing--Federal Housing 
Commissioner, Department of Housing and Urban Development: See Housing 
and Urban Development, 24 CFR, chapter II.

  Fiscal Service: See Money and Finance: Treasury, 31 CFR, chapter II.

  Monetary Offices: See Money and Finance: Treasury, 31 CFR, chapter I.

  Commodity Credit Corporation: See Agriculture, 7 CFR, chapter XIV.

  Small Business Administration: See Business Credit and Assistance, 13 
CFR, chapter I.

  Rural Electrification Administration: See Agriculture, 7 CFR, chapter 
XVII.

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                   CHAPTER II--FEDERAL RESERVE SYSTEM




  --------------------------------------------------------------------

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part                                                                Page
201             Extensions of credit by Federal Reserve 
                    banks (Regulation A)....................           5
202             Equal Credit Opportunity Act (Regulation B).          14
203             Home mortgage disclosure (Regulation C).....          70
204             Reserve requirements of depository 
                    institutions (Regulation D).............          94
205             Electronic fund transfers (Regulation E)....         127
206             Limitations on interbank liabilities 
                    (Regulation F)..........................         163
207             Disclosure and reporting of CRA-related 
                    agreements (Regulation G)...............         167
208             Membership of State banking institutions in 
                    the Federal Reserve System (Regulation 
                    H)......................................         180
209             Issue and cancellation of Federal Reserve 
                    Bank capital stock (Regulation I).......         278
210             Collection of checks and other items by 
                    Federal Reserve banks and funds 
                    transfers through Fedwire (Regulation J)         282
211             International banking operations (Regulation 
                    K)......................................         318
212             Management official interlocks..............         366
213             Consumer leasing (Regulation M).............         370
214             Relations with foreign banks and bankers 
                    (Regulation N)..........................         396
215             Loans to executive officers, directors, and 
                    principal shareholders of member banks 
                    (Regulation O)..........................         398
216             Privacy of consumer financial information 
                    (Regulation P)..........................         410
217             Prohibition against the payment of interest 
                    on demand deposits (Regulation Q).......         428
219             Reimbursement for providing financial 
                    records; recordkeeping requirements for 
                    certain financial records (Regulation S)         430

Supplementary Publications: The Federal Reserve Act, as amended through 
  December 31, 1976, with an Appendix containing provisions of certain 
  other statutes affecting the Federal Reserve System. Rules of 
  Organization and Procedure--Board of Governors of the Federal Reserve 
  System.

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  Regulations of the Board of Governors of the Federal Reserve System. 
  The Federal Reserve System--Purposes and Functions. Annual Report. 
  Federal Reserve Bulletin. Monthly. Federal Reserve Chart Book 
  Quarterly; Historical Chart Book issued in September.

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      SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM





PART 201_EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A)
--Table of Contents




Sec.
201.1 Authority, purpose and scope.
201.2 Definitions.
201.3 Extensions of credit generally.
201.4 Availability and terms of credit.
201.5 Limitations on availability and assessments.
201.51 Interest rates applicable to credit extended by a Federal Reserve 
          Bank.

                             Interpretations

201.104 Eligibility of consumer loans and finance company paper.
201.107 Eligibility of demand paper for discount and as security for 
          advances by Reserve Banks.
201.108 Obligations eligible as collateral for advances.
201.109 Eligibility for discount of mortgage company notes.
201.110 Goods held by persons employed by owner.

    Authority: 12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 348 
et seq., 357, 374, 374a, and 461.

    Source: 45 FR 54010, Aug. 14, 1980, unless otherwise noted.



Sec. 201.1  Authority, purpose and scope.

    (a) Authority. This part is issued under the authority of sections 
10A, 10B, 11(i), 11(j), 13, 13A, 14(d), and 19 of the Federal Reserve 
Act (12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 348 et seq., 
357, 374, 374a, and 461).
    (b) Purpose and scope. This part establishes rules under which a 
Federal Reserve Bank may extend credit to depository institutions and 
others. Except as otherwise provided, this part applies to United States 
branches and agencies of foreign banks that are subject to reserve 
requirements under Regulation D (12 CFR part 204) in the same manner and 
to the same extent as this part applies to depository institutions. The 
Federal Reserve System extends credit with due regard to the basic 
objectives of monetary policy and the maintenance of a sound and orderly 
financial system.

[Reg. A, 67 FR 67785, Nov. 7, 2002]



Sec. 201.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) Appropriate federal banking agency has the same meaning as in 
section 3 of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 
1813(q)).
    (b) Critically undercapitalized insured depository institution means 
any insured depository institution as defined in section 3 of the FDI 
Act (12 U.S.C. 1813(c)(2)) that is deemed to be critically 
undercapitalized under section 38 of the FDI Act (12 U.S.C. 
1831o(b)(1)(E)) and its implementing regulations.
    (c)(1) Depository institution means an institution that maintains 
reservable transaction accounts or nonpersonal time deposits and is:
    (i) An insured bank as defined in section 3 of the FDI Act (12 
U.S.C. 1813(h)) or a bank that is eligible to make application to become 
an insured bank under section 5 of such act (12 U.S.C. 1815);
    (ii) A mutual savings bank as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(f)) or a bank that is eligible to make application to 
become an insured bank under section 5 of such act (12 U.S.C. 1815);
    (iii) A savings bank as defined in section 3 of the FDI Act (12 
U.S.C. 1813(g)) or a bank that is eligible to make application to become 
an insured bank under section 5 of such act (12 U.S.C. 1815);
    (iv) An insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752(7)) or a credit union that is 
eligible to make application to become an insured credit union pursuant 
to section 201 of such act (12 U.S.C. 1781);
    (v) A member as defined in section 2 of the Federal Home Loan Bank 
Act (12 U.S.C. 1422(4)); or
    (vi) A savings association as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(b)) that is an insured depository

[[Page 6]]

institution as defined in section 3 of the act (12 U.S.C. 1813(c)(2)) or 
is eligible to apply to become an insured depository institution under 
section 5 of the act (12 U.S.C. 15(a)).
    (2) The term depository institution does not include a financial 
institution that is not required to maintain reserves under Sec. 
204.1(c)(4) of Regulation D (12 CFR 204.1(c)(4)) because it is organized 
solely to do business with other financial institutions, is owned 
primarily by the financial institutions with which it does business, and 
does not do business with the general public.
    (d) Transaction account and nonpersonal time deposit have the 
meanings specified in Regulation D (12 CFR part 204).
    (e) Undercapitalized insured depository institution means any 
insured depository institution as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(c)(2)) that:
    (1) Is not a critically undercapitalized insured depository 
institution; and
    (2)(i) Is deemed to be undercapitalized under section 38 of the FDI 
Act (12 U.S.C. 1831o(b)(1)(C)) and its implementing regulations; or
    (ii) Has received from its appropriate federal banking agency a 
composite CAMELS rating of 5 under the Uniform Financial Institutions 
Rating System (or an equivalent rating by its appropriate federal 
banking agency under a comparable rating system) as of the most recent 
examination of such institution.
    (f) Viable, with respect to a depository institution, means that the 
Board of Governors or the appropriate federal banking agency has 
determined, giving due regard to the economic conditions and 
circumstances in the market in which the institution operates, that the 
institution is not critically undercapitalized, is not expected to 
become critically undercapitalized, and is not expected to be placed in 
conservatorship or receivership. Although there are a number of criteria 
that may be used to determine viability, the Board of Governors believes 
that ordinarily an undercapitalized insured depository institution is 
viable if the appropriate federal banking agency has accepted a capital 
restoration plan for the depository institution under 12 U.S.C. 
1831o(e)(2) and the depository institution is complying with that plan.

[Reg. A, 67 FR 67785, Nov. 7, 2002]



Sec. 201.3  Extensions of credit generally.

    (a) Advances to and discounts for a depository institution. (1) A 
Federal Reserve Bank may lend to a depository institution either by 
making an advance secured by acceptable collateral under Sec. 201.4 of 
this part or by discounting certain types of paper. A Federal Reserve 
Bank generally extends credit by making an advance.
    (2) An advance to a depository institution must be secured to the 
satisfaction of the Federal Reserve Bank that makes the advance. 
Satisfactory collateral generally includes United States government and 
federal-agency securities, and, if of acceptable quality, mortgage notes 
covering one-to four-family residences, state and local government 
securities, and business, consumer, and other customer notes.
    (3) If a Federal Reserve Bank concludes that a discount would meet 
the needs of a depository institution or an institution described in 
section 13A of the Federal Reserve Act (12 U.S.C. 349) more effectively, 
the Reserve Bank may discount any paper indorsed by the institution, 
provided the paper meets the requirements specified in the Federal 
Reserve Act.
    (b) No obligation to make advances or discounts. A Federal Reserve 
Bank shall have no obligation to make, increase, renew, or extend any 
advance or discount to any depository institution.
    (c) Information requirements. (1) Before extending credit to a 
depository institution, a Federal Reserve Bank should determine if the 
institution is an undercapitalized insured depository institution or a 
critically undercapitalized insured depository institution and, if so, 
follow the lending procedures specified in Sec. 201.5.
    (2) Each Federal Reserve Bank shall require any information it 
believes appropriate or desirable to ensure that assets tendered as 
collateral for advances or for discount are acceptable and that the 
borrower uses the credit provided in a manner consistent with this part.
    (3) Each Federal Reserve Bank shall:

[[Page 7]]

    (i) Keep itself informed of the general character and amount of the 
loans and investments of a depository institution as provided in section 
4(8) of the Federal Reserve Act (12 U.S.C. 301); and
    (ii) Consider such information in determining whether to extend 
credit.
    (d) Indirect credit for others. Except for depository institutions 
that receive primary credit as described in Sec. 201.4(a), no 
depository institution shall act as the medium or agent of another 
depository institution in receiving Federal Reserve credit except with 
the permission of the Federal Reserve Bank extending credit.

[Reg. A, 67 FR 67786, Nov. 7, 2002]



Sec. 201.4  Availability and terms of credit.

    (a) Primary credit. A Federal Reserve Bank may extend primary credit 
on a very short-term basis, usually overnight, as a backup source of 
funding to a depository institution that is in generally sound financial 
condition in the judgment of the Reserve Bank. Such primary credit 
ordinarily is extended with minimal administrative burden on the 
borrower. A Federal Reserve Bank also may extend primary credit with 
maturities up to a few weeks as a backup source of funding to a 
depository institution if, in the judgment of the Reserve Bank, the 
depository institution is in generally sound financial condition and 
cannot obtain such credit in the market on reasonable terms. Credit 
extended under the primary credit program is granted at the primary 
credit rate.
    (b) Secondary credit. A Federal Reserve Bank may extend secondary 
credit on a very short-term basis, usually overnight, as a backup source 
of funding to a depository institution that is not eligible for primary 
credit if, in the judgment of the Reserve Bank, such a credit extension 
would be consistent with a timely return to a reliance on market funding 
sources. A Federal Reserve Bank also may extend longer-term secondary 
credit if the Reserve Bank determines that such credit would facilitate 
the orderly resolution of serious financial difficulties of a depository 
institution. Credit extended under the secondary credit program is 
granted at a rate above the primary credit rate.
    (c) Seasonal credit. A Federal Reserve Bank may extend seasonal 
credit for periods longer than those permitted under primary credit to 
assist a smaller depository institution in meeting regular needs for 
funds arising from expected patterns of movement in its deposits and 
loans. An interest rate that varies with the level of short-term market 
interest rates is applied to seasonal credit.
    (1) A Federal Reserve Bank may extend seasonal credit only if:
    (i) The depository institution's seasonal needs exceed a threshold 
that the institution is expected to meet from other sources of liquidity 
(this threshold is calculated as a certain percentage, established by 
the Board of Governors, of the institution's average total deposits in 
the preceding calendar year); and
    (ii) The Federal Reserve Bank is satisfied that the institution's 
qualifying need for funds is seasonal and will persist for at least four 
weeks.
    (2) The Board may establish special terms for seasonal credit when 
depository institutions are experiencing unusual seasonal demands for 
credit in a period of liquidity strain.
    (d) Emergency credit for others. In unusual and exigent 
circumstances and after consultation with the Board of Governors, a 
Federal Reserve Bank may extend credit to an individual, partnership, or 
corporation that is not a depository institution if, in the judgment of 
the Federal Reserve Bank, credit is not available from other sources and 
failure to obtain such credit would adversely affect the economy. If the 
collateral used to secure emergency credit consists of assets other than 
obligations of, or fully guaranteed as to principal and interest by, the 
United States or an agency thereof, credit must be in the form of a 
discount and five or more members of the Board of Governors must 
affirmatively vote to authorize the discount prior to the extension of 
credit. Emergency credit will be extended at a rate above the highest 
rate in effect for advances to depository institutions.

[Reg. A, 67 FR 67786, Nov. 7, 2002]

[[Page 8]]



Sec. 201.5  Limitations on availability and assessments.

    (a) Lending to undercapitalized insured depository institutions. A 
Federal Reserve Bank may make or have outstanding advances to or 
discounts for a depository institution that it knows to be an 
undercapitalized insured depository institution, only:
    (1) If, in any 120-day period, advances or discounts from any 
Federal Reserve Bank to that depository institution are not outstanding 
for more than 60 days during which the institution is an 
undercapitalized insured depository institution; or
    (2) During the 60 calendar days after the receipt of a written 
certification from the chairman of the Board of Governors or the head of 
the appropriate federal banking agency that the borrowing depository 
institution is viable; or
    (3) After consultation with the Board of Governors. In unusual 
circumstances, when prior consultation with the Board is not possible, a 
Federal Reserve Bank should consult with the Board as soon as possible 
after extending credit that requires consultation under this paragraph 
(a)(3).
    (b) Lending to critically undercapitalized insured depository 
institutions. A Federal Reserve Bank may make or have outstanding 
advances to or discounts for a depository institution that it knows to 
be a critically undercapitalized insured depository institution only:
    (1) During the 5-day period beginning on the date the institution 
became a critically undercapitalized insured depository institution; or
    (2) After consultation with the Board of Governors. In unusual 
circumstances, when prior consultation with the Board is not possible, a 
Federal Reserve Bank should consult with the Board as soon as possible 
after extending credit that requires consultation under this paragraph 
(b)(2).
    (c) Assessments. The Board of Governors will assess the Federal 
Reserve Banks for any amount that the Board pays to the FDIC due to any 
excess loss in accordance with section 10B(b) of the Federal Reserve 
Act. Each Federal Reserve Bank shall be assessed that portion of the 
amount that the Board of Governors pays to the FDIC that is attributable 
to an extension of credit by that Federal Reserve Bank, up to 1 percent 
of its capital as reported at the beginning of the calendar year in 
which the assessment is made. The Board of Governors will assess all of 
the Federal Reserve Banks for the remainder of the amount it pays to the 
FDIC in the ratio that the capital of each Federal Reserve Bank bears to 
the total capital of all Federal Reserve Banks at the beginning of the 
calendar year in which the assessment is made, provided, however, that 
if any assessment exceeds 50 percent of the total capital and surplus of 
all Federal Reserve Banks, whether to distribute the excess over such 50 
percent shall be made at the discretion of the Board of Governors.

[Reg. A, 67 FR 67787, Nov. 7, 2002]



Sec. 201.51  Interest rates applicable to credit extended by a Federal 
Reserve Bank.\1\

---------------------------------------------------------------------------

    \1\ The primary, secondary, and seasonal credit rates described in 
this section apply to both advances and discounts made under the 
primary, secondary, and seasonal credit programs, respectively.
---------------------------------------------------------------------------

    (a) Primary credit. The interest rates for primary credit provided 
to depository institutions under Sec. 201.4(a) are:

------------------------------------------------------------------------
        Federal reserve bank          Rate            Effective
------------------------------------------------------------------------
Boston.............................    3.25  December 14, 2004.
New York...........................    3.25  December 14, 2004.
Philadelphia.......................    3.25  December 14, 2004.
Cleveland..........................    3.25  December 14, 2004.
Richmond...........................    3.25  December 14, 2004.
Atlanta............................    3.25  December 14, 2004.
Chicago............................    3.25  December 14, 2004.
St. Louis..........................    3.25  December 15, 2004.
Minneapolis........................    3.25  December 14, 2004.
Kansas City........................    3.25  December 14, 2004.
Dallas.............................    3.25  December 14, 2004.
San Francisco......................    3.25  December 14, 2004.
------------------------------------------------------------------------

    (b) Secondary credit. The interest rates for secondary credit 
provided to depository institutions under Sec. 201.4(b) are:

------------------------------------------------------------------------
        Federal reserve bank          Rate            Effective
------------------------------------------------------------------------
Boston.............................    3.75  December 14, 2004
New York...........................    3.75  December 14, 2004
Philadelphia.......................    3.75  December 14, 2004
Cleveland..........................    3.75  December 14, 2004
Richmond...........................    3.75  December 14, 2004
Atlanta............................    3.75  December 14, 2004
Chicago............................    3.75  December 14, 2004
St. Louis..........................    3.75  December 15, 2004

[[Page 9]]

 
Minneapolis........................    3.75  December 14, 2004
Kansas City........................    3.75  December 14, 2004
Dallas.............................    3.75  December 14, 2004
San Francisco......................    3.75  December 14, 2004
------------------------------------------------------------------------

    (c) Seasonal credit. The rate for seasonal credit extended to 
depository institutions under Sec. 201.4(c) is a flexible rate that 
takes into account rates on market sources of funds.
    (d) Primary credit rate in a financial emergency. (1) The primary 
credit rate at a Federal Reserve Bank is the target federal funds rate 
of the Federal Open Market Committee if:
    (i) In a financial emergency the Reserve Bank has established the 
primary credit rate at that rate; and
    (ii) The Chairman of the Board of Governors (or, in the Chairman's 
absence, his authorized designee) certifies that a quorum of the Board 
is not available to act on the Reserve Bank's rate establishment.
    (2) For purposes of this paragraph (d), a financial emergency is a 
significant disruption to the U.S. money markets resulting from an act 
of war, military or terrorist attack, natural disaster, or other 
catastrophic event.

[Reg. A, 67 FR 67787, Nov. 7, 2002, as amended at 68 FR 1794, Jan. 14, 
2003; 68 FR 41054, July 10, 2003; 69 FR 41389, July 9, 2004; 69 FR 
51002, Aug. 17, 2004; 69 FR 57836, Sept. 28, 2004; 69 FR 67635, Nov. 19, 
2004; 69 FR 75819, Dec. 20, 2004]

                             Interpretations



Sec. 201.104  Eligibility of consumer loans and finance company paper.

    (a) The Board of Governors has clarified and modified its position 
with respect to the eligibility of consumer loans and finance company 
paper for discount with and as collateral for advances by the reserve 
banks.
    (b) Section 13, paragraph 2, of the Federal Reserve Act authorizes a 
Federal Reserve Bank, under certain conditions, to discount for member 
banks

    * * * notes, drafts, and bills of exchange arising out of actual 
commercial transactions; that is, notes, drafts, and bills of exchange 
issued or drawn for agricultural, industrial, or commercial purposes, or 
the proceeds of which have been used, or are to be used, for such 
purposes, the Board of Governors of the Federal Reserve System to have 
the right to determine or define the character of the paper thus 
eligible for discount, within the meaning of this Act.

    (c) It continues to be the opinion of the Board that borrowing for 
the purpose of purchasing goods is borrowing for a commercial purpose, 
whether the borrower intends to use the goods himself or to resell them. 
Hence, loans made to enable consumers to purchase automobiles or other 
goods should be included under commercial, agricultural, and industrial 
paper within the meaning of the Federal Reserve Act, and as such are 
eligible for discounting with the Reserve Banks and as security for 
advances from the Reserve Banks under section 13, paragraph 8, of the 
Federal Reserve Act as long as they conform to requirements with respect 
to maturity and other matters. This applies equally to loans made 
directly by banks to consumers and to paper accepted by banks from 
dealers or finance companies. It also applies to notes of finance 
companies themselves as long as the proceeds of such notes are used to 
finance the purchase of consumer goods or for other purposes which are 
eligible within the meaning of the Federal Reserve Act.
    (d) If there is any question as to whether the proceeds of a note of 
a finance company have been or are to be used for a commercial, 
agricultural, or industrial purpose, a financial statement of the 
finance company reflecting an excess of notes receivable which appear 
eligible for rediscount (without regard to maturity) over total current 
liabilities (i.e., notes due within 1 year) may be taken as an 
indication of eligibility. Where information is lacking as to whether 
direct consumer loans by a finance company are for eligible purposes, it 
may be assumed that 50 percent of such loans are ``notes receivable 
which appear eligible for rediscount''. In addition, that language 
should be regarded as including notes given for the purchase of mobile 
homes that are acquired by a finance company from a dealer-seller of 
such homes.
    (e) The principles stated above apply not only to notes of a finance 
company engaged in making consumer loans but also to notes of a finance 
company engaged in making loans for other eligible purposes, including 
business and agricultural loans. Under section 13a of

[[Page 10]]

the Federal Reserve Act, paper representing loans to finance the 
production, marketing, and carrying of agricultural products or the 
breeding, raising, fattening, or marketing of livestock is eligible for 
discount if the paper has a maturity of not exceeding 9 months. 
Consequently, a note of a finance company the proceeds of which are used 
by it to make loans for such purposes is eligible for discount or as 
security for a Federal Reserve advance, and such a note, unlike the note 
of a finance company making consumer loans, may have a maturity of up to 
9 months.

[37 FR 4701, Mar. 4, 1972]



Sec. 201.107  Eligibility of demand paper for discount and as security 
for advances by Reserve Banks.

    (a) The Board of Governors has reconsidered a ruling made in 1917 
that demand notes are ineligible for discount under the provisions of 
the Federal Reserve Act. (1917 Federal Reserve Bulletin 378.)
    (b) The basis of that ruling was the provision in the second 
paragraph of section 13 of the Federal Reserve Act that notes, drafts, 
and bills of exchange must have a maturity at the time of discount of 
not more than 90 days, exclusive of grace. The ruling stated that

    a demand note or bill is not eligible under the provisions of the 
act, since it is not in terms payable within the prescribed 90 days, 
but, at the option of the holder, may not be presented for payment until 
after that time.

    (c) It is well settled as a matter of law, however, that demand 
paper is due and payable on the date of its issue. The generally 
accepted legal view is stated in Beutel's Brannan on Negotiable 
Instruments Law, at page 305, as follows:

    The words on demand serve the same purpose as words making 
instruments payable at a specified time. They fix maturity of the 
obligation and do not make demand necessary, but mean that the 
instrument is due, payable and matured when made and delivered.

    (d) Accordingly, the Board has concluded that, since demand paper is 
due and payable on the date of its issue, it satisfies the maturity 
requirements of the statute. Demand paper which otherwise meets the 
eligibility requirements of the Federal Reserve Act and this part 
Regulation A, therefore, is eligible for discount and as security for 
advances by Reserve Banks.

[31 FR 5443, Apr. 16, 1966]



Sec. 201.108  Obligations eligible as collateral for advances.

    (a) Section 3(a) of Pub. L. 90-505, approved September 21, 1968, 
amended the eighth paragraph of section 13 of the Federal Reserve Act 
(12 U.S.C. 347) to authorize advances thereunder to member banks 
``secured by such obligations as are eligible for purchase under section 
14(b) of this Act.'' The relevant part of such paragraph had previously 
referred only to ``notes * * * eligible * * * for purchase'', which the 
Board had construed as not including obligations generally regarded as 
securities. (See 1962 Federal Reserve Bulletin 690, Sec. 201.103(d).)
    (b) Under section 14(b) direct obligations of, and obligations fully 
guaranteed as to principal and interest by, the United States are 
eligible for purchase by Reserve Banks. Such obligations include 
certificates issued by the trustees of Penn Central Transportation Co. 
that are fully guaranteed by the Secretary of Transportation. Under 
section 14(b) direct obligations of, and obligations fully guaranteed as 
to principal and interest by, any agency of the United States are also 
eligible for purchase by Reserve Banks. Following are the principal 
agency obligations eligible as collateral for advances:
    (1) Federal Intermediate Credit Bank debentures;
    (2) Federal Home Loan Bank notes and bonds;
    (3) Federal Land Bank bonds;
    (4) Bank for Cooperative debentures;
    (5) Federal National Mortgage Association notes, debentures and 
guaranteed certificates of participation;
    (6) Obligations of or fully guaranteed by the Government National 
Mortgage Association;
    (7) Merchant Marine bonds;
    (8) Export-Import Bank notes and guaranteed participation 
certificates;
    (9) Farmers Home Administration insured notes;

[[Page 11]]

    (10) Notes fully guaranteed as to principal and interest by the 
Small Business Administration;
    (11) Federal Housing Administration debentures;
    (12) District of Columbia Armory Board bonds;
    (13) Tennessee Valley Authority bonds and notes;
    (14) Bonds and notes of local urban renewal or public housing 
agencies fully supported as to principal and interest by the full faith 
and credit of the United States pursuant to section 302 of the Housing 
Act of 1961 (42 U.S.C. 1421a(c), 1452(c)).
    (15) Commodity Credit Corporation certificates of interest in a 
price-support loan pool.
    (16) Federal Home Loan Mortgage Corporation notes, debentures, and 
guaranteed certificates of participation.
    (17) U.S. Postal Service obligations.
    (18) Participation certificates evidencing undivided interests in 
purchase contracts entered into by the General Services Administration.
    (19) Obligations entered into by the Secretary of Health, Education, 
and Welfare under the Public Health Service Act, as amended by the 
Medical Facilities Construction and Modernization Amendments of 1970.
    (20) Obligations guaranteed by the Overseas Private Investment 
Corp., pursuant to the provisions of the Foreign Assistance Act of 1961, 
as amended.
    (c) Nothing less than a full guarantee of principal and interest by 
a Federal agency will make an obligation eligible. For example, mortgage 
loans insured by the Federal Housing Administration are not eligible 
since the insurance contract is not equivalent to an unconditional 
guarantee and does not fully cover interest payable on the loan. 
Obligations of international institutions, such as the Inter-American 
Development Bank and the International Bank for Reconstruction and 
Development, are also not eligible, since such institutions are not 
agencies of the United States.
    (d) Also eligible for purchase under section 14(b) are ``bills, 
notes, revenue bonds, and warrants with a maturity from date of purchase 
of not exceeding 6 months, issued in anticipation of the collection of 
taxes or in anticipation of the receipt of assured revenues by any 
State, county, district, political subdivision, or municipality in the 
continental United States, including irrigation, drainage and 
reclamation districts.''\3\ In determining the eligibility of such 
obligations as collateral for advances, but the Reserve Bank will 
satisfy itself that sufficient tax or other assured revenues earmarked 
for payment of such obligations will be available for that purpose at 
maturity, or within 6 months from the date of the advance if no maturity 
is stated. Payments due from Federal, State or other governmental units 
may, in the Reserve Bank's discretion, be regarded as ``other assured 
revenues''; but neither the proceeds of a prospective issue of 
securities nor future tolls, rents or similar collections for the 
voluntary use of government property for non-governmental purposes will 
normally be so regarded. Obligations with original maturities exceeding 
1 year would not ordinarily be self-liquidating as contemplated by the 
statute, unless at the time of issue provision is made for a redemption 
or sinking fund that will be sufficient to pay such obligations at 
maturity.
---------------------------------------------------------------------------

    \2\ [Reserved]
    \3\ Paragraph 3 of section 1 of the Federal Reserve Act (12 U.S.C. 
221) defines the continental United States to mean ``the States of the 
United States and the District of Columbia'', thus including Alaska and 
Hawaii.

[Reg. A, 33 FR 17231, Nov. 21, 1968, as amended at 34 FR 1113, Jan. 24, 
1969; 34 FR 6417, Apr. 12, 1969; 36 FR 8441, May 6, 1971; 37 FR 24105, 
Nov. 14, 1972; 43 FR 53709, Nov. 17, 1978; 58 FR 68515, Dec. 28, 1993]



Sec. 201.109  Eligibility for discount of mortgage company notes.

    (a) The question has arisen whether notes issued by mortgage banking 
companies to finance their acquisition and temporary holding of real 
estate mortgages are eligible for discount by Reserve Banks.
    (b) Under section 13 of the Federal Reserve Act the Board has 
authority to define what are ``agricultural, industrial, or commercial 
purposes'', which is the statutory criterion for determining the 
eligibility of notes and

[[Page 12]]

drafts for discount. However, such definition may not include paper 
``covering merely investments or issued or drawn for the purpose of 
carrying or trading in stocks, bonds, or other investment securities''.
    (c) The legislative history of section 13 suggests that Congress 
intended to make eligible for discount ``any paper drawn for a 
legitimate business purpose of any kind'' \4\ and that the Board, in 
determining what paper is eligible, should place a ``broad and adaptable 
construction'' \5\ upon the terms in section 13. It may also be noted 
that Congress apparently considered paper issued to carry investment 
securities as paper issued for a ``commercial purpose'', since it 
specifically prohibited the Board from making such paper eligible for 
discount. If ``commercial'' is broad enough to encompass investment 
banking, it would also seem to include mortgage banking.
---------------------------------------------------------------------------

    \4\ House Report No. 69, 63d Cong., p. 48.
    \5\ 50 Cong. Rec. 4675 (1913) (remarks of Rep. Phelan).
---------------------------------------------------------------------------

    (d) In providing for the discount of commercial paper by Reserve 
Banks, Congress obviously intended to facilitate the current financing 
of agriculture, industry, and commerce, as opposed to long-term 
investment.\6\ In the main, trading in stocks and bonds is investment-
oriented; most securities transactions do not directly affect the 
production or distribution of goods and services. Mortgage banking, on 
the other hand, is essential to the construction industry and thus more 
closely related to industry and commerce. Although investment bankers 
also perform similar functions with respect to newly issued securities, 
Congress saw fit to deny eligibility to all paper issued to finance the 
carrying of securities. Congress did not distinguish between newly 
issued and outstanding securities, perhaps covering the larger area in 
order to make certain that the area of principal concern (i.e., trading 
in outstanding stocks and bonds) was fully included. Speculation was 
also a major Congressional concern, but speculation is not a material 
element in mortgage banking operations. Mortgage loans would not 
therefore seem to be within the purpose underlying the exclusions from 
eligibility in section 13.
---------------------------------------------------------------------------

    \6\ 50 Cong. Rec. 5021 (1913) (remarks of Rep. Thompson of 
Oklahoma); 50 Cong. Rec. 4731-32 (1913) (remarks of Rep. Borland).
---------------------------------------------------------------------------

    (e) Section 201.3(a) provides that a negotiable note maturing in 90 
days or less is not eligible for discount if the proceeds are used ``for 
permanent or fixed investments of any kind, such as land, buildings or 
machinery, or for any other fixed capital purpose''. However, the 
proceeds of a mortgage company's commercial paper are not used by it for 
any permanent or fixed capital purpose, but only to carry temporarily an 
inventory of mortgage loans pending their ``packaging'' for sale to 
permanent investors that are usually recurrent customers.
    (f) In view of the foregoing considerations the Board concluded that 
notes issued to finance such temporary ``warehousing'' of real estate 
mortgage loans are notes issued for an industrial or commercial purpose, 
that such mortgage loans do not constitute ``investment securities'', as 
that term is used in section 13, and that the temporary holding of such 
mortgages in these circumstances is not a permanent investment by the 
mortgage banking company. Accordingly, the Board held that notes having 
not more than 90 days to run which are issued to finance the temporary 
holding of mortgage loans are eligible for discount by Reserve Banks.

[35 FR 527, Jan. 15, 1970, as amended at 58 FR 68515, Dec. 28, 1993]



Sec. 201.110  Goods held by persons employed by owner.

    (a) The Board has been asked to review an Interpretation it issued 
in 1933 concerning the eligibility for rediscount by a Federal Reserve 
Bank of bankers' acceptances issued against field warehouse receipts 
where the custodian of the goods is a present or former employee of the 
borrower. [] 1445 Published Interpretations, 1933 BULLETIN 188] The 
Board determined at that time that the acceptances were not eligible 
because such receipts do not comply with the requirement of section 13 
of the Federal Reserve Act that a banker's acceptance be ``secured at 
the time of acceptance by a warehouse receipt or other such document

[[Page 13]]

conveying or securing title covering readily marketable staples,'' nor 
with the requirement of section XI of the Board's Regulation A that it 
be ``secured at the time of acceptance by a warehouse, terminal, or 
other similar receipt, conveying security title to such staples, issued 
by a party independent of the customer.''

The requirement that the receipt be ``issued by a party independent of 
the customer'' was deleted from Regulation A in 1973, and thus the 
primary issue for the Board's consideration is whether a field warehouse 
receipt is a document `'securing title'' to readily marketable staples.
    (b) While bankers' acceptances secured by field warehouse receipts 
are rarely offered for rediscount or as collateral for an advance, the 
issue of ``eligibility'' is still significant. If an ineligible 
acceptance is discounted and then sold by a member bank, the proceeds 
are deemed to be ``deposits'' under Sec. 204.1(f) of Regulation D and 
are subject to reserve requirements.
    (c) In reviewing this matter, the Board has taken into consideration 
the changes that have occurred in commercial law and practice since 
1933. Modern commercial law, embodied in the Uniform Commercial Code, 
refers to ``perfecting security interests'' rather than ``securing 
title'' to goods. The Board believes that if, under State law, the 
issuance of a field warehouse receipt provides the lender with a 
perfected security interest in the goods, the receipt should be regarded 
as a document ``securing title'' to goods for the purposes of section 13 
of the Federal Reserve Act. It should be noted, however, that the mere 
existence of a perfected security interest alone is not sufficient; the 
Act requires that the acceptance be secured by a warehouse receipt or 
its equivalent.
    (d) Under the U.C.C., evidence of an agreement between the secured 
party and the debtor must exist before a security interest can attach. 
[U.C.C. section 9-202.] This agreement may be evidence by: (1) A written 
security agreement signed by the debtor, or (2) the collateral being 
placed in the possession of the secured party or his agent [U.C.C. 
section 9-203]. Generally, a security interest is perfected by the 
filing of a financing statement, [U.C.C. section 9-302.] However, if the 
collateral is in the possession of a bailee, then perfection can be 
achieved by:
    (1) Having warehouse receipts issued in the name of the secured 
party; (2) notifying the bailee of the secured party's interest; or (3) 
having a financing statement filed. [U.C.C. section 9-304(3).]
    (e) If the field warehousing operation is properly conducted, a 
security interest in the goods is perfected when a warehouse receipt is 
issued in the name of the secured party (the lending bank). Therefore, 
warehouse receipts issued pursuant to a bona fide field warehousing 
operation satisfy the legal requirements of section 13 of the Federal 
Reserve Act. Moreover, in a properly conducted field warehousing 
operation, the warehouse manager will be trained, bonded, supervised and 
audited by the field warehousing company. This procedure tends to insure 
that he will not be impermissibly controlled by his former (or sometimes 
present) employer, the borrower, even though he may look to the borrower 
for reemployment at some future time. A prudent lender will, of course, 
carefully review the field warehousing operation to ensure that stated 
procedures are satisfactory and that they are actually being followed. 
The lender may also wish to review the field warehousing company's 
fidelity bonds and legal liability insurance policies to ensure that 
they provide satisfactory protection to the lender.
    (f) If the warehousing operation is not conducted properly, however, 
and the manager remains under the control of the borrower, the security 
interest may be lost. Consequently, the lender may wish to require a 
written security agreement and the filing of a financing statement to 
insure that the lender will have a perfected security interest even if 
it is later determined that the field warehousing operation was not 
properly conducted. It should be noted however, that the Federal Reserve 
Act clearly requires that the bankers' acceptance be secured by a 
warehouse receipt in order to satisfy the requirements of eligibility, 
and a written security agreement and a filed financing statement, while 
desirable, cannot

[[Page 14]]

serve as a substitute for a warehouse receipt.
    (g) This Interpretation is based on facts that have been presented 
in regard to field warehousing operations conducted by established, 
professional field warehouse companies, and it does not necessarily 
apply to all field warehousing operations. Thus ] 1430 and ] 1440 of the 
Published Interpretations [1918 BULLETIN 31 and 1918 BULLETIN 862] 
maintain their validity with regard to corporations formed for the 
purpose of conducting limited field warehousing operations. Furthermore, 
the prohibition contained in ] 1435 Published Interpretations [1918 
BULLETIN 634] that ``the borrower shall not have access to the premises 
and shall exercise no control over the goods stored'' retains its 
validity, except that access for inspection purposes is still permitted 
under ] 1450 [1926 BULLETIN 666]. The purpose for the acceptance 
transaction must be proper and cannot be for speculation [] 1400, 1919 
BULLETIN 858] or for the purpose of furnishing working capital [] 1405, 
1922 BULLETIN 52].
    (h) This interpretation suspersedes only the previous ] 1445 of the 
Published Interpretations [1933 BULLETIN 188], and is not intended to 
affect any other Board Interpretation regarding field warehousing.

(12 U.S.C. 342 et seq.)

[43 FR 21434, May 18, 1978]



PART 202_EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)--Table of Contents


Sec.

                 Regulation B (Equal Credit Opportunity)

202.1 Authority, scope and purpose.
202.2 Definitions.
202.3 Limited exceptions for certain classes of transactions.
202.4 General rules.
202.5 Rules concerning requests for information.
202.6 Rules concerning evaluation of applications.
202.7 Rules concerning extensions of credit.
202.8 Special purpose credit programs.
202.9 Notifications.
202.10 Furnishing of credit information.
202.11 Relation to state law.
202.12 Record retention.
202.13 Information for monitoring purposes.
202.14 Rules on providing appraisal reports.
202.15 Incentives for self-testing and self-correction.
202.16 Requirements for electronic communication.
202.17 Enforcement, penalties and liabilities.

Appendix A to Part 202--Federal Enforcement Agencies
Appendix B to Part 202--Model Application Forms
Appendix C to Part 202--Sample Notification Forms
Appendix D to Part 202--Issuance of Staff Interpretations
Supplement I to Part 202--Official Staff Interpretations

    Authority: 15 U.S.C. 1691-1691f.

    Source:  68 FR 13161, March 18, 2003, unless otherwise noted.



Sec. 202.1  Authority, scope and purpose.

    (a) Authority and scope. This regulation is issued by the Board of 
Governors of the Federal Reserve System pursuant to title VII (Equal 
Credit Opportunity Act) of the Consumer Credit Protection Act, as 
amended (15 U.S.C. 1601 et seq.). Except as otherwise provided herein, 
this regulation applies to all persons who are creditors, as defined in 
Sec. 202.2(1). Information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
under the provisions of 44 U.S.C. 3501 et seq. and have been assigned 
OMB No. 7100-0201.
    (b) Purpose. The purpose of this regulation is to promote the 
availability of credit to all creditworthy applicants without regard to 
race, color, religion, national origin, sex, marital status, or age 
(provided the applicant has the capacity to contract); to the fact that 
all or part of the applicant's income derives from a public assistance 
program; or to the fact that the applicant has in good faith exercised 
any right under the Consumer Credit Protection Act. The regulation 
prohibits creditor practices that discriminate on the basis of any of 
these factors. The regulation also requires creditors to notify 
applicants of action taken on their applications; to report credit 
history in the names of both spouses on an account; to retain records of 
credit applications;

[[Page 15]]

to collect information about the applicant's race and other personal 
characteristics in applications for certain dwelling-related loans; and 
to provide applicants with copies of appraisal reports used in 
connection with credit transactions.



Sec. 202.2  Definitions.

    For the purposes of this regulation, unless the context indicates 
otherwise, the following definitions apply.
    (a) Account means an extension of credit. When employed in relation 
to an account, the word use refers only to open-end credit.
    (b) Act means the Equal Credit Opportunity Act (title VII of the 
Consumer Credit Protection Act).
    (c) Adverse action. (1) The term means:
    (i) A refusal to grant credit in substantially the amount or on 
substantially the terms requested in an application unless the creditor 
makes a counteroffer (to grant credit in a different amount or on other 
terms) and the applicant uses or expressly accepts the credit offered;
    (ii) A termination of an account or an unfavorable change in the 
terms of an account that does not affect all or substantially all of a 
class of the creditor's accounts; or
    (iii) A refusal to increase the amount of credit available to an 
applicant who has made an application for an increase.
    (2) The term does not include:
    (i) A change in the terms of an account expressly agreed to by an 
applicant.
    (ii) Any action or forbearance relating to an account taken in 
connection with inactivity, default, or delinquency as to that account;
    (iii) A refusal or failure to authorize an account transaction at 
point of sale or loan, except when the refusal is a termination or an 
unfavorable change in the terms of an account that does not affect all 
or substantially all of a class of the creditor's accounts, or when the 
refusal is a denial of an application for an increase in the amount of 
credit available under the account;
    (iv) A refusal to extend credit because applicable law prohibits the 
creditor from extending the credit requested; or
    (v) A refusal to extend credit because the creditor does not offer 
the type of credit or credit plan requested.
    (3) An action that falls within the definition of both paragraphs 
(c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of 
this section.
    (d) Age refers only to the age of natural persons and means the 
number of fully elapsed years from the date of an applicant's birth.
    (e) Applicant means any person who requests or who has received an 
extension of credit from a creditor, and includes any person who is or 
may become contractually liable regarding an extension of credit. For 
purposes of Sec. 202.7(d), the term includes guarantors, sureties, 
endorsers, and similar parties.
    (f) Application means an oral or written request for an extension of 
credit that is made in accordance with procedures used by a creditor for 
the type of credit requested. The term application does not include the 
use of an account or line of credit to obtain an amount of credit that 
is within a previously established credit limit. A completed application 
means an application in connection with which a creditor has received 
all the information that the creditor regularly obtains and considers in 
evaluating applications for the amount and type of credit requested 
(including, but not limited to, credit reports, any additional 
information requested from the applicant, and any approvals or reports 
by governmental agencies or other persons that are necessary to 
guarantee, insure, or provide security for the credit or collateral). 
The creditor shall exercise reasonable diligence in obtaining such 
information.
    (g) Business credit refers to extensions of credit primarily for 
business or commercial (including agricultural) purposes, but excluding 
extensions of credit of the types described in Sec. 202.3(a)-(d).
    (h) Consumer credit means credit extended to a natural person 
primarily for personal, family, or household purposes.
    (i) Contractually liable means expressly obligated to repay all 
debts

[[Page 16]]

arising on an account by reason of an agreement to that effect.
    (j) Credit means the right granted by a creditor to an applicant to 
defer payment of a debt, incur debt and defer its payment, or purchase 
property or services and defer payment therefor.
    (k) Credit card means any card, plate, coupon book, or other single 
credit device that may be used from time to time to obtain money, 
property, or services on credit.
    (l) Creditor means a person who, in the ordinary course of business, 
regularly participates in a credit decision, including setting the terms 
of the credit. The term creditor includes a creditor's assignee, 
transferee, or subrogee who so participates. For purposes of Sec. 
202.4(a) and (b), the term creditor also includes a person who, in the 
ordinary course of business, regularly refers applicants or prospective 
applicants to creditors, or selects or offers to select creditors to 
whom requests for credit may be made. A person is not a creditor 
regarding any violation of the Act or this regulation committed by 
another creditor unless the person knew or had reasonable notice of the 
act, policy, or practice that constituted the violation before becoming 
involved in the credit transaction. The term does not include a person 
whose only participation in a credit transaction involves honoring a 
credit card.
    (m) Credit transaction means every aspect of an applicant's dealings 
with a creditor regarding an application for credit or an existing 
extension of credit (including, but not limited to, information 
requirements; investigation procedures; standards of creditworthiness; 
terms of credit; furnishing of credit information; revocation, 
alteration, or termination of credit; and collection procedures).
    (n) Discriminate against an applicant means to treat an applicant 
less favorably than other applicants.
    (o) Elderly means age 62 or older.
    (p) Empirically derived and other credit scoring systems--(1) A 
credit scoring system is a system that evaluates an applicant's 
creditworthiness mechanically, based on key attributes of the applicant 
and aspects of the transaction, and that determines, alone or in 
conjunction with an evaluation of additional information about the 
applicant, whether an applicant is deemed creditworthy. To qualify as an 
empirically derived, demonstrably and statistically sound, credit 
scoring system, the system must be:
    (i) Based on data that are derived from an empirical comparison of 
sample groups or the population of creditworthy and noncreditworthy 
applicants who applied for credit within a reasonable preceding period 
of time;
    (ii) Developed for the purpose of evaluating the creditworthiness of 
applicants with respect to the legitimate business interests of the 
creditor utilizing the system (including, but not limited to, minimizing 
bad debt losses and operating expenses in accordance with the creditor's 
business judgment);
    (iii) Developed and validated using accepted statistical principles 
and methodology; and
    (iv) Periodically revalidated by the use of appropriate statistical 
principles and methodology and adjusted as necessary to maintain 
predictive ability.
    (2) A creditor may use an empirically derived, demonstrably and 
statistically sound, credit scoring system obtained from another person 
or may obtain credit experience from which to develop such a system. Any 
such system must satisfy the criteria set forth in paragraph (p)(1)(i) 
through (iv) of this section; if the creditor is unable during the 
development process to validate the system based on its own credit 
experience in accordance with paragraph (p)(1) of this section, the 
system must be validated when sufficient credit experience becomes 
available. A system that fails this validity test is no longer an 
empirically derived, demonstrably and statistically sound, credit 
scoring system for that creditor.
    (q) Extend credit and extension of credit mean the granting of 
credit in any form (including, but not limited to, credit granted in 
addition to any existing credit or credit limit; credit granted pursuant 
to an open-end credit plan; the refinancing or other renewal of credit, 
including the issuance of a new credit card in place of an expiring 
credit card or in substitution for an existing credit card; the 
consolidation of two or more obligations; or the continuance of existing 
credit without any

[[Page 17]]

special effort to collect at or after maturity).
    (r) Good faith means honesty in fact in the conduct or transaction.
    (s) Inadvertent error means a mechanical, electronic, or clerical 
error that a creditor demonstrates was not intentional and occurred 
notwithstanding the maintenance of procedures reasonably adapted to 
avoid such errors.
    (t) Judgmental system of evaluating applicants means any system for 
evaluating the creditworthiness of an applicant other than an 
empirically derived, demonstrably and statistically sound, credit 
scoring system.
    (u) Marital status means the state of being unmarried, married, or 
separated, as defined by applicable state law. The term ``unmarried'' 
includes persons who are single, divorced, or widowed.
    (v) Negative factor or value, in relation to the age of elderly 
applicants, means utilizing a factor, value, or weight that is less 
favorable regarding elderly applicants than the creditor's experience 
warrants or is less favorable than the factor, value, or weight assigned 
to the class of applicants that are not classified as elderly and are 
most favored by a creditor on the basis of age.
    (w) Open-end credit means credit extended under a plan in which a 
creditor may permit an applicant to make purchases or obtain loans from 
time to time directly from the creditor or indirectly by use of a credit 
card, check, or other device.
    (x) Person means a natural person, corporation, government or 
governmental subdivision or agency, trust, estate, partnership, 
cooperative, or association.
    (y) Pertinent element of creditworthiness, in relation to a 
judgmental system of evaluating applicants, means any information about 
applicants that a creditor obtains and considers and that has a 
demonstrable relationship to a determination of creditworthiness.
    (z) Prohibited basis means race, color, religion, national origin, 
sex, marital status, or age (provided that the applicant has the 
capacity to enter into a binding contract); the fact that all or part of 
the applicant's income derives from any public assistance program; or 
the fact that the applicant has in good faith exercised any right under 
the Consumer Credit Protection Act or any state law upon which an 
exemption has been granted by the Board.
    (aa) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, or any territory or possession of the 
United States.



Sec. 202.3  Limited exceptions for certain classes of transactions.

    (a) Public utilities credit--(1) Definition. Public utilities credit 
refers to extensions of credit that involve public utility services 
provided through pipe, wire, or other connected facilities, or radio or 
similar transmission (including extensions of such facilities), if the 
charges for service, delayed payment, and any discount for prompt 
payment are filed with or regulated by a government unit.
    (2) Exceptions. The following provisions of this regulation do not 
apply to public utilities credit:
    (i) Section 202.5(d)(1) concerning information about marital status; 
and
    (ii) Section 202.12(b) relating to record retention.
    (b) Securities credit--(1) Definition. Securities credit refers to 
extensions of credit subject to regulation under section 7 of the 
Securities Exchange Act of 1934 or extensions of credit by a broker or 
dealer subject to regulation as a broker or dealer under the Securities 
Exchange Act of 1934.
    (2) Exceptions. The following provisions of this regulation do not 
apply to securities credit:
    (i) Section 202.5(b) concerning information about the sex of an 
applicant;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.7(b) relating to designation of name to the extent 
necessary to comply with rules regarding an account in which a broker or 
dealer has an interest, or rules regarding the aggregation of accounts 
of spouses to determine controlling interests, beneficial interests, 
beneficial ownership, or purchase limitations and restrictions;
    (v) Section 202.7(c) relating to action concerning open-end 
accounts, to the

[[Page 18]]

extent the action taken is on the basis of a change of name or marital 
status;
    (vi) Section 202.7(d) relating to the signature of a spouse or other 
person;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) Section 202.12(b) relating to record retention.
    (c) Incidental credit--(1) Definition. Incidental credit refers to 
extensions of consumer credit other than the types described in 
paragraphs (a) and (b) of this section:
    (i) That are not made pursuant to the terms of a credit card 
account;
    (ii) That are not subject to a finance charge (as defined in 
Regulation Z, 12 CFR 226.4); and
    (iii) That are not payable by agreement in more than four 
installments.
    (2) Exceptions. The following provisions of this regulation do not 
apply to incidental credit:
    (i) Section 202.5(b) concerning information about the sex of an 
applicant, but only to the extent necessary for medical records or 
similar purposes;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.5(d)(2) concerning information about income derived 
from alimony, child support, or separate maintenance payments;
    (v) Section 202.7(d) relating to the signature of a spouse or other 
person;
    (vi) Section 202.9 relating to notifications;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) Section 202.12(b) relating to record retention.
    (d) Government credit--(1) Definition. Government credit refers to 
extensions of credit made to governments or governmental subdivisions, 
agencies, or instrumentalities.
    (2) Applicability of regulation. Except for Sec. 202.4(a), the 
general rule against discrimination on a prohibited basis, the 
requirements of this regulation do not apply to government credit.



Sec. 202.4  General rules.

    (a) Discrimination. A creditor shall not discriminate against an 
applicant on a prohibited basis regarding any aspect of a credit 
transaction.
    (b) Discouragement. A creditor shall not make any oral or written 
statement, in advertising or otherwise, to applicants or prospective 
applicants that would discourage on a prohibited basis a reasonable 
person from making or pursuing an application.
    (c) Written applications. A creditor shall take written applications 
for the dwelling-related types of credit covered by Sec. 202.13(a).
    (d) Form of disclosures. A creditor that provides in writing any 
disclosures or information required by this regulation must provide the 
disclosures in a clear and conspicuous manner and, except for the 
disclosures required by Sec. Sec. 202.5 and 202.13, in a form the 
applicant may retain.
    (e) Foreign-language disclosures. Disclosures may be made in 
languages other than English, provided they are available in English 
upon request.



Sec. 202.5  Rules concerning requests for information.

    (a) General rules--(1) Requests for information. Except as provided 
in paragraphs (b) through (d) of this section, a creditor may request 
any information in connection with a credit transaction.\1\
---------------------------------------------------------------------------

    \1\ This paragraph does not limit or abrogate any Federal or State 
law regarding privacy, privileged information, credit reporting 
limitations, or similar restrictions on obtainable information.
---------------------------------------------------------------------------

    (2) Required collection of information. Notwithstanding paragraphs 
(b) through (d) of this section, a creditor shall request information 
for monitoring purposes as required by Sec. 202.13 for credit secured 
by the applicant's dwelling. In addition, a creditor may obtain 
information required by a regulation, order, or agreement issued by, or 
entered into with, a court or an enforcement agency (including the 
Attorney General of the United States or a similar state official) to 
monitor or enforce compliance with the Act, this regulation, or other 
federal or state statutes or regulations.
    (3) Special-purpose credit. A creditor may obtain information that 
is otherwise restricted to determine eligibility

[[Page 19]]

for a special purpose credit program, as provided in Sec. 202.8(b), 
(c), and (d).
    (b) Limitation on information about race, color, religion, national 
origin, or sex. A creditor shall not inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person in 
connection with a credit transaction, except as provided in paragraphs 
(b)(1) and (b)(2) of this section.
    (1) Self-test. A creditor may inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person in 
connection with a credit transaction for the purpose of conducting a 
self-test that meets the requirements of Sec. 202.15. A creditor that 
makes such an inquiry shall disclose orally or in writing, at the time 
the information is requested, that:
    (i) The applicant will not be required to provide the information;
    (ii) The creditor is requesting the information to monitor its 
compliance with the federal Equal Credit Opportunity Act;
    (iii) Federal law prohibits the creditor from discriminating on the 
basis of this information, or on the basis of an applicant's decision 
not to furnish the information; and
    (iv) If applicable, certain information will be collected based on 
visual observation or surname if not provided by the applicant or other 
person.
    (2) Sex. An applicant may be requested to designate a title on an 
application form (such as Ms., Miss, Mr., or Mrs.) if the form discloses 
that the designation of a title is optional. An application form shall 
otherwise use only terms that are neutral as to sex.
    (c) Information about a spouse or former spouse--(1) General rule. 
Except as permitted in this paragraph, a creditor may not request any 
information concerning the spouse or former spouse of an applicant.
    (2) Permissible inquiries. A creditor may request any information 
concerning an applicant's spouse (or former spouse under paragraph 
(c)(2)(v) of this section) that may be requested about the applicant if:
    (i) The spouse will be permitted to use the account;
    (ii) The spouse will be contractually liable on the account;
    (iii) The applicant is relying on the spouse's income as a basis for 
repayment of the credit requested;
    (iv) The applicant resides in a community property state or is 
relying on property located in such a state as a basis for repayment of 
the credit requested; or
    (v) The applicant is relying on alimony, child support, or separate 
maintenance payments from a spouse or former spouse as a basis for 
repayment of the credit requested.
    (3) Other accounts of the applicant. A creditor may request that an 
applicant list any account on which the applicant is contractually 
liable and to provide the name and address of the person in whose name 
the account is held. A creditor may also ask an applicant to list the 
names in which the applicant has previously received credit.
    (d) Other limitations on information requests--(1) Marital status. 
If an applicant applies for individual unsecured credit, a creditor 
shall not inquire about the applicant's marital status unless the 
applicant resides in a community property state or is relying on 
property located in such a state as a basis for repayment of the credit 
requested. If an application is for other than individual unsecured 
credit, a creditor may inquire about the applicant's marital status, but 
shall use only the terms married, unmarried, and separated. A creditor 
may explain that the category unmarried includes single, divorced, and 
widowed persons.
    (2) Disclosure about income from alimony, child support, or separate 
maintenance. A creditor shall not inquire whether income stated in an 
application is derived from alimony, child support, or separate 
maintenance payments unless the creditor discloses to the applicant that 
such income need not be revealed if the applicant does not want the 
creditor to consider it in determining the applicant's creditworthiness.
    (3) Childbearing, childrearing. A creditor shall not inquire about 
birth control practices, intentions concerning the bearing or rearing of 
children, or capability to bear children. A creditor may inquire about 
the number and ages of an applicant's dependents or

[[Page 20]]

about dependent-related financial obligations or expenditures, provided 
such information is requested without regard to sex, marital status, or 
any other prohibited basis.
    (e) Permanent residency and immigration status. A creditor may 
inquire about the permanent residency and immigration status of an 
applicant or any other person in connection with a credit transaction.



Sec. 202.6  Rules concerning evaluation of applications.

    (a) General rule concerning use of information. Except as otherwise 
provided in the Act and this regulation, a creditor may consider any 
information obtained, so long as the information is not used to 
discriminate against an applicant on a prohibited basis.\2\
---------------------------------------------------------------------------

    \2\ The legislative history of the Act indicates that the Congress 
intended an ``effects test'' concept, as outlined in the employment 
field by the Supreme Court in the cases of Griggs v. Duke Power Co., 401 
U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975), 
to be applicable to a creditor's determination of creditworthiness.
---------------------------------------------------------------------------

    (b) Specific rules concerning use of information--(1) Except as 
provided in the Act and this regulation, a creditor shall not take a 
prohibited basis into account in any system of evaluating the 
creditworthiness of applicants.
    (2) Age, receipt of public assistance. (i) Except as permitted in 
this paragraph, a creditor shall not take into account an applicant's 
age (provided that the applicant has the capacity to enter into a 
binding contract) or whether an applicant's income derives from any 
public assistance program.
    (ii) In an empirically derived, demonstrably and statistically 
sound, credit scoring system, a creditor may use an applicant's age as a 
predictive variable, provided that the age of an elderly applicant is 
not assigned a negative factor or value.
    (iii) In a judgmental system of evaluating creditworthiness, a 
creditor may consider an applicant's age or whether an applicant's 
income derives from any public assistance program only for the purpose 
of determining a pertinent element of creditworthiness.
    (iv) In any system of evaluating creditworthiness, a creditor may 
consider the age of an elderly applicant when such age is used to favor 
the elderly applicant in extending credit.
    (3) Childbearing, childrearing. In evaluating creditworthiness, a 
creditor shall not make assumptions or use aggregate statistics relating 
to the likelihood that any category of persons will bear or rear 
children or will, for that reason, receive diminished or interrupted 
income in the future.
    (4) Telephone listing. A creditor shall not take into account 
whether there is a telephone listing in the name of an applicant for 
consumer credit but may take into account whether there is a telephone 
in the applicant's residence.
    (5) Income. A creditor shall not discount or exclude from 
consideration the income of an applicant or the spouse of an applicant 
because of a prohibited basis or because the income is derived from 
part-time employment or is an annuity, pension, or other retirement 
benefit; a creditor may consider the amount and probable continuance of 
any income in evaluating an applicant's creditworthiness. When an 
applicant relies on alimony, child support, or separate maintenance 
payments in applying for credit, the creditor shall consider such 
payments as income to the extent that they are likely to be consistently 
made.
    (6) Credit history. To the extent that a creditor considers credit 
history in evaluating the creditworthiness of similarly qualified 
applicants for a similar type and amount of credit, in evaluating an 
applicant's creditworthiness a creditor shall consider:
    (i) The credit history, when available, of accounts designated as 
accounts that the applicant and the applicant's spouse are permitted to 
use or for which both are contractually liable;
    (ii) On the applicant's request, any information the applicant may 
present that tends to indicate the credit history being considered by 
the creditor does not accurately reflect the applicant's 
creditworthiness; and
    (iii) On the applicant's request, the credit history, when 
available, of any account reported in the name of the applicant's spouse 
or former spouse that the applicant can demonstrate accurately reflects 
the applicant's creditworthiness.

[[Page 21]]

    (7) Immigration status. A creditor may consider the applicant's 
immigration status or status as a permanent resident of the United 
States, and any additional information that may be necessary to 
ascertain the creditor's rights and remedies regarding repayment.
    (8) Marital status. Except as otherwise permitted or required by 
law, a creditor shall evaluate married and unmarried applicants by the 
same standards; and in evaluating joint applicants, a creditor shall not 
treat applicants differently based on the existence, absence, or 
likelihood of a marital relationship between the parties.
    (9) Race, color, religion, national origin, sex. Except as otherwise 
permitted or required by law, a creditor shall not consider race, color, 
religion, national origin, or sex (or an applicant's or other person's 
decision not to provide the information) in any aspect of a credit 
transaction.
    (c) State property laws. A creditor's consideration or application 
of state property laws directly or indirectly affecting creditworthiness 
does not constitute unlawful discrimination for the purposes of the Act 
or this regulation.



Sec. 202.7  Rules concerning extensions of credit.

    (a) Individual accounts. A creditor shall not refuse to grant an 
individual account to a creditworthy applicant on the basis of sex, 
marital status, or any other prohibited basis.
    (b) Designation of name. A creditor shall not refuse to allow an 
applicant to open or maintain an account in a birth-given first name and 
a surname that is the applicant's birth-given surname, the spouse's 
surname, or a combined surname.
    (c) Action concerning existing open-end accounts--(1) Limitations. 
In the absence of evidence of the applicant's inability or unwillingness 
to repay, a creditor shall not take any of the following actions 
regarding an applicant who is contractually liable on an existing open-
end account on the basis of the applicant's reaching a certain age or 
retiring or on the basis of a change in the applicant's name or marital 
status:
    (i) Require a reapplication, except as provided in paragraph (c)(2) 
of this section;
    (ii) Change the terms of the account; or
    (iii) Terminate the account.
    (2) Requiring reapplication. A creditor may require a reapplication 
for an open-end account on the basis of a change in the marital status 
of an applicant who is contractually liable if the credit granted was 
based in whole or in part on income of the applicant's spouse and if 
information available to the creditor indicates that the applicant's 
income may not support the amount of credit currently available.
    (d) Signature of spouse or other person--(1) Rule for qualified 
applicant. Except as provided in this paragraph, a creditor shall not 
require the signature of an applicant's spouse or other person, other 
than a joint applicant, on any credit instrument if the applicant 
qualifies under the creditor's standards of creditworthiness for the 
amount and terms of the credit requested. A creditor shall not deem the 
submission of a joint financial statement or other evidence of jointly 
held assets as an application for joint credit.
    (2) Unsecured credit. If an applicant requests unsecured credit and 
relies in part upon property that the applicant owns jointly with 
another person to satisfy the creditor's standards of creditworthiness, 
the creditor may require the signature of the other person only on the 
instrument(s) necessary, or reasonably believed by the creditor to be 
necessary, under the law of the state in which the property is located, 
to enable the creditor to reach the property being relied upon in the 
event of the death or default of the applicant.
    (3) Unsecured credit--community property states. If a married 
applicant requests unsecured credit and resides in a community property 
state, or if the applicant is relying on property located in such a 
state, a creditor may require the signature of the spouse on any 
instrument necessary, or reasonably believed by the creditor to be 
necessary, under applicable state law to make the community property 
available to satisfy the debt in the event of default if:

[[Page 22]]

    (i) Applicable state law denies the applicant power to manage or 
control sufficient community property to qualify for the credit 
requested under the creditor's standards of creditworthiness; and
    (ii) The applicant does not have sufficient separate property to 
qualify for the credit requested without regard to community property.
    (4) Secured credit. If an applicant requests secured credit, a 
creditor may require the signature of the applicant's spouse or other 
person on any instrument necessary, or reasonably believed by the 
creditor to be necessary, under applicable state law to make the 
property being offered as security available to satisfy the debt in the 
event of default, for example, an instrument to create a valid lien, 
pass clear title, waive inchoate rights, or assign earnings.
    (5) Additional parties. If, under a creditor's standards of 
creditworthiness, the personal liability of an additional party is 
necessary to support the credit requested, a creditor may request a 
cosigner, guarantor, endorser, or similar party. The applicant's spouse 
may serve as an additional party, but the creditor shall not require 
that the spouse be the additional party.
    (6) Rights of additional parties. A creditor shall not impose 
requirements upon an additional party that the creditor is prohibited 
from imposing upon an applicant under this section.
    (e) Insurance. A creditor shall not refuse to extend credit and 
shall not terminate an account because credit life, health, accident, 
disability, or other credit-related insurance is not available on the 
basis of the applicant's age.



Sec. 202.8  Special purpose credit programs.

    (a) Standards for programs. Subject to the provisions of paragraph 
(b) of this section, the Act and this regulation permit a creditor to 
extend special purpose credit to applicants who meet eligibility 
requirements under the following types of credit programs:
    (1) Any credit assistance program expressly authorized by federal or 
state law for the benefit of an economically disadvantaged class of 
persons;
    (2) Any credit assistance program offered by a not-for-profit 
organization, as defined under section 501(c) of the Internal Revenue 
Code of 1954, as amended, for the benefit of its members or for the 
benefit of an economically disadvantaged class of persons; or
    (3) Any special purpose credit program offered by a for-profit 
organization, or in which such an organization participates to meet 
special social needs, if:
    (i) The program is established and administered pursuant to a 
written plan that identifies the class of persons that the program is 
designed to benefit and sets forth the procedures and standards for 
extending credit pursuant to the program; and
    (ii) The program is established and administered to extend credit to 
a class of persons who, under the organization's customary standards of 
creditworthiness, probably would not receive such credit or would 
receive it on less favorable terms than are ordinarily available to 
other applicants applying to the organization for a similar type and 
amount of credit.
    (b) Rules in other sections--(1) General applicability. All the 
provisions of this regulation apply to each of the special purpose 
credit programs described in paragraph (a) of this section except as 
modified by this section.
    (2) Common characteristics. A program described in paragraph (a)(2) 
or (a)(3) of this section qualifies as a special purpose credit program 
only if it was established and is administered so as not to discriminate 
against an applicant on any prohibited basis; however, all program 
participants may be required to share one or more common characteristics 
(for example, race, national origin, or sex) so long as the program was 
not established and is not administered with the purpose of evading the 
requirements of the Act or this regulation.
    (c) Special rule concerning requests and use of information. If 
participants in a special purpose credit program described in paragraph 
(a) of this section are required to possess one or more common 
characteristics (for example, race, national origin, or sex) and if the

[[Page 23]]

program otherwise satisfies the requirements of paragraph (a) of this 
section, a creditor may request and consider information regarding the 
common characteristic(s) in determining the applicant's eligibility for 
the program.
    (d) Special rule in the case of financial need. If financial need is 
one of the criteria under a special purpose credit program described in 
paragraph (a) of this section, the creditor may request and consider, in 
determining an applicant's eligibility for the program, information 
regarding the applicant's marital status; alimony, child support, and 
separate maintenance income; and the spouse's financial resources. In 
addition, a creditor may obtain the signature of an applicant's spouse 
or other person on an application or credit instrument relating to a 
special purpose credit program if the signature is required by federal 
or state law.



Sec. 202.9  Notifications.

    (a) Notification of action taken, ECOA notice, and statement of 
specific reasons--(1) When notification is required. A creditor shall 
notify an applicant of action taken within:
    (i) 30 days after receiving a completed application concerning the 
creditor's approval of, counteroffer to, or adverse action on the 
application;
    (ii) 30 days after taking adverse action on an incomplete 
application, unless notice is provided in accordance with paragraph (c) 
of this section;
    (iii) 30 days after taking adverse action on an existing account; or
    (iv) 90 days after notifying the applicant of a counteroffer if the 
applicant does not expressly accept or use the credit offered.
    (2) Content of notification when adverse action is taken. A 
notification given to an applicant when adverse action is taken shall be 
in writing and shall contain a statement of the action taken; the name 
and address of the creditor; a statement of the provisions of Sec. 
701(a) of the Act; the name and address of the federal agency that 
administers compliance with respect to the creditor; and either:
    (i) A statement of specific reasons for the action taken; or
    (ii) A disclosure of the applicant's right to a statement of 
specific reasons within 30 days, if the statement is requested within 60 
days of the creditor's notification. The disclosure shall include the 
name, address, and telephone number of the person or office from which 
the statement of reasons can be obtained. If the creditor chooses to 
provide the reasons orally, the creditor shall also disclose the 
applicant's right to have them confirmed in writing within 30 days of 
receiving the applicant's written request for confirmation.
    (3) Notification to business credit applicants. For business credit, 
a creditor shall comply with the notification requirements of this 
section in the following manner:
    (i) With regard to a business that had gross revenues of $1 million 
or less in its preceding fiscal year (other than an extension of trade 
credit, credit incident to a factoring agreement, or other similar types 
of business credit), a creditor shall comply with paragraphs (a)(1) and 
(2) of this section, except that:
    (A) The statement of the action taken may be given orally or in 
writing, when adverse action is taken;
    (B) Disclosure of an applicant's right to a statement of reasons may 
be given at the time of application, instead of when adverse action is 
taken, provided the disclosure contains the information required by 
paragraph (a)(2)(ii) of this section and the ECOA notice specified in 
paragraph (b)(1) of this section;
    (C) For an application made entirely by telephone, a creditor 
satisfies the requirements of paragraph (a)(3)(i) of this section by an 
oral statement of the action taken and of the applicant's right to a 
statement of reasons for adverse action.
    (ii) With regard to a business that had gross revenues in excess of 
$1 million in its preceding fiscal year or an extension of trade credit, 
credit incident to a factoring agreement, or other similar types of 
business credit, a creditor shall:
    (A) Notify the applicant, within a reasonable time, orally or in 
writing, of the action taken; and
    (B) Provide a written statement of the reasons for adverse action 
and the

[[Page 24]]

ECOA notice specified in paragraph (b)(1) of this section if the 
applicant makes a written request for the reasons within 60 days of the 
creditor's notification.
    (b) Form of ECOA notice and statement of specific reasons--(1) ECOA 
notice. To satisfy the disclosure requirements of paragraph (a)(2) of 
this section regarding section 701(a) of the Act, the creditor shall 
provide a notice that is substantially similar to the following: The 
federal Equal Credit Opportunity Act prohibits creditors from 
discriminating against credit applicants on the basis of race, color, 
religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is [name 
and address as specified by the appropriate agency listed in appendix A 
of this regulation].
    (2) Statement of specific reasons. The statement of reasons for 
adverse action required by paragraph (a)(2)(i) of this section must be 
specific and indicate the principal reason(s) for the adverse action. 
Statements that the adverse action was based on the creditor's internal 
standards or policies or that the applicant, joint applicant, or similar 
party failed to achieve a qualifying score on the creditor's credit 
scoring system are insufficient.
    (c) Incomplete applications--(1) Notice alternatives. Within 30 days 
after receiving an application that is incomplete regarding matters that 
an applicant can complete, the creditor shall notify the applicant 
either:
    (i) Of action taken, in accordance with paragraph (a) of this 
section; or
    (ii) Of the incompleteness, in accordance with paragraph (c)(2) of 
this section.
    (2) Notice of incompleteness. If additional information is needed 
from an applicant, the creditor shall send a written notice to the 
applicant specifying the information needed, designating a reasonable 
period of time for the applicant to provide the information, and 
informing the applicant that failure to provide the information 
requested will result in no further consideration being given to the 
application. The creditor shall have no further obligation under this 
section if the applicant fails to respond within the designated time 
period. If the applicant supplies the requested information within the 
designated time period, the creditor shall take action on the 
application and notify the applicant in accordance with paragraph (a) of 
this section.
    (3) Oral request for information. At its option, a creditor may 
inform the applicant orally of the need for additional information. If 
the application remains incomplete the creditor shall send a notice in 
accordance with paragraph (c)(1) of this section.
    (d) Oral notifications by small-volume creditors. In the case of a 
creditor that did not receive more than 150 applications during the 
preceding calendar year, the requirements of this section (including 
statements of specific reasons) are satisfied by oral notifications.
    (e) Withdrawal of approved application. When an applicant submits an 
application and the parties contemplate that the applicant will inquire 
about its status, if the creditor approves the application and the 
applicant has not inquired within 30 days after applying, the creditor 
may treat the application as withdrawn and need not comply with 
paragraph (a)(1) of this section.
    (f) Multiple applicants. When an application involves more than one 
applicant, notification need only be given to one of them but must be 
given to the primary applicant where one is readily apparent.
    (g) Applications submitted through a third party. When an 
application is made on behalf of an applicant to more than one creditor 
and the applicant expressly accepts or uses credit offered by one of the 
creditors, notification of action taken by any of the other creditors is 
not required. If no credit is offered or if the applicant does not 
expressly accept or use the credit offered, each creditor taking adverse 
action must comply with this section, directly or through a third party. 
A notice given by a third party shall disclose

[[Page 25]]

the identity of each creditor on whose behalf the notice is given.
    (h) Duties of third parties. A third party may use electronic 
communication in accordance with the requirements of Sec. 202.16, as 
applicable, to comply with the requirements of paragraph (g) of this 
section on behalf of a creditor.



Sec. 202.10  Furnishing of credit information.

    (a) Designation of accounts. A creditor that furnishes credit 
information shall designate:
    (1) Any new account to reflect the participation of both spouses if 
the applicant's spouse is permitted to use or is contractually liable on 
the account (other than as a guarantor, surety, endorser, or similar 
party); and
    (2) Any existing account to reflect such participation, within 90 
days after receiving a written request to do so from one of the spouses.
    (b) Routine reports to consumer reporting agency. If a creditor 
furnishes credit information to a consumer reporting agency concerning 
an account designated to reflect the participation of both spouses, the 
creditor shall furnish the information in a manner that will enable the 
agency to provide access to the information in the name of each spouse.
    (c) Reporting in response to inquiry. If a creditor furnishes credit 
information in response to an inquiry, concerning an account designated 
to reflect the participation of both spouses, the creditor shall furnish 
the information in the name of the spouse about whom the information is 
requested.



Sec. 202.11  Relation to state law.

    (a) Inconsistent state laws. Except as otherwise provided in this 
section, this regulation alters, affects, or preempts only those state 
laws that are inconsistent with the Act and this regulation and then 
only to the extent of the inconsistency. A state law is not inconsistent 
if it is more protective of an applicant.
    (b) Preempted provisions of state law. (1) A state law is deemed to 
be inconsistent with the requirements of the Act and this regulation and 
less protective of an applicant within the meaning of section 705(f) of 
the Act to the extent that the law:
    (i) Requires or permits a practice or act prohibited by the Act or 
this regulation;
    (ii) Prohibits the individual extension of consumer credit to both 
parties to a marriage if each spouse individually and voluntarily 
applies for such credit;
    (iii) Prohibits inquiries or collection of data required to comply 
with the Act or this regulation;
    (iv) Prohibits asking about or considering age in an empirically 
derived, demonstrably and statistically sound, credit scoring system to 
determine a pertinent element of creditworthiness, or to favor an 
elderly applicant; or
    (v) Prohibits inquiries necessary to establish or administer a 
special purpose credit program as defined by Sec. 202.8.
    (2) A creditor, state, or other interested party may request that 
the Board determine whether a state law is inconsistent with the 
requirements of the Act and this regulation.
    (c) Laws on finance charges, loan ceilings. If married applicants 
voluntarily apply for and obtain individual accounts with the same 
creditor, the accounts shall not be aggregated or otherwise combined for 
purposes of determining permissible finance charges or loan ceilings 
under any federal or state law. Permissible loan ceiling laws shall be 
construed to permit each spouse to become individually liable up to the 
amount of the loan ceilings, less the amount for which the applicant is 
jointly liable.
    (d) State and federal laws not affected. This section does not alter 
or annul any provision of state property laws, laws relating to the 
disposition of decedents' estates, or federal or state banking 
regulations directed only toward insuring the solvency of financial 
institutions.
    (e) Exemption for state-regulated transactions--(1) Applications. A 
state may apply to the Board for an exemption from the requirements of 
the Act and this regulation for any class of credit transactions within 
the state. The Board will grant such an exemption if the Board 
determines that:

[[Page 26]]

    (i) The class of credit transactions is subject to state law 
requirements substantially similar to those of the Act and this 
regulation or that applicants are afforded greater protection under 
state law; and
    (ii) There is adequate provision for state enforcement.
    (2) Liability and enforcement. (i) No exemption will extend to the 
civil liability provisions of section 706 of the Act or the 
administrative enforcement provisions of section 704 of the Act.
    (ii) After an exemption has been granted, the requirements of the 
applicable state law (except for additional requirements not imposed by 
federal law) will constitute the requirements of the Act and this 
regulation.



Sec. 202.12  Record retention.

    (a) Retention of prohibited information. A creditor may retain in 
its files information that is prohibited by the Act or this regulation 
for use in evaluating applications, without violating the Act or this 
regulation, if the information was obtained:
    (1) From any source prior to March 23, 1977;
    (2) From consumer reporting agencies, an applicant, or others 
without the specific request of the creditor; or
    (3) As required to monitor compliance with the Act and this 
regulation or other federal or state statutes or regulations.
    (b) Preservation of records--(1) Applications. For 25 months (12 
months for business credit, except as provided in paragraph (b)(5) of 
this section) after the date that a creditor notifies an applicant of 
action taken on an application or of incompleteness, the creditor shall 
retain in original form or a copy thereof:
    (i) Any application that it receives, any information required to be 
obtained concerning characteristics of the applicant to monitor 
compliance with the Act and this regulation or other similar law, and 
any other written or recorded information used in evaluating the 
application and not returned to the applicant at the applicant's 
request;
    (ii) A copy of the following documents if furnished to the applicant 
in written form (or, if furnished orally, any notation or memorandum 
made by the creditor):
    (A) The notification of action taken; and
    (B) The statement of specific reasons for adverse action; and
    (iii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (2) Existing accounts. For 25 months (12 months for business credit, 
except as provided in paragraph (b)(5) of this section) after the date 
that a creditor notifies an applicant of adverse action regarding an 
existing account, the creditor shall retain as to that account, in 
original form or a copy thereof:
    (i) Any written or recorded information concerning the adverse 
action; and
    (ii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (3) Other applications. For 25 months (12 months for business 
credit, except as provided in paragraph (b)(5) of this section) after 
the date that a creditor receives an application for which the creditor 
is not required to comply with the notification requirements of Sec. 
202.9, the creditor shall retain all written or recorded information in 
its possession concerning the applicant, including any notation of 
action taken.
    (4) Enforcement proceedings and investigations. A creditor shall 
retain the information beyond 25 months (12 months for business credit, 
except as provided in paragraph (b)(5) of this section) if the creditor 
has actual notice that it is under investigation or is subject to an 
enforcement proceeding for an alleged violation of the Act or this 
regulation, by the Attorney General of the United States or by an 
enforcement agency charged with monitoring that creditor's compliance 
with the Act and this regulation, or if it has been served with notice 
of an action filed pursuant to section 706 of the Act and Sec. 202.17 
of this regulation. The creditor shall retain the information until 
final disposition of the matter, unless an earlier time is allowed by 
order of the agency or court.
    (5) Special rule for certain business credit applications. With 
regard to a business that had gross revenues in excess of $1 million in 
its preceding fiscal

[[Page 27]]

year, or an extension of trade credit, credit incident to a factoring 
agreement, or other similar types of business credit, the creditor shall 
retain records for at least 60 days after notifying the applicant of the 
action taken. If within that time period the applicant requests in 
writing the reasons for adverse action or that records be retained, the 
creditor shall retain records for 12 months.
    (6) Self-tests. For 25 months after a self-test (as defined in Sec. 
202.15) has been completed, the creditor shall retain all written or 
recorded information about the self-test. A creditor shall retain 
information beyond 25 months if it has actual notice that it is under 
investigation or is subject to an enforcement proceeding for an alleged 
violation, or if it has been served with notice of a civil action. In 
such cases, the creditor shall retain the information until final 
disposition of the matter, unless an earlier time is allowed by the 
appropriate agency or court order.
    (7) Prescreened solicitations. For 25 months after the date on which 
an offer of credit is made to potential customers (12 months for 
business credit, except as provided in paragraph (b)(5) of this 
section), the creditor shall retain in original form or a copy thereof:
    (i) The text of any prescreened solicitation;
    (ii) The list of criteria the creditor used to select potential 
recipients of the solicitation; and
    (iii) Any correspondence related to complaints (formal or informal) 
about the solicitation.



Sec. 202.13  Information for monitoring purposes.

    (a) Information to be requested. (1) A creditor that receives an 
application for credit primarily for the purchase or refinancing of a 
dwelling occupied or to be occupied by the applicant as a principal 
residence, where the extension of credit will be secured by the 
dwelling, shall request as part of the application the following 
information regarding the applicant(s):
    (i) Ethnicity, using the categories Hispanic or Latino, and not 
Hispanic or Latino; and race, using the categories American Indian or 
Alaska Native, Asian, Black or African American, Native Hawaiian or 
Other Pacific Islander, and White;
    (ii) Sex;
    (iii) Marital status, using the categories married, unmarried, and 
separated; and
    (iv) Age.
    (2) Dwelling means a residential structure that contains one to four 
units, whether or not that structure is attached to real property. The 
term includes, but is not limited to, an individual condominium or 
cooperative unit and a mobile or other manufactured home.
    (b) Obtaining information. Questions regarding ethnicity, race, sex, 
marital status, and age may be listed, at the creditor's option, on the 
application form or on a separate form that refers to the application. 
The applicant(s) shall be asked but not required to supply the requested 
information. If the applicant(s) chooses not to provide the information 
or any part of it, that fact shall be noted on the form. The creditor 
shall then also note on the form, to the extent possible, the ethnicity, 
race, and sex of the applicant(s) on the basis of visual observation or 
surname.
    (c) Disclosure to applicant(s). The creditor shall inform the 
applicant(s) that the information regarding ethnicity, race, sex, 
marital status, and age is being requested by the federal government for 
the purpose of monitoring compliance with federal statutes that prohibit 
creditors from discriminating against applicants on those bases. The 
creditor shall also inform the applicant(s) that if the applicant(s) 
chooses not to provide the information, the creditor is required to note 
the ethnicity, race and sex on the basis of visual observation or 
surname.
    (d) Substitute monitoring program. A monitoring program required by 
an agency charged with administrative enforcement under section 704 of 
the Act may be substituted for the requirements contained in paragraphs 
(a), (b), and (c) of this section.



Sec. 202.14  Rules on providing appraisal reports.

    (a) Providing appraisals. A creditor shall provide a copy of an 
appraisal report used in connection with an application for credit that 
is to be secured

[[Page 28]]

by a lien on a dwelling. A creditor shall comply with either paragraph 
(a)(1) or (a)(2) of this section.
    (1) Routine delivery. A creditor may routinely provide a copy of an 
appraisal report to an applicant (whether credit is granted or denied or 
the application is withdrawn).
    (2) Upon request. A creditor that does not routinely provide 
appraisal reports shall provide a copy upon an applicant's written 
request.
    (i) Notice. A creditor that provides appraisal reports only upon 
request shall notify an applicant in writing of the right to receive a 
copy of an appraisal report. The notice may be given at any time during 
the application process but no later than when the creditor provides 
notice of action taken under Sec. 202.9 of this regulation. The notice 
shall specify that the applicant's request must be in writing, give the 
creditor's mailing address, and state the time for making the request as 
provided in paragraph (a)(2)(ii) of this section.
    (ii) Delivery. A creditor shall mail or deliver a copy of the 
appraisal report promptly (generally within 30 days) after the creditor 
receives an applicant's request, receives the report, or receives 
reimbursement from the applicant for the report, whichever is last to 
occur. A creditor need not provide a copy when the applicant's request 
is received more than 90 days after the creditor has provided notice of 
action taken on the application under Sec. 202.9 of this regulation or 
90 days after the application is withdrawn.
    (b) Credit unions. A creditor that is subject to the regulations of 
the National Credit Union Administration on making copies of appraisal 
reports available is not subject to this section.
    (c) Definitions. For purposes of paragraph (a) of this section, the 
term dwelling means a residential structure that contains one to four 
units whether or not that structure is attached to real property. The 
term includes, but is not limited to, an individual condominium or 
cooperative unit, and a mobile or other manufactured home. The term 
appraisal report means the document(s) relied upon by a creditor in 
evaluating the value of the dwelling.



Sec. 202.15  Incentives for self-testing and self-correction.

    (a) General rules--(1) Voluntary self-testing and correction. The 
report or results of a self-test that a creditor voluntarily conducts 
(or authorizes) are privileged as provided in this section. Data 
collection required by law or by any governmental authority is not a 
voluntary self-test.
    (2) Corrective action required. The privilege in this section 
applies only if the creditor has taken or is taking appropriate 
corrective action.
    (3) Other privileges. The privilege created by this section does not 
preclude the assertion of any other privilege that may also apply.
    (b) Self-test defined--(1) Definition. A self-test is any program, 
practice, or study that:
    (i) Is designed and used specifically to determine the extent or 
effectiveness of a creditor's compliance with the Act or this 
regulation; and
    (ii) Creates data or factual information that is not available and 
cannot be derived from loan or application files or other records 
related to credit transactions.
    (2) Types of information privileged. The privilege under this 
section applies to the report or results of the self-test, data or 
factual information created by the self-test, and any analysis, 
opinions, and conclusions pertaining to the self-test report or results. 
The privilege covers workpapers or draft documents as well as final 
documents.
    (3) Types of information not privileged. The privilege under this 
section does not apply to:
    (i) Information about whether a creditor conducted a self-test, the 
methodology used or the scope of the self-test, the time period covered 
by the self-test, or the dates it was conducted; or
    (ii) Loan and application files or other business records related to 
credit transactions, and information derived from such files and 
records, even if the information has been aggregated, summarized, or 
reorganized to facilitate analysis.
    (c) Appropriate corrective action--(1) General requirement. For the 
privilege in this section to apply, appropriate corrective action is 
required when the self-test shows that it is more likely

[[Page 29]]

than not that a violation occurred, even though no violation has been 
formally adjudicated.
    (2) Determining the scope of appropriate corrective action. A 
creditor must take corrective action that is reasonably likely to remedy 
the cause and effect of a likely violation by:
    (i) Identifying the policies or practices that are the likely cause 
of the violation; and
    (ii) Assessing the extent and scope of any violation.
    (3) Types of relief. Appropriate corrective action may include both 
prospective and remedial relief, except that to establish a privilege 
under this section:
    (i) A creditor is not required to provide remedial relief to a 
tester used in a self-test;
    (ii) A creditor is only required to provide remedial relief to an 
applicant identified by the self-test as one whose rights were more 
likely than not violated; and
    (iii) A creditor is not required to provide remedial relief to a 
particular applicant if the statute of limitations applicable to the 
violation expired before the creditor obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
    (4) No admission of violation. Taking corrective action is not an 
admission that a violation occurred.
    (d) Scope of privilege--(1) General rule. The report or results of a 
privileged self-test may not be obtained or used:
    (i) By a government agency in any examination or investigation 
relating to compliance with the Act or this regulation; or
    (ii) By a government agency or an applicant (including a prospective 
applicant who alleges a violation of Sec. 202.4(b)) in any proceeding 
or civil action in which a violation of the Act or this regulation is 
alleged.
    (2) Loss of privilege. The report or results of a self-test are not 
privileged under paragraph (d)(1) of this section if the creditor or a 
person with lawful access to the report or results:
    (i) Voluntarily discloses any part of the report or results, or any 
other information privileged under this section, to an applicant or 
government agency or to the public;
    (ii) Discloses any part of the report or results, or any other 
information privileged under this section, as a defense to charges that 
the creditor has violated the Act or regulation; or
    (iii) Fails or is unable to produce written or recorded information 
about the self-test that is required to be retained under Sec. 
202.12(b)(6) when the information is needed to determine whether the 
privilege applies. This paragraph does not limit any other penalty or 
remedy that may be available for a violation of Sec. 202.12.
    (3) Limited use of privileged information. Notwithstanding paragraph 
(d)(1) of this section, the self-test report or results and any other 
information privileged under this section may be obtained and used by an 
applicant or government agency solely to determine a penalty or remedy 
after a violation of the Act or this regulation has been adjudicated or 
admitted. Disclosures for this limited purpose may be used only for the 
particular proceeding in which the adjudication or admission was made. 
Information disclosed under this paragraph (d)(3) remains privileged 
under paragraph (d)(1) of this section.



Sec. 202.16  Requirements for electronic communication.

    (a) Definition. Electronic communication means a message transmitted 
electronically between a creditor and an applicant in a format that 
allows visual text to be displayed on equipment, for example, a personal 
computer monitor.
    (b) General rule. In accordance with the Electronic Signatures in 
Global and National Commerce Act (the E-Sign Act) (15 U.S.C. 7001 et 
seq.) and the rules set forth in this regulation, a creditor may provide 
by electronic communication any disclosure required by this regulation 
to be in writing. Disclosures provided by electronic communication must 
be provided in a clear and conspicuous manner and in a form the 
applicant may retain.
    (c) When consent is required. For disclosures required by this 
regulation to be in writing, a creditor shall obtain an applicant's 
affirmative consent in accordance with the requirements of the E-Sign 
Act. Disclosures under Sec. Sec. 202.9(a)(3)(i)(B), 202.13(a), and

[[Page 30]]

202.14(a)(2)(i) are not subject to this requirement if provided on or 
with the application.
    (d) Address or location to receive electronic communication. A 
creditor that uses electronic communication to provide disclosures 
required by this part shall:
    (1) Send the disclosure to the applicant's electronic address; or
    (2) Make the disclosure available at another location such as an 
Internet Web site; and
    (i) Alert the applicant of the disclosure's availability by sending 
a notice to the applicant's electronic address (or to a postal address, 
at the creditor's option). The notice shall identify the account 
involved and the address of the Internet Web site or other location 
where the disclosure is available; and
    (ii) Make the disclosure available for at least 90 days from the 
date the disclosure first becomes available or from the date of the 
notice alerting the applicant of the disclosure, whichever comes later.
    (3) Exceptions. A creditor need not comply with paragraph (d)(2)(i) 
and (ii) of this section for the disclosure required by Sec. 202.13(a).
    (e) Redelivery. When a disclosure provided by electronic 
communication is returned to a creditor undelivered, the creditor shall 
take reasonable steps to attempt redelivery using information in its 
files.
    (f) Electronic signatures. An electronic signature as defined under 
the E-Sign Act satisfies any requirement under this part for an 
applicant's signature or initials.



Sec. 202.17  Enforcement, penalties and liabilities.

    (a) Administrative enforcement. (1) As set forth more fully in 
section 704 of the Act, administrative enforcement of the Act and this 
regulation regarding certain creditors is assigned to the Comptroller of 
the Currency, Board of Governors of the Federal Reserve System, Board of 
Directors of the Federal Deposit Insurance Corporation, Office of Thrift 
Supervision, National Credit Union Administration, Surface 
Transportation Board, Secretary of Agriculture, Farm Credit 
Administration, Securities and Exchange Commission, Small Business 
Administration, and Secretary of Transportation.
    (2) Except to the extent that administrative enforcement is 
specifically assigned to other authorities, compliance with the 
requirements imposed under the Act and this regulation is enforced by 
the Federal Trade Commission.
    (b) Penalties and liabilities. (1) Sections 702(g) and 706(a) and 
(b) of the Act provide that any creditor that fails to comply with a 
requirement imposed by the Act or this regulation is subject to civil 
liability for actual and punitive damages in individual or class 
actions. Pursuant to sections 702(g) and 704(b), (c), and (d) of the 
Act, violations of the Act or this regulation also constitute violations 
of other federal laws. Liability for punitive damages can apply only to 
nongovernmental entities and is limited to $10,000 in individual actions 
and the lesser of $500,000 or 1 percent of the creditor's net worth in 
class actions. Section 706(c) provides for equitable and declaratory 
relief and section 706(d) authorizes the awarding of costs and 
reasonable attorney's fees to an aggrieved applicant in a successful 
action.
    (2) As provided in section 706(f), a civil action under the Act or 
this regulation may be brought in the appropriate United States district 
court without regard to the amount in controversy or in any other court 
of competent jurisdiction within two years after the date of the 
occurrence of the violation, or within one year after the commencement 
of an administrative enforcement proceeding or of a civil action brought 
by the Attorney General of the United States within two years after the 
alleged violation.
    (3) If an agency responsible for administrative enforcement is 
unable to obtain compliance with the Act or this regulation, it may 
refer the matter to the Attorney General of the United States. If the 
Board, the Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Office of Thrift Supervision, or the National Credit 
Union Administration has reason to believe that one or more creditors 
have engaged in a pattern or practice of discouraging or denying 
applications in violation of the Act or this regulation, the agency 
shall refer the

[[Page 31]]

matter to the Attorney General. If the agency has reason to believe that 
one or more creditors violated section 701(a) of the Act, the agency may 
refer a matter to the Attorney General.
    (4) On referral, or whenever the Attorney General has reason to 
believe that one or more creditors have engaged in a pattern or practice 
in violation of the Act or this regulation, the Attorney General may 
bring a civil action for such relief as may be appropriate, including 
actual and punitive damages and injunctive relief.
    (5) If the Board, the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the Office of Thrift Supervision, or the 
National Credit Union Administration has reason to believe (as a result 
of a consumer complaint, a consumer compliance examination, or some 
other basis) that a violation of the Act or this regulation has occurred 
which is also a violation of the Fair Housing Act, and the matter is not 
referred to the Attorney General, the agency shall:
    (i) Notify the Secretary of Housing and Urban Development; and
    (ii) Inform the applicant that the Secretary of Housing and Urban 
Development has been notified and that remedies may be available under 
the Fair Housing Act.
    (c) Failure of compliance. A creditor's failure to comply with 
Sec. Sec. 202.6(b)(6), 202.9, 202.10, 202.12 or 202.13 is not a 
violation if it results from an inadvertent error. On discovering an 
error under Sec. Sec. 202.9 and 202.10, the creditor shall correct it 
as soon as possible. If a creditor inadvertently obtains the monitoring 
information regarding the ethnicity, race, and sex of the applicant in a 
dwelling-related transaction not covered by Sec. 202.13, the creditor 
may retain information and act on the application without violating the 
regulation.

          Appendix A to Part 202--Federal Enforcement Agencies

    The following list indicates the federal agencies that enforce 
Regulation B for particular classes of creditors. Any questions 
concerning a particular creditor should be directed to its enforcement 
agency. Terms that are not defined in the Federal Deposit Insurance Act 
(12 U.S.C. 1813(s)) shall have the meaning given to them in the 
International Banking Act of 1978 (12 U.S.C. 3101).

National Banks, and Federal Branches and Federal Agencies of Foreign 
Banks: Office of the Comptroller of the Currency, Customer Assistance 
Group, 1301 McKinney Street, Suite 3710, Houston, Texas 77010

    State Member Banks, Branches and Agencies of Foreign Banks (other 
than federal branches, federal agencies, and insured state branches of 
foreign banks), Commercial Lending Companies Owned or Controlled by 
Foreign Banks, and Organizations Operating under Section 25 or 25A of 
the Federal Reserve Act.
    Federal Reserve Bank serving the district in which the institution 
is located.

Nonmember Insured Banks and Insured State Branches of Foreign Banks: 
FDIC Consumer Response Center, 2345 Grand Boulevard, Suite 100, Kansas 
City, Missouri 64108

    Savings institutions insured under the Savings Association Insurance 
Fund of the FDIC and federally chartered savings banks insured under the 
Bank Insurance Fund of the FDIC (but not including state-chartered 
savings banks insured under the Bank Insurance Fund).
    Office of Thrift Supervision Regional Director for the region in 
which the institution is located.
Federal Credit Unions: Regional office of the National Credit Union 
Administration serving the area in which the federal credit union is 
located.
Air carriers: Assistant General Counsel for Aviation Enforcement and 
Proceedings, Department of Transportation, 400 Seventh Street, SW., 
Washington, DC 20590
Creditors Subject to Surface Transportation Board: Office of 
Proceedings, Surface Transportation Board, Department of Transportation, 
1925 K Street NW., Washington, DC 20423
Creditors Subject to Packers and Stockyards Act: Nearest Packers and 
Stockyards Administration area supervisor.
Small Business Investment Companies: U.S. Small Business Administration, 
409 Third Street, SW., Washington, DC 20416.
Brokers and Dealers: Securities and Exchange Commission, Washington, DC 
20549.
Federal Land Banks, Federal Land Bank Associations, Federal Intermediate 
Credit Banks, and Production Credit Associations: Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
Retailers, Finance Companies, and All Other Creditors Not Listed Above: 
FTC Regional Office for region in which the creditor operates or Federal 
Trade Commission, Equal Credit Opportunity, Washington, DC 20580.

             Appendix B to Part 202--Model Application Forms

    1. This appendix contains five model credit application forms, each 
designated for use in a particular type of consumer credit transaction 
as indicated by the bracketed caption

[[Page 32]]

on each form. The first sample form is intended for use in open-end, 
unsecured transactions; the second for closed-end, secured transactions; 
the third for closed-end transactions, whether unsecured or secured; the 
fourth in transactions involving community property or occurring in 
community property states; and the fifth in residential mortgage 
transactions which contains a model disclosure for use in complying with 
Sec. 202.13 for certain dwelling-related loans. All forms contained in 
this appendix are models; their use by creditors is optional.
    2. The use or modification of these forms is governed by the 
following instructions. A creditor may change the forms: by asking for 
additional information not prohibited by Sec. 202.5; by deleting any 
information request; or by rearranging the format without modifying the 
substance of the inquiries. In any of these three instances, however, 
the appropriate notices regarding the optional nature of courtesy 
titles, the option to disclose alimony, child support, or separate 
maintenance, and the limitation concerning marital status inquiries must 
be included in the appropriate places if the items to which they relate 
appear on the creditor's form.
    3. If a creditor uses an appropriate Appendix B model form, or 
modifies a form in accordance with the above instructions, that creditor 
shall be deemed to be acting in compliance with the provisions of 
paragraphs (b), (c) and (d) of Sec. 202.5 of this regulation.

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[68 FR 13161, March 18, 2003, as amended at 68 FR 53491, Sept. 11, 2003]

            Appendix C to Part 202--Sample Notification Forms

    1. This appendix contains ten sample notification forms. Forms C-1 
through C-4 are intended for use in notifying an applicant that adverse 
action has been taken on an application or account under Sec. Sec. 
202.9(a)(1) and (2)(i) of this regulation. Form C-5 is a notice of 
disclosure of the right to request specific reasons for adverse action 
under Sec. Sec. 202.9(a)(1) and (2)(ii). Form C-6 is designed for use 
in notifying an applicant, under Sec. 202.9(c)(2), that an application 
is incomplete. Forms C-7 and C-8 are intended for use in connection with 
applications for business credit under Sec. 202.9(a)(3). Form C-9 is 
designed for use in notifying an applicant of the right to receive a 
copy of an appraisal under Sec. 202.14. Form C-10 is designed for use 
in notifying an applicant for nonmortgage credit that the creditor is 
requesting applicant characteristic information.
    2. Form C-1 contains the Fair Credit Reporting Act disclosure as 
required by sections 615(a) and (b) of that act. Forms C-2 through C-5 
contain only the section 615(a) disclosure (that a creditor obtained 
information from a consumer reporting agency that played a part in the 
credit decision). A creditor must provide the section 615(a) disclosure 
when adverse action is taken against a consumer based on information 
from a consumer reporting agency. A creditor must provide the section 
615(b) disclosure when adverse action is taken based on information from 
an outside source other than a consumer reporting agency. In addition, a 
creditor must provide the section 615(b) disclosure if the creditor 
obtained information from an affiliate other than information in a 
consumer report or other than information concerning the affiliate's own 
transactions or experiences with the consumer. Creditors may comply with 
the disclosure requirements for adverse action based on information in a 
consumer report obtained from an affiliate by providing either the 
section 615(a) or section 615(b) disclosure.
    3. The sample forms are illustrative and may not be appropriate for 
all creditors. They were designed to include some of the factors that 
creditors most commonly consider. If a creditor chooses to use the 
checklist of reasons provided in one of the sample forms in this 
appendix and if reasons commonly used by the creditor are not provided 
on the form, the creditor should modify the checklist by substituting or 
adding other reasons. For example, if ``inadequate down payment'' or 
``no deposit relationship with us'' are common reasons for taking 
adverse action on an application, the creditor ought to add or 
substitute such reasons for those presently contained on the sample 
forms.
    4. If the reasons listed on the forms are not the factors actually 
used, a creditor will not satisfy the notice requirement by simply 
checking the closest identifiable factor listed. For example, some 
creditors consider only references from banks or other depository 
institutions and disregard finance company references altogether; their 
statement of reasons should disclose ``insufficient bank references,'' 
not ``insufficient credit references.'' Similarly, a creditor that 
considers bank references and other credit references as distinct 
factors should treat the two factors separately and disclose them as 
appropriate. The creditor should either add such other factors to the 
form or check ``other'' and include the appropriate explanation. The 
creditor need not, however, describe how or why a factor adversely 
affected the application. For example, the notice may say ``length of 
residence'' rather than ``too short a period of residence.''
    5. A creditor may design its own notification forms or use all or a 
portion of the forms contained in this appendix. Proper use of Forms C-1 
through C-4 will satisfy the requirement of Sec. 202.9(a)(2)(i). Proper 
use of Forms C-5 and C-6 constitutes full compliance with Sec. Sec. 
202.9(a)(2)(ii) and 202.9(c)(2), respectively. Proper use of Forms C-7 
and C-8 will satisfy the requirements of Sec. 202.9(a)(2)(i) and (ii), 
respectively, for applications for business credit. Proper use of Form 
C-9 will satisfy the requirements of Sec. 202.14 of this part. Proper 
use of Form C-10 will satisfy the requirements of Sec. 202.5(b)(1).

    Form C-1--Sample Notice of Action Taken and Statement of Reasons

            Statement of Credit Denial, Termination or Change

 Date:__________________________________________________________________

 Applicant's Name:______________________________________________________

 Applicant's Address:___________________________________________________

Description of Account, Transaction, or Requested Credit:

________________________________________________________________________

Description of Action Taken:

________________________________________________________________________
________________________________________________________________________

  Part I--Principal Reason(s) for Credit Denial, Termination, or Other 
                     Action Taken Concerning Credit

    This section must be completed in all instances.

------ Credit application incomplete
------ Insufficient number of credit references provided
------ Unacceptable type of credit references provided
------ Unable to verify credit references

[[Page 46]]

------ Temporary or irregular employment
------ Unable to verify employment
------ Length of employment
------ Income insufficient for amount of credit requested
------ Excessive obligations in relation to income
------ Unable to verify income
------ Length of residence
------ Temporary residence
------ Unable to verify residence
------ No credit file
------ Limited credit experience
------ Poor credit performance with us
------ Delinquent past or present credit obligations with others
------ Collection action or judgment
------ Garnishment or attachment
------ Foreclosure or repossession
------ Bankruptcy
------ Number of recent inquiries on credit bureau report
------ Value or type of collateral not sufficient
------ Other, specify: ----------

   Part II--Disclosure of Use of Information Obtained From an Outside 
                                 Source

    This section should be completed if the credit decision was based in 
whole or in part on information that has been obtained from an outside 
source.
    ------ Our credit decision was based in whole or in part on 
information obtained in a report from the consumer reporting agency 
listed below. You have a right under the Fair Credit Reporting Act to 
know the information contained in your credit file at the consumer 
reporting agency. The reporting agency played no part in our decision 
and is unable to supply specific reasons why we have denied credit to 
you. You also have a right to a free copy of your report from the 
reporting agency, if you request it no later than 60 days after you 
receive this notice. In addition, if you find that any information 
contained in the report you receive is inaccurate or incomplete, you 
have the right to dispute the matter with the reporting agency.

 Name:__________________________________________________________________

 Address:_______________________________________________________________

________________________________________________________________________

 [Toll-free] Telephone number:__________________________________________

    ------ Our credit decision was based in whole or in part on 
information obtained from an affiliate or from an outside source other 
than a consumer reporting agency. Under the Fair Credit Reporting Act, 
you have the right to make a written request, no later than 60 days 
after you receive this notice, for disclosure of the nature of this 
information.
    If you have any questions regarding this notice, you should contact:
 Creditor's name:_______________________________________________________

 Creditor's address:____________________________________________________

 Creditor's telephone number:___________________________________________

    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is (name 
and address as specified by the appropriate agency listed in appendix 
A).

    Form C-2--Sample Notice of Action Taken and Statement of Reasons

Date

    Dear Applicant: Thank you for your recent application. Your request 
for [a loan/a credit card/an increase in your credit limit] was 
carefully considered, and we regret that we are unable to approve your 
application at this time, for the following reason(s):

Your Income:

------ is below our minimum requirement.
------ is insufficient to sustain payments on the amount of credit 
          requested.
------ could not be verified.

Your Employment:

------ is not of sufficient length to qualify.
------ could not be verified.

Your Credit History:

------ of making payments on time was not satisfactory.
------ could not be verified.

Your Application:

------ lacks a sufficient number of credit references.
------ lacks acceptable types of credit references.
------ reveals that current obligations are excessive in relation to 
          income.
 Other:_________________________________________________________________
    The consumer reporting agency contacted that provided information 
that influenced our decision in whole or in part was [name, address and 
[toll-free] telephone number of the reporting agency]. The reporting 
agency played no part in our decision and is unable to supply specific 
reasons why we have denied credit to you. You have a right under the 
Fair Credit Reporting Act to know the information contained in your 
credit file at the consumer reporting agency. You also have a right to a 
free copy of your report from the reporting agency, if you request it no 
later than 60 days after you receive this notice. In addition, if you 
find that any information contained in the report you receive is 
inaccurate or incomplete, you have

[[Page 47]]

the right to dispute the matter with the reporting agency. Any questions 
regarding such information should be directed to [consumer reporting 
agency]. If you have any questions regarding this letter, you should 
contact us at [creditor's name, address and telephone number].
    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is (name 
and address as specified by the appropriate agency listed in appendix 
A).

Form C-3--Sample Notice of Action Taken and Statement of Reasons (Credit 
                                Scoring)

Date

    Dear Applicant: Thank you for your recent application for --------
--. We regret that we are unable to approve your request.
    Your application was processed by a credit scoring system that 
assigns a numerical value to the various items of information we 
consider in evaluating an application. These numerical values are based 
upon the results of analyses of repayment histories of large numbers of 
customers.
    The information you provided in your application did not score a 
sufficient number of points for approval of the application. The reasons 
you did not score well compared with other applicants were:
     Insufficient bank references
     Type of occupation
     Insufficient credit experience
     Number of recent inquiries on credit bureau 
report
    In evaluating your application the consumer reporting agency listed 
below provided us with information that in whole or in part influenced 
our decision. The consumer reporting agency played no part in our 
decision and is unable to supply specific reasons why we have denied 
credit to you. You have a right under the Fair Credit Reporting Act to 
know the information contained in your credit file at the consumer 
reporting agency. It can be obtained by contacting: [name, address, and 
[toll-free] telephone number of the consumer reporting agency]. You also 
have a right to a free copy of your report from the reporting agency, if 
you request it no later than 60 days after you receive this notice. In 
addition, if you find that any information contained in the report you 
receive is inaccurate or incomplete, you have the right to dispute the 
matter with the reporting agency.
    If you have any questions regarding this letter, you should contact 
us at

 Creditor's Name:_______________________________________________________

 Address:_______________________________________________________________

________________________________________________________________________

 Telephone:_____________________________________________________________

    Sincerely,

    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (with certain 
limited exceptions); because all or part of the applicant's income 
derives from any public assistance program; or because the applicant has 
in good faith exercised any right under the Consumer Credit Protection 
Act. The federal agency that administers compliance with this law 
concerning this creditor is (name and address as specified by the 
appropriate agency listed in appendix A).

   Form C-4--Sample Notice of Action Taken, Statement of Reasons and 
                              Counteroffer

Date

    Dear Applicant: Thank you for your application for ----------. We 
are unable to offer you credit on the terms that you requested for the 
following reason(s):
________________________________________________________________________
    We can, however, offer you credit on the following terms: ----------
________________________________________________________________________
    If this offer is acceptable to you, please notify us within [amount 
of time] at the following address: ----------.
    Our credit decision on your application was based in whole or in 
part on information obtained in a report from [name, address and [toll-
free] telephone number of the consumer reporting agency]. You have a 
right under the Fair Credit Reporting Act to know the information 
contained in your credit file at the consumer reporting agency. The 
reporting agency played no part in our decision and is unable to supply 
specific reasons why we have denied credit to you. You also have a right 
to a free copy of your report from the reporting agency, if you request 
it no later than 60 days after you receive this notice. In addition, if 
you find that any information contained in the report you receive is 
inaccurate or incomplete, you have the right to dispute the matter with 
the reporting agency.
    You should know that the federal Equal Credit Opportunity Act 
prohibits creditors, such as ourselves, from discriminating against 
credit applicants on the basis of their race, color, religion, national 
origin, sex, marital status, age (provided the applicant has the 
capacity to enter into a binding contract), because they receive income 
from

[[Page 48]]

a public assistance program, or because they may have exercised their 
rights under the Consumer Credit Protection Act. If you believe there 
has been discrimination in handling your application you should contact 
the [name and address of the appropriate federal enforcement agency 
listed in appendix A].
    Sincerely,

  Form C-5--Sample Disclosure of Right to Request Specific Reasons for 
                              Credit Denial

Date

    Dear Applicant: Thank you for applying to us for ----------.
    After carefully reviewing your application, we are sorry to advise 
you that we cannot [open an account for you/grant a loan to you/increase 
your credit limit] at this time. If you would like a statement of 
specific reasons why your application was denied, please contact [our 
credit service manager] shown below within 60 days of the date of this 
letter. We will provide you with the statement of reasons within 30 days 
after receiving your request.

Creditor's Name
Address
Telephone Number

    If we obtained information from a consumer reporting agency as part 
of our consideration of your application, its name, address, and [toll-
free] telephone number is shown below. The reporting agency played no 
part in our decision and is unable to supply specific reasons why we 
have denied credit to you. [You have a right under the Fair Credit 
Reporting Act to know the information contained in your credit file at 
the consumer reporting agency.] You have a right to a free copy of your 
report from the reporting agency, if you request it no later than 60 
days after you receive this notice. In addition, if you find that any 
information contained in the report you received is inaccurate or 
incomplete, you have the right to dispute the matter with the reporting 
agency. You can find out about the information contained in your file 
(if one was used) by contacting:

Consumer reporting agency's name
Address
[Toll-free] Telephone number

    Sincerely,

    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is (name 
and address as specified by the appropriate agency listed in appendix 
A).

   Form C-6--Sample Notice of Incomplete Application and Request for 
                         Additional Information

Creditor's name
Address
Telephone number

Date

    Dear Applicant: Thank you for your application for credit. The 
following information is needed to make a decision on your application: 
----------
________________________________________________________________________
    We need to receive this information by ----------(date). If we do 
not receive it by that date, we will regrettably be unable to give 
further consideration to your credit request.

    Sincerely,

    Form C-7--Sample Notice of Action Taken and Statement of Reasons 
                            (Business Credit)

Creditor's Name
Creditor's address

Date

    Dear Applicant: Thank you for applying to us for credit. We have 
given your request careful consideration, and regret that we are unable 
to extend credit to you at this time for the following reasons:
    (Insert appropriate reason, such as: Value or type of collateral not 
sufficient; Lack of established earnings record; Slow or past due in 
trade or loan payments)
    Sincerely,

    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is [name 
and address as specified by the appropriate agency listed in appendix 
A].

  Form C-8--Sample Disclosure of Right To Request Specific Reasons for 
      Credit Denial Given at Time of Application (Business Credit)

Creditor's name
Creditor's address

    If your application for business credit is denied, you have the 
right to a written statement of the specific reasons for the denial.

[[Page 49]]

To obtain the statement, please contact [name, address and telephone 
number of the person or office from which the statement of reasons can 
be obtained] within 60 days from the date you are notified of our 
decision. We will send you a written statement of reasons for the denial 
within 30 days of receiving your request for the statement.

    Notice: The federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is [name 
and address as specified by the appropriate agency listed in appendix 
A].

 Form C-9--Sample Disclosure of Right To Receive a Copy of an Appraisal

    You have the right to a copy of the appraisal report used in 
connection with your application for credit. If you wish a copy, please 
write to us at the mailing address we have provided. We must hear from 
you no later than 90 days after we notify you about the action taken on 
your credit application or you withdraw your application.
    [In your letter, give us the following information:]

       Form C-10--Sample Disclosure About Voluntary Data Notation

    We are requesting the following information to monitor our 
compliance with the federal Equal Credit Opportunity Act, which 
prohibits unlawful discrimination. You are not required to provide this 
information. We will not take this information (or your decision not to 
provide this information) into account in connection with your 
application or credit transaction. The law provides that a creditor may 
not discriminate based on this information, or based on whether or not 
you choose to provide it. [If you choose not to provide the information, 
we will note it by visual observation or surname].

        Appendix D to Part 202--Issuance of Staff Interpretations

    1. Official Staff Interpretations. Officials in the Board's Division 
of Consumer and Community Affairs are authorized to issue official staff 
interpretations of this regulation. These interpretations provide the 
protection afforded under section 706(e) of the Act. Except in unusual 
circumstances, such interpretations will not be issued separately but 
will be incorporated in an official commentary to the regulation, which 
will be amended periodically.
    2. Requests for Issuance of Official Staff Interpretations. A 
request for an official staff interpretation should be in writing and 
addressed to the Director, Division of Consumer and Community Affairs, 
Board of Governors of the Federal Reserve System, Washington, DC 20551. 
The request should contain a complete statement of all relevant facts 
concerning the issue, including copies of all pertinent documents.
    3. Scope of Interpretations. No staff interpretations will be issued 
approving creditors' forms or statements. This restriction does not 
apply to forms or statements whose use is required or sanctioned by a 
government agency.

        Supplement I to Part 202--Official Staff Interpretations

    Following is an official staff interpretation of Regulation B (12 
CFR part 202) issued under authority delegated by the Federal Reserve 
Board to officials in the Division of Consumer and Community Affairs. 
References are to sections of the regulation or the Equal Credit 
Opportunity Act (15 U.S.C. 1601 et seq.).

                              Introduction

    1. Official status. Section 706(e) of the Equal Credit Opportunity 
Act protects a creditor from civil liability for any act done or omitted 
in good faith in conformity with an interpretation issued by a duly 
authorized official of the Federal Reserve Board. This commentary is the 
means by which the Division of Consumer and Community Affairs of the 
Federal Reserve Board issues official staff interpretations of 
Regulation B. Good-faith compliance with this commentary affords a 
creditor protection under section 706(e) of the Act.
    2. Issuance of interpretations. Under Appendix D to the regulation, 
any person may request an official staff interpretation. Interpretations 
will be issued at the discretion of designated officials and 
incorporated in this commentary following publication for comment in the 
Federal Register. Except in unusual circumstances, official staff 
interpretations will be issued only by means of this commentary.
    3. Status of previous interpretations. Interpretations of Regulation 
B previously issued by the Federal Reserve Board and its staff have been 
incorporated into this commentary as appropriate. All other previous 
Board and staff interpretations, official and unofficial, are superseded 
by this commentary.
    4. Footnotes. Footnotes in the regulation have the same legal effect 
as the text of the regulation, whether they are explanatory or 
illustrative in nature.

[[Page 50]]

    5. Comment designations. The comments are designated with as much 
specificity as possible according to the particular regulatory provision 
addressed. Each comment in the commentary is identified by a number and 
the regulatory section or paragraph that it interprets. For example, 
comments to Sec. 202.2(c) are further divided by subparagraph, such as 
comment 2(c)(1)(ii)-1 and comment 2(c)(2)(ii)-1.

              Section 202.1--Authority, Scope, and Purpose

    1(a) Authority and scope.
    1. Scope. The Equal Credit Opportunity Act and Regulation B apply to 
all credit--commercial as well as personal--without regard to the nature 
or type of the credit or the creditor. If a transaction provides for the 
deferral of the payment of a debt, it is credit covered by Regulation B 
even though it may not be a credit transaction covered by Regulation Z 
(Truth in Lending) (12 CFR part 226). Further, the definition of 
creditor is not restricted to the party or person to whom the obligation 
is initially payable, as is the case under Regulation Z. Moreover, the 
Act and regulation apply to all methods of credit evaluation, whether 
performed judgmentally or by use of a credit scoring system.
    2. Foreign applicability. Regulation B generally does not apply to 
lending activities that occur outside the United States. The regulation 
does apply to lending activities that take place within the United 
States (as well as the Commonwealth of Puerto Rico and any territory or 
possession of the United States), whether or not the applicant is a 
citizen.
    3. Board. The term Board, as used in this regulation, means the 
Board of Governors of the Federal Reserve System.

                       Section 202.2--Definitions

    2(c) Adverse action.

                          Paragraph 2(c)(1)(i)

    1. Application for credit. If the applicant applied in accordance 
with the creditor's procedures, a refusal to refinance or extend the 
term of a business or other loan is adverse action.

                          Paragraph 2(c)(1)(ii)

    1. Move from service area. If a credit card issuer terminates the 
open-end account of a customer because the customer has moved out of the 
card issuer's service area, the termination is adverse action unless 
termination on this ground was explicitly provided for in the credit 
agreement between the parties. In cases where termination is adverse 
action, notification is required under Sec. 202.9.
    2. Termination based on credit limit. If a creditor terminates 
credit accounts that have low credit limits (for example, under $400) 
but keeps open accounts with higher credit limits, the termination is 
adverse action and notification is required under Sec. 202.9.

                          Paragraph 2(c)(2)(ii)

    1. Default--exercise of due-on-sale clause. If a mortgagor sells or 
transfers mortgaged property without the consent of the mortgagee, and 
the mortgagee exercises its contractual right to accelerate the mortgage 
loan, the mortgagee may treat the mortgagor as being in default. An 
adverse action notice need not be given to the mortgagor or the 
transferee. (See comment 2(e)-1 for treatment of a purchaser who 
requests to assume the loan.)
    2. Current delinquency or default. The term adverse action does not 
include a creditor's termination of an account when the accountholder is 
currently in default or delinquent on that account. Notification in 
accordance with Sec. 202.9 of the regulation generally is required, 
however, if the creditor's action is based on a past delinquency or 
default on the account.

                         Paragraph 2(c)(2)(iii)

    1. Point-of-sale transactions. Denial of credit at point of sale is 
not adverse action except under those circumstances specified in the 
regulation. For example, denial at point of sale is not adverse action 
in the following situations:
    i. A credit cardholder presents an expired card or a card that has 
been reported to the card issuer as lost or stolen.
    ii. The amount of a transaction exceeds a cash advance or credit 
limit.
    iii. The circumstances (such as excessive use of a credit card in a 
short period of time) suggest that fraud is involved.
    iv. The authorization facilities are not functioning.
    v. Billing statements have been returned to the creditor for lack of 
a forwarding address.
    2. Application for increase in available credit. A refusal or 
failure to authorize an account transaction at the point of sale or loan 
is not adverse action except when the refusal is a denial of an 
application, submitted in accordance with the creditor's procedures, for 
an increase in the amount of credit.

                          Paragraph 2(c)(2)(v)

    1. Terms of credit versus type of credit offered. When an applicant 
applies for credit and the creditor does not offer the credit terms 
requested by the applicant (for example, the interest rate, length of 
maturity, collateral, or amount of downpayment), a denial of the 
application for that reason is adverse action (unless the creditor makes 
a counteroffer that is accepted by the applicant) and the applicant is 
entitled to notification under Sec. 202.9.
    2(e) Applicant.

[[Page 51]]

    1. Request to assume loan. If a mortgagor sells or transfers the 
mortgaged property and the buyer makes an application to the creditor to 
assume the mortgage loan, the mortgagee must treat the buyer as an 
applicant unless its policy is not to permit assumptions.
    2(f) Application.
    1. General. A creditor has the latitude under the regulation to 
establish its own application process and to decide the type and amount 
of information it will require from credit applicants.
    2. Procedures used. The term ``procedures'' refers to the actual 
practices followed by a creditor for making credit decisions as well as 
its stated application procedures. For example, if a creditor's stated 
policy is to require all applications to be in writing on the creditor's 
application form, but the creditor also makes credit decisions based on 
oral requests, the creditor's procedures are to accept both oral and 
written applications.
    3. When an inquiry or prequalification request becomes an 
application. A creditor is encouraged to provide consumers with 
information about loan terms. However, if in giving information to the 
consumer the creditor also evaluates information about the consumer, 
decides to decline the request, and communicates this to the consumer, 
the creditor has treated the inquiry or prequalification request as an 
application and must then comply with the notification requirements 
under Sec. 202.9. Whether the inquiry or prequalification request 
becomes an application depends on how the creditor responds to the 
consumer, not on what the consumer says or asks. (See comment 9-5 for 
further discussion of prequalification requests; see comment 2(f)-5 for 
a discussion of preapproval requests.)
    4. Examples of inquiries that are not applications. The following 
examples illustrate situations in which only an inquiry has taken place:
    i. A consumer calls to ask about loan terms and an employee explains 
the creditor's basic loan terms, such as interest rates, loan-to-value 
ratio, and debt-to-income ratio.
    ii. A consumer calls to ask about interest rates for car loans, and, 
in order to quote the appropriate rate, the loan officer asks for the 
make and sales price of the car and the amount of the downpayment, then 
gives the consumer the rate.
    iii. A consumer asks about terms for a loan to purchase a home and 
tells the loan officer her income and intended downpayment, but the loan 
officer only explains the creditor's loan-to-value ratio policy and 
other basic lending policies, without telling the consumer whether she 
qualifies for the loan.
    iv. A consumer calls to ask about terms for a loan to purchase 
vacant land and states his income and the sales price of the property to 
be financed, and asks whether he qualifies for a loan; the employee 
responds by describing the general lending policies, explaining that he 
would need to look at all of the consumer's qualifications before making 
a decision, and offering to send an application form to the consumer.
    5. Examples of an application. An application for credit includes 
the following situations:
    i. A person asks a financial institution to ``preapprove'' her for a 
loan (for example, to finance a house or a vehicle she plans to buy) and 
the institution reviews the request under a program in which the 
institution, after a comprehensive analysis of her creditworthiness, 
issues a written commitment valid for a designated period of time to 
extend a loan up to a specified amount. The written commitment may not 
be subject to conditions other than conditions that require the 
identification of adequate collateral, conditions that require no 
material change in the applicant's financial condition or 
creditworthiness prior to funding the loan, and limited conditions that 
are not related to the financial condition or creditworthiness of the 
applicant that the lender ordinarily attaches to a traditional 
application (such as certification of a clear termite inspection for a 
home purchase loan, or a maximum mileage requirement for a used car 
loan). But if the creditor's program does not provide for giving written 
commitments, requests for preapprovals are treated as prequalification 
requests for purposes of the regulation.
    ii. Under the same facts as above, the financial institution 
evaluates the person's creditworthiness and determines that she does not 
qualify for a preapproval.
    6. Completed application--diligence requirement. The regulation 
defines a completed application in terms that give a creditor the 
latitude to establish its own information requirements. Nevertheless, 
the creditor must act with reasonable diligence to collect information 
needed to complete the application. For example, the creditor should 
request information from third parties, such as a credit report, 
promptly after receiving the application. If additional information is 
needed from the applicant, such as an address or a telephone number to 
verify employment, the creditor should contact the applicant promptly. 
(But see comment 9(a)(1)-3, which discusses the creditor's option to 
deny an application on the basis of incompleteness.)
    2(g) Business credit.
    1. Definition. The test for deciding whether a transaction qualifies 
as business credit is one of primary purpose. For example, an open-end 
credit account used for both personal and business purposes is not 
business credit unless the primary purpose of the account is business-
related. A creditor may

[[Page 52]]

rely on an applicant's statement of the purpose for the credit 
requested.
    2(j) Credit.
    1. General. Regulation B covers a wider range of credit transactions 
than Regulation Z (Truth in Lending). Under Regulation B, a transaction 
is credit if there is a right to defer payment of a debt--regardless of 
whether the credit is for personal or commercial purposes, the number of 
installments required for repayment, or whether the transaction is 
subject to a finance charge.
    2(l) Creditor.
    1. Assignees. The term creditor includes all persons participating 
in the credit decision. This may include an assignee or a potential 
purchaser of the obligation who influences the credit decision by 
indicating whether or not it will purchase the obligation if the 
transaction is consummated.
    2. Referrals to creditors. For certain purposes, the term creditor 
includes persons such as real estate brokers, automobile dealers, home 
builders, and home-improvement contractors who do not participate in 
credit decisions but who only accept applications and refer applicants 
to creditors, or select or offer to select creditors to whom credit 
requests can be made. These persons must comply with Sec. 202.4(a), the 
general rule prohibiting discrimination, and with Sec. 202.4(b), the 
general rule against discouraging applications.
    2(p) Empirically derived and other credit scoring systems.
    1. Purpose of definition. The definition under Sec. 202.2(p)(1)(i) 
through (iv) sets the criteria that a credit system must meet in order 
to use age as a predictive factor. Credit systems that do not meet these 
criteria are judgmental systems and may consider age only for the 
purpose of determining a ``pertinent element of creditworthiness.'' 
(Both types of systems may favor an elderly applicant. See Sec. 
202.6(b)(2).)
    2. Periodic revalidation. The regulation does not specify how often 
credit scoring systems must be revalidated. The credit scoring system 
must be revalidated frequently enough to ensure that it continues to 
meet recognized professional statistical standards for statistical 
soundness. To ensure that predictive ability is being maintained, the 
creditor must periodically review the performance of the system. This 
could be done, for example, by analyzing the loan portfolio to determine 
the delinquency rate for each score interval, or by analyzing population 
stability over time to detect deviations of recent applications from the 
applicant population used to validate the system. If this analysis 
indicates that the system no longer predicts risk with statistical 
soundness, the system must be adjusted as necessary to reestablish its 
predictive ability. A creditor is responsible for ensuring its system is 
validated and revalidated based on the creditor's own data.
    3. Pooled data scoring systems. A scoring system or the data from 
which to develop such a system may be obtained from either a single 
credit grantor or multiple credit grantors. The resulting system will 
qualify as an empirically derived, demonstrably and statistically sound, 
credit scoring system provided the criteria set forth in paragraph 
(p)(1)(i) through (iv) of this section are met. A creditor is 
responsible for ensuring its system is validated and revalidated based 
on the creditor's own data when it becomes available.
    4. Effects test and disparate treatment. An empirically derived, 
demonstrably and statistically sound, credit scoring system may include 
age as a predictive factor (provided that the age of an elderly 
applicant is not assigned a negative factor or value). Besides age, no 
other prohibited basis may be used as a variable. Generally, credit 
scoring systems treat all applicants objectively and thus avoid problems 
of disparate treatment. In cases where a credit scoring system is used 
in conjunction with individual discretion, disparate treatment could 
conceivably occur in the evaluation process. In addition, neutral 
factors used in credit scoring systems could nonetheless be subject to 
challenge under the effects test. (See comment 6(a)-2 for a discussion 
of the effects test).
    2(w) Open-end credit.
    1. Open-end real estate mortgages. The term ``open-end credit'' does 
not include negotiated advances under an open-end real estate mortgage 
or a letter of credit.
    2(z) Prohibited basis.
    1. Persons associated with applicant. As used in this regulation, 
prohibited basis refers not only to characteristics--the race, color, 
religion, national origin, sex, marital status, or age--of an applicant 
(or officers of an applicant in the case of a corporation) but also to 
the characteristics of individuals with whom an applicant is affiliated 
or with whom the applicant associates. This means, for example, that 
under the general rule stated in Sec. 202.4(a), a creditor may not 
discriminate against an applicant because of that person's personal or 
business dealings with members of a certain religion, because of the 
national origin of any persons associated with the extension of credit 
(such as the tenants in the apartment complex being financed), or 
because of the race of other residents in the neighborhood where the 
property offered as collateral is located.
    2. National origin. A creditor may not refuse to grant credit 
because an applicant comes from a particular country but may take the 
applicant's immigration status into account. A creditor may also take 
into account any applicable law, regulation, or executive order 
restricting dealings with citizens (or the government) of a particular

[[Page 53]]

country or imposing limitations regarding credit extended for their use.
    3. Public assistance program. Any federal, state, or local 
governmental assistance program that provides a continuing, periodic 
income supplement, whether premised on entitlement or need, is ``public 
assistance'' for purposes of the regulation. The term includes (but is 
not limited to) Temporary Aid to Needy Families, food stamps, rent and 
mortgage supplement or assistance programs, social security and 
supplemental security income, and unemployment compensation. Only 
physicians, hospitals, and others to whom the benefits are payable need 
consider Medicare and Medicaid as public assistance.

  Section 202.3--Limited Exceptions for Certain Classes of Transactions

    1. Scope. Under this section, procedural requirements of the 
regulation do not apply to certain types of credit. All classes of 
transactions remain subject to Sec. 202.4(a), the general rule barring 
discrimination on a prohibited basis, and to any other provision not 
specifically excepted.
    3(a) Public-utilities credit.
    1. Definition. This definition applies only to credit for the 
purchase of a utility service, such as electricity, gas, or telephone 
service. Credit provided or offered by a public utility for some other 
purpose--such as for financing the purchase of a gas dryer, telephone 
equipment, or other durable goods, or for insulation or other home 
improvements--is not excepted.
    2. Security deposits. A utility company is a creditor when it 
supplies utility service and bills the user after the service has been 
provided. Thus, any credit term (such as a requirement for a security 
deposit) is subject to the regulation's bar against discrimination on a 
prohibited basis.
    3. Telephone companies. A telephone company's credit transactions 
qualify for the exceptions provided in Sec. 202.3(a)(2) only if the 
company is regulated by a government unit or files the charges for 
service, delayed payment, or any discount for prompt payment with a 
government unit.
    3(c) Incidental credit.
    1. Examples. If a service provider (such as a hospital, doctor, 
lawyer, or merchant) allows the client or customer to defer the payment 
of a bill, this deferral of debt is credit for purposes of the 
regulation, even though there is no finance charge and no agreement for 
payment in installments. Because of the exceptions provided by this 
section, however, these particular credit extensions are excepted from 
compliance with certain procedural requirements as specified in Sec. 
202.3(c).
    3(d) Government credit.
    1. Credit to governments. The exception relates to credit extended 
to (not by) governmental entities. For example, credit extended to a 
local government is covered by this exception, but credit extended to 
consumers by a federal or state housing agency does not qualify for 
special treatment under this category.

                      Section 202.4--General Rules

                             Paragraph 4(a)

    1. Scope of rule. The general rule stated in Sec. 202.4(a) covers 
all dealings, without exception, between an applicant and a creditor, 
whether or not addressed by other provisions of the regulation. Other 
provisions of the regulation identify specific practices that the Board 
has decided are impermissible because they could result in credit 
discrimination on a basis prohibited by the Act. The general rule 
covers, for example, application procedures, criteria used to evaluate 
creditworthiness, administration of accounts, and treatment of 
delinquent or slow accounts. Thus, whether or not specifically 
prohibited elsewhere in the regulation, a credit practice that treats 
applicants differently on a prohibited basis violates the law because it 
violates the general rule. Disparate treatment on a prohibited basis is 
illegal whether or not it results from a conscious intent to 
discriminate.
    2. Examples.
    i. Disparate treatment would exist, for example, in the following 
situations:
    A. A creditor provides information only on ``subprime'' and similar 
products to minority applicants who request information about the 
creditor's mortgage products, but provides information on a wider 
variety of mortgage products to similarly situated nonminority 
applicants.
    B. A creditor provides more comprehensive information to men than to 
similarly situated women.
    C. A creditor requires a minority applicant to provide greater 
documentation to obtain a loan than a similarly situated nonminority 
applicant.
    D. A creditor waives or relaxes credit standards for a nonminority 
applicant but not for a similarly situated minority applicant.
    ii. Treating applicants differently on a prohibited basis is 
unlawful if the creditor lacks a legitimate nondiscriminatory reason for 
its action, or if the asserted reason is found to be a pretext for 
discrimination.

                             Paragraph 4(b)

    1. Prospective applicants. Generally, the regulation's protections 
apply only to persons who have requested or received an extension of 
credit. In keeping with the purpose of the Act--to promote the 
availability of credit on a nondiscriminatory basis--Sec. 202.4(b) 
covers acts or practices directed at prospective applicants that could 
discourage a reasonable person, on a prohibited basis, from applying

[[Page 54]]

for credit. Practices prohibited by this section include:
    i. A statement that the applicant should not bother to apply, after 
the applicant states that he is retired.
    ii. The use of words, symbols, models or other forms of 
communication in advertising that express, imply, or suggest a 
discriminatory preference or a policy of exclusion in violation of the 
Act.
    iii. The use of interview scripts that discourage applications on a 
prohibited basis.
    2. Affirmative advertising. A creditor may affirmatively solicit or 
encourage members of traditionally disadvantaged groups to apply for 
credit, especially groups that might not normally seek credit from that 
creditor.

                             Paragraph 4(c)

    1. Requirement for written applications. Model application forms are 
provided in Appendix B to the regulation, although use of a printed form 
is not required. A creditor will satisfy the requirement by writing down 
the information that it normally considers in making a credit decision. 
The creditor may complete an application on behalf of an applicant and 
need not require the applicant to sign the application.
    2. Telephone applications. A creditor that accepts applications by 
telephone for dwelling-related credit covered by Sec. 202.13 can meet 
the requirement for written applications by writing down pertinent 
information that is provided by the applicant.
    3. Computerized entry. Information entered directly into and 
retained by a computerized system qualifies as a written application 
under this paragraph. (See the commentary to Sec. 202.13(b), 
Applications through electronic media and Applications through video.)

                             Paragraph 4(d)

    1. Clear and conspicuous. This standard requires that disclosures be 
presented in a reasonably understandable format in a way that does not 
obscure the required information. No minimum type size is mandated, but 
the disclosures must be legible, whether typewritten, handwritten, or 
printed by computer.

        Section 202.5--Rules Concerning Requests for Information

    5(a) General rules.

                            Paragraph 5(a)(1)

    1. Requests for information. This section governs the types of 
information that a creditor may gather. Section 202.6 governs how 
information may be used.

                            Paragraph 5(a)(2)

    1. Local laws. Information that a creditor is allowed to collect 
pursuant to a ``state'' statute or regulation includes information 
required by a local statute, regulation, or ordinance.
    2. Information required by Regulation C. Regulation C generally 
requires creditors covered by the Home Mortgage Disclosure Act (HMDA) to 
collect and report information about the race, ethnicity, and sex of 
applicants for home-improvement loans and home-purchase loans, including 
some types of loans not covered by Sec. 202.13.
    3. Collecting information on behalf of creditors. Persons such as 
loan brokers and correspondents do not violate the ECOA or Regulation B 
if they collect information that they are otherwise prohibited from 
collecting, where the purpose of collecting the information is to 
provide it to a creditor that is subject to the Home Mortgage Disclosure 
Act or another federal or state statute or regulation requiring data 
collection.
    5(d) Other limitations on information requests.

                            Paragraph 5(d)(1)

    1. Indirect disclosure of prohibited information. The fact that 
certain credit-related information may indirectly disclose marital 
status does not bar a creditor from seeking such information. For 
example, the creditor may ask about:
    i. The applicant's obligation to pay alimony, child support, or 
separate maintenance income.
    ii. The source of income to be used as the basis for repaying the 
credit requested, which could disclose that it is the income of a 
spouse.
    iii. Whether any obligation disclosed by the applicant has a co-
obligor, which could disclose that the co-obligor is a spouse or former 
spouse.
    iv. The ownership of assets, which could disclose the interest of a 
spouse.

                            Paragraph 5(d)(2)

    1. Disclosure about income. The sample application forms in appendix 
B to the regulation illustrate how a creditor may inform an applicant of 
the right not to disclose alimony, child support, or separate 
maintenance income.
    2. General inquiry about source of income. Since a general inquiry 
about the source of income may lead an applicant to disclose alimony, 
child support, or separate maintenance income, a creditor making such an 
inquiry on an application form should preface the request with the 
disclosure required by this paragraph.
    3. Specific inquiry about sources of income. A creditor need not 
give the disclosure if the inquiry about income is specific and worded 
in a way that is unlikely to lead the applicant to disclose the fact 
that income is derived from alimony, child support, or separate 
maintenance payments. For example, an application form that asks about 
specific

[[Page 55]]

types of income such as salary, wages, or investment income need not 
include the disclosure.

       Section 202.6--Rules Concerning Evaluation of Applications

    6(a) General rule concerning use of information.
    1. General. When evaluating an application for credit, a creditor 
generally may consider any information obtained. However, a creditor may 
not consider in its evaluation of creditworthiness any information that 
it is barred by Sec. 202.5 from obtaining or from using for any purpose 
other than to conduct a self-test under Sec. 202.15.
    2. Effects test. The effects test is a judicial doctrine that was 
developed in a series of employment cases decided by the U.S. Supreme 
Court under Title VII of the Civil Rights Act of 1964 (42 U.S.C. 2000e 
et seq.), and the burdens of proof for such employment cases were 
codified by Congress in the Civil Rights Act of 1991 (42 U.S.C. 2000e-
2). Congressional intent that this doctrine apply to the credit area is 
documented in the Senate Report that accompanied H.R. 6516, No. 94-589, 
pp. 4-5; and in the House Report that accompanied H.R. 6516, No. 94-210, 
p.5. The Act and regulation may prohibit a creditor practice that is 
discriminatory in effect because it has a disproportionately negative 
impact on a prohibited basis, even though the creditor has no intent to 
discriminate and the practice appears neutral on its face, unless the 
creditor practice meets a legitimate business need that cannot 
reasonably be achieved as well by means that are less disparate in their 
impact. For example, requiring that applicants have income in excess of 
a certain amount to qualify for an overdraft line of credit could mean 
that women and minority applicants will be rejected at a higher rate 
than men and nonminority applicants. If there is a demonstrable 
relationship between the income requirement and creditworthiness for the 
level of credit involved, however, use of the income standard would 
likely be permissible.
    6(b) Specific rules concerning use of information.

                            Paragraph 6(b)(1)

    1. Prohibited basis--special purpose credit. In a special purpose 
credit program, a creditor may consider a prohibited basis to determine 
whether the applicant possesses a characteristic needed for eligibility. 
(See Sec. 202.8.)

                            Paragraph 6(b)(2)

    1. Favoring the elderly. Any system of evaluating creditworthiness 
may favor a credit applicant who is age 62 or older. A credit program 
that offers more favorable credit terms to applicants age 62 or older is 
also permissible; a program that offers more favorable credit terms to 
applicants at an age lower than 62 is permissible only if it meets the 
special-purpose credit requirements of Sec. 202.8.
    2. Consideration of age in a credit scoring system. Age may be taken 
directly into account in a credit scoring system that is ``demonstrably 
and statistically sound,'' as defined in Sec. 202.2(p), with one 
limitation: applicants age 62 years or older must be treated at least as 
favorably as applicants who are under age 62. If age is scored by 
assigning points to an applicant's age category, elderly applicants must 
receive the same or a greater number of points as the most favored class 
of nonelderly applicants.
    i. Age-split scorecards. Some credit systems segment the population 
and use different scorecards based on the age of an applicant. In such a 
system, one card may cover a narrow age range (for example, applicants 
in their twenties or younger) who are evaluated under attributes 
predictive for that age group. A second card may cover all other 
applicants, who are evaluated under the attributes predictive for that 
broader class. When a system uses a card covering a wide age range that 
encompasses elderly applicants, the credit scoring system is not deemed 
to score age. Thus, the system does not raise the issue of assigning a 
negative factor or value to the age of elderly applicants. But if a 
system segments the population by age into multiple scorecards, and 
includes elderly applicants in a narrower age range, the credit scoring 
system does score age. To comply with the Act and regulation in such a 
case, the creditor must ensure that the system does not assign a 
negative factor or value to the age of elderly applicants as a class.
    3. Consideration of age in a judgmental system. In a judgmental 
system, defined in Sec. 202.2(t), a creditor may not decide whether to 
extend credit or set the terms and conditions of credit based on age or 
information related exclusively to age. Age or age-related information 
may be considered only in evaluating other ``pertinent elements of 
creditworthiness'' that are drawn from the particular facts and 
circumstances concerning the applicant. For example, a creditor may not 
reject an application or terminate an account because the applicant is 
60 years old. But a creditor that uses a judgmental system may relate 
the applicant's age to other information about the applicant that the 
creditor considers in evaluating creditworthiness. As the following 
examples illustrate, the evaluation must be made in an individualized, 
case-by-case manner:
    i. A creditor may consider the applicant's occupation and length of 
time to retirement to ascertain whether the applicant's income 
(including retirement income) will support the extension of credit to 
its maturity.
    ii. A creditor may consider the adequacy of any security offered 
when the term of the

[[Page 56]]

credit extension exceeds the life expectancy of the applicant and the 
cost of realizing on the collateral could exceed the applicant's equity. 
An elderly applicant might not qualify for a 5 percent down, 30-year 
mortgage loan but might qualify with a larger downpayment or a shorter 
loan maturity.
    iii. A creditor may consider the applicant's age to assess the 
significance of length of employment (a young applicant may have just 
entered the job market) or length of time at an address (an elderly 
applicant may recently have retired and moved from a long-term 
residence).
    4. Consideration of age in a reverse mortgage. A reverse mortgage is 
a home-secured loan in which the borrower receives payments from the 
creditor, and does not become obligated to repay these amounts (other 
than in the case of default) until the borrower dies, moves permanently 
from the home, or transfers title to the home, or upon a specified 
maturity date. Disbursements to the borrower under a reverse mortgage 
typically are determined by considering the value of the borrower's 
home, the current interest rate, and the borrower's life expectancy. A 
reverse mortgage program that requires borrowers to be age 62 or older 
is permissible under Sec. 202.6(b)(2)(iv). In addition, under Sec. 
202.6(b)(2)(iii), a creditor may consider a borrower's age to evaluate a 
pertinent element of creditworthiness, such as the amount of the credit 
or monthly payments that the borrower will receive, or the estimated 
repayment date.
    5. Consideration of age in a combined system. A creditor using a 
credit scoring system that qualifies as ``empirically derived'' under 
Sec. 202.2(p) may consider other factors (such as a credit report or 
the applicant's cash flow) on a judgmental basis. Doing so will not 
negate the classification of the credit scoring component of the 
combined system as ``demonstrably and statistically sound.'' While age 
could be used in the credit scoring portion, however, in the judgmental 
portion age may not be considered directly. It may be used only for the 
purpose of determining a ``pertinent element of creditworthiness.'' (See 
comment 6(b)(2)-3.)
    6. Consideration of public assistance. When considering income 
derived from a public assistance program, a creditor may take into 
account, for example:
    i. The length of time an applicant will likely remain eligible to 
receive such income.
    ii. Whether the applicant will continue to qualify for benefits 
based on the status of the applicant's dependents (as in the case of 
Temporary Aid to Needy Families, or social security payments to a 
minor).
    iii. Whether the creditor can attach or garnish the income to assure 
payment of the debt in the event of default.

                            Paragraph 6(b)(5)

    1. Consideration of an individual applicant. A creditor must 
evaluate income derived from part-time employment, alimony, child 
support, separate maintenance payments, retirement benefits, or public 
assistance on an individual basis, not on the basis of aggregate 
statistics; and must assess its reliability or unreliability by 
analyzing the applicant's actual circumstances, not by analyzing 
statistical measures derived from a group.
    2. Payments consistently made. In determining the likelihood of 
consistent payments of alimony, child support, or separate maintenance, 
a creditor may consider factors such as whether payments are received 
pursuant to a written agreement or court decree; the length of time that 
the payments have been received; whether the payments are regularly 
received by the applicant; the availability of court or other procedures 
to compel payment; and the creditworthiness of the payor, including the 
credit history of the payor when it is available to the creditor.
    3. Consideration of income.
    i. A creditor need not consider income at all in evaluating 
creditworthiness. If a creditor does consider income, there are several 
acceptable methods, whether in a credit scoring or a judgmental system:
    A. A creditor may score or take into account the total sum of all 
income stated by the applicant without taking steps to evaluate the 
income for reliability.
    B. A creditor may evaluate each component of the applicant's income, 
and then score or take into account income determined to be reliable 
separately from other income; or the creditor may disregard that portion 
of income that is not reliable when it aggregates reliable income.
    C. A creditor that does not evaluate all income components for 
reliability must treat as reliable any component of protected income 
that is not evaluated.
    ii. In considering the separate components of an applicant's income, 
the creditor may not automatically discount or exclude from 
consideration any protected income. Any discounting or exclusion must be 
based on the applicant's actual circumstances.
    4. Part-time employment, sources of income. A creditor may score or 
take into account the fact that an applicant has more than one source of 
earned income--a full-time and a part-time job or two part-time jobs. A 
creditor may also score or treat earned income from a secondary source 
differently than earned income from a primary source. The creditor may 
not, however, score or otherwise take into account the number of sources 
for income such as retirement income, social security, supplemental 
security income, and alimony. Nor may the creditor treat negatively the 
fact that an applicant's

[[Page 57]]

only earned income is derived from, for example, a part-time job.

                            Paragraph 6(b)(6)

    1. Types of credit references. A creditor may restrict the types of 
credit history and credit references that it will consider, provided 
that the restrictions are applied to all credit applicants without 
regard to sex, marital status, or any other prohibited basis. On the 
applicant's request, however, a creditor must consider credit 
information not reported through a credit bureau when the information 
relates to the same types of credit references and history that the 
creditor would consider if reported through a credit bureau.

                            Paragraph 6(b)(7)

    1. National origin--immigration status. The applicant's immigration 
status and ties to the community (such as employment and continued 
residence in the area) could have a bearing on a creditor's ability to 
obtain repayment. Accordingly, the creditor may consider immigration 
status and differentiate, for example, between a noncitizen who is a 
long-time resident with permanent resident status and a noncitizen who 
is temporarily in this country on a student visa.
    2. National origin--citizenship. A denial of credit on the ground 
that an applicant is not a United States citizen is not per se 
discrimination based on national origin.

                            Paragraph 6(b)(8)

    1. Prohibited basis--marital status. A creditor may consider the 
marital status of an applicant or joint applicant for the purpose of 
ascertaining the creditor's rights and remedies applicable to the 
particular extension of credit. For example, in a secured transaction 
involving real property, a creditor could take into account whether 
state law gives the applicant's spouse an interest in the property being 
offered as collateral.

          Section 202.7--Rules Concerning Extensions of Credit

    7(a) Individual accounts.
    1. Open-end credit--authorized user. A creditor may not require a 
creditworthy applicant seeking an individual credit account to provide 
additional signatures. But the creditor may condition the designation of 
an authorized user by the account holder on the authorized user's 
becoming contractually liable for the account, as long as the creditor 
does not differentiate on any prohibited basis in imposing this 
requirement.
    2. Open-end credit--choice of authorized user. A creditor that 
permits an account holder to designate an authorized user may not 
restrict this designation on a prohibited basis. For example, if the 
creditor allows the designation of spouses as authorized users, the 
creditor may not refuse to accept a nonspouse as an authorized user.
    3. Overdraft authority on transaction accounts. If a transaction 
account (such as a checking account or NOW account) includes an 
overdraft line of credit, the creditor may require that all persons 
authorized to draw on the transaction account assume liability for any 
overdraft.
    7(b) Designation of name.
    1. Single name on account. A creditor may require that joint 
applicants on an account designate a single name for purposes of 
administering the account and that a single name be embossed on any 
credit cards issued on the account. But the creditor may not require 
that the name be the husband's name. (See Sec. 202.10 for rules 
governing the furnishing of credit history on accounts held by spouses.)
    7(c) Action concerning existing open-end accounts.

                            Paragraph 7(c)(1)

    1. Termination coincidental with marital status change. When an 
account holder's marital status changes, a creditor generally may not 
terminate the account unless it has evidence that the account holder is 
now unable or unwilling to repay. But the creditor may terminate an 
account on which both spouses are jointly liable, even if the action 
coincides with a change in marital status, when one or both spouses:
    i. Repudiate responsibility for future charges on the joint account.
    ii. Request separate accounts in their own names.
    iii. Request that the joint account be closed.
    2. Updating information. A creditor may periodically request updated 
information from applicants but may not use events related to a 
prohibited basis--such as an applicant's retirement or reaching a 
particular age, or a change in name or marital status--to trigger such a 
request.

                            Paragraph 7(c)(2)

    1. Procedure pending reapplication. A creditor may require a 
reapplication from an account holder, even when there is no evidence of 
unwillingness or inability to repay, if (1) the credit was based on the 
qualifications of a person who is no longer available to support the 
credit and (2) the creditor has information indicating that the account 
holder's income may be insufficient to support the credit. While a 
reapplication is pending, the creditor must allow the account holder 
full access to the account under the existing contract terms. The 
creditor may specify a reasonable time period within which the account 
holder must submit the required information.
    7(d) Signature of spouse or other person.

[[Page 58]]

    1. Qualified applicant. The signature rules ensure that qualified 
applicants are able to obtain credit in their own names. Thus, when an 
applicant requests individual credit, a creditor generally may not 
require the signature of another person unless the creditor has first 
determined that the applicant alone does not qualify for the credit 
requested.
    2. Unqualified applicant. When an applicant requests individual 
credit but does not meet a creditor's standards, the creditor may 
require a cosigner, guarantor, endorser, or similar partie--but cannot 
require that it be the spouse. (See commentary to Sec. 202.7(d)(5) and 
(6).)

                            Paragraph 7(d)(1)

    1. Signature of another person. It is impermissible for a creditor 
to require an applicant who is individually creditworthy to provide a 
cosigner--even if the creditor applies the requirement without regard to 
sex, marital status, or any other prohibited basis. (But see comment 
7(d)(6)-1 concerning guarantors of closely held corporations.)
    2. Joint applicant. The term ``joint applicant'' refers to someone 
who applies contemporaneously with the applicant for shared or joint 
credit. It does not refer to someone whose signature is required by the 
creditor as a condition for granting the credit requested.
    3. Evidence of joint application. A person's intent to be a joint 
applicant must be evidenced at the time of application. Signatures on a 
promissory note may not be used to show intent to apply for joint 
credit. On the other hand, signatures or initials on a credit 
application affirming applicants' intent to apply for joint credit may 
be used to establish intent to apply for joint credit. (See Appendix B). 
The method used to establish intent must be distinct from the means used 
by individuals to affirm the accuracy of information. For example, 
signatures on a joint financial statement affirming the veracity of 
information are not sufficient to establish intent to apply for joint 
credit.

                            Paragraph 7(d)(2)

    1. Jointly owned property. If an applicant requests unsecured 
credit, does not own sufficient separate property, and relies on joint 
property to establish creditworthiness, the creditor must value the 
applicant's interest in the jointly owned property. A creditor may not 
request that a nonapplicant joint owner sign any instrument as a 
condition of the credit extension unless the applicant's interest does 
not support the amount and terms of the credit sought.
    i. Valuation of applicant's interest. In determining the value of an 
applicant's interest in jointly owned property, a creditor may consider 
factors such as the form of ownership and the property's susceptibility 
to attachment, execution, severance, or partition; the value of the 
applicant's interest after such action; and the cost associated with the 
action. This determination must be based on the existing form of 
ownership, and not on the possibility of a subsequent change. For 
example, in determining whether a married applicant's interest in 
jointly owned property is sufficient to satisfy the creditor's standards 
of creditworthiness for individual credit, a creditor may not consider 
that the applicant's separate property could be transferred into tenancy 
by the entirety after consummation. Similarly, a creditor may not 
consider the possibility that the couple may divorce. Accordingly, a 
creditor may not require the signature of the nonapplicant spouse in 
these or similar circumstances.
    ii. Other options to support credit. If the applicant's interest in 
jointly owned property does not support the amount and terms of credit 
sought, the creditor may offer the applicant other options to qualify 
for the extension of credit. For example:
    A. Providing a co-signer or other party (Sec. 202.7(d)(5));
    B. Requesting that the credit be granted on a secured basis (Sec. 
202.7(d)(4)); or
    C. Providing the signature of the joint owner on an instrument that 
ensures access to the property in the event of the applicant's death or 
default, but does not impose personal liability unless necessary under 
state law (such as a limited guarantee). A creditor may not routinely 
require, however, that a joint owner sign an instrument (such as a 
quitclaim deed) that would result in the forfeiture of the joint owner's 
interest in the property.
    2. Need for signature--reasonable belief. A creditor's reasonable 
belief as to what instruments need to be signed by a person other than 
the applicant should be supported by a thorough review of pertinent 
statutory and decisional law or an opinion of the state attorney 
general.

                            Paragraph 7(d)(3)

    1. Residency. In assessing the creditworthiness of a person who 
applies for credit in a community property state, a creditor may assume 
that the applicant is a resident of the state unless the applicant 
indicates otherwise.

                            Paragraph 7(d)(4)

    1. Creation of enforceable lien. Some state laws require that both 
spouses join in executing any instrument by which real property is 
encumbered. If an applicant offers such property as security for credit, 
a creditor may require the applicant's spouse to sign the instruments 
necessary to create a valid security interest in the property. The 
creditor may not require the spouse to sign the note evidencing the 
credit obligation if

[[Page 59]]

signing only the mortgage or other security agreement is sufficient to 
make the property available to satisfy the debt in the event of default. 
However, if under state law both spouses must sign the note to create an 
enforceable lien, the creditor may require the signatures.
    2. Need for signature--reasonable belief. Generally, a signature to 
make the secured property available will only be needed on a security 
agreement. A creditor's reasonable belief that, to ensure access to the 
property, the spouse's signature is needed on an instrument that imposes 
personal liability should be supported by a thorough review of pertinent 
statutory and decisional law or an opinion of the state attorney 
general.
    3. Integrated instruments. When a creditor uses an integrated 
instrument that combines the note and the security agreement, the spouse 
cannot be asked to sign the integrated instrument if the signature is 
only needed to grant a security interest. But the spouse could be asked 
to sign an integrated instrument that makes clear--for example, by a 
legend placed next to the spouse's signature--that the spouse's 
signature is only to grant a security interest and that signing the 
instrument does not impose personal liability.

                            Paragraph 7(d)(5)

    1. Qualifications of additional parties. In establishing guidelines 
for eligibility of guarantors, cosigners, or similar additional parties, 
a creditor may restrict the applicant's choice of additional parties but 
may not discriminate on the basis of sex, marital status, or any other 
prohibited basis. For example, the creditor could require that the 
additional party live in the creditor's market area.
    2. Reliance on income of another person--individual credit. An 
applicant who requests individual credit relying on the income of 
another person (including a spouse in a non-community property state) 
may be required to provide the signature of the other person to make the 
income available to pay the debt. In community property states, the 
signature of a spouse may be required if the applicant relies on the 
spouse's separate income. If the applicant relies on the spouse's future 
earnings that as a matter of state law cannot be characterized as 
community property until earned, the creditor may require the spouse's 
signature, but need not do so--even if it is the creditor's practice to 
require the signature when an applicant relies on the future earnings of 
a person other than a spouse. (See Sec. 202.6(c) on consideration of 
state property laws.)
    3. Renewals. If the borrower's creditworthiness is reevaluated when 
a credit obligation is renewed, the creditor must determine whether an 
additional party is still warranted and, if not warranted, release the 
additional party.

                            Paragraph 7(d)(6)

    1. Guarantees. A guarantee on an extension of credit is part of a 
credit transaction and therefore subject to the regulation. A creditor 
may require the personal guarantee of the partners, directors, or 
officers of a business, and the shareholders of a closely held 
corporation, even if the business or corporation is creditworthy. The 
requirement must be based on the guarantor's relationship with the 
business or corporation, however, and not on a prohibited basis. For 
example, a creditor may not require guarantees only for women-owned or 
minority-owned businesses. Similarly, a creditor may not require 
guarantees only of the married officers of a business or the married 
shareholders of a closely held corporation.
    2. Spousal guarantees. The rules in Sec. 202.7(d) bar a creditor 
from requiring the signature of a guarantor's spouse just as they bar 
the creditor from requiring the signature of an applicant's spouse. For 
example, although a creditor may require all officers of a closely held 
corporation to personally guarantee a corporate loan, the creditor may 
not automatically require that spouses of married officers also sign the 
guarantee. If an evaluation of the financial circumstances of an officer 
indicates that an additional signature is necessary, however, the 
creditor may require the signature of another person in appropriate 
circumstances in accordance with Sec. 202.7(d)(2).
    7(e) Insurance.
    1. Differences in terms. Differences in the availability, rates, and 
other terms on which credit-related casualty insurance or credit life, 
health, accident, or disability insurance is offered or provided to an 
applicant does not violate Regulation B.
    2. Insurance information. A creditor may obtain information about an 
applicant's age, sex, or marital status for insurance purposes. The 
information may only be used for determining eligibility and premium 
rates for insurance, however, and not in making the credit decision.

             Section 202.8--Special Purpose Credit Programs

    8(a) Standards for programs.
    1. Determining qualified programs. The Board does not determine 
whether individual programs qualify for special purpose credit status, 
or whether a particular program benefits an ``economically disadvantaged 
class of persons.'' The agency or creditor administering or offering the 
loan program must make these decisions regarding the status of its 
program.

[[Page 60]]

    2. Compliance with a program authorized by federal or state law. A 
creditor does not violate Regulation B when it complies in good faith 
with a regulation promulgated by a government agency implementing a 
special purpose credit program under Sec. 202.8(a)(1). It is the 
agency's responsibility to promulgate a regulation that is consistent 
with federal and state law.
    3. Expressly authorized. Credit programs authorized by federal or 
state law include programs offered pursuant to federal, state, or local 
statute, regulation or ordinance, or pursuant to judicial or 
administrative order.
    4. Creditor liability. A refusal to grant credit to an applicant is 
not a violation of the Act or regulation if the applicant does not meet 
the eligibility requirements under a special purpose credit program.
    5. Determining need. In designing a special purpose credit program 
under Sec. 202.8(a), a for-profit organization must determine that the 
program will benefit a class of people who would otherwise be denied 
credit or would receive it on less favorable terms. This determination 
can be based on a broad analysis using the organization's own research 
or data from outside sources, including governmental reports and 
studies. For example, a creditor might design new products to reach 
consumers who would not meet, or have not met, its traditional standards 
of creditworthiness due to such factors as credit inexperience or the 
use of credit sources that may not report to consumer reporting 
agencies. Or, a bank could review Home Mortgage Disclosure Act data 
along with demographic data for its assessment area and conclude that 
there is a need for a special purpose credit program for low-income 
minority borrowers.
    6. Elements of the program. The written plan must contain 
information that supports the need for the particular program. The plan 
also must either state a specific period of time for which the program 
will last, or contain a statement regarding when the program will be 
reevaluated to determine if there is a continuing need for it.
    8(b) Rules in other sections.
    1. Applicability of rules. A creditor that rejects an application 
because the applicant does not meet the eligibility requirements (common 
characteristic or financial need, for example) must nevertheless notify 
the applicant of action taken as required by Sec. 202.9.
    8(c) Special rule concerning requests and use of information.
    1. Request of prohibited basis information. This section permits a 
creditor to request and consider certain information that would 
otherwise be prohibited by Sec. Sec. 202.5 and 202.6 to determine an 
applicant's eligibility for a particular program.
    2. Examples. Examples of programs under which the creditor can ask 
for and consider information about a prohibited basis are:
    i. Energy conservation programs to assist the elderly, for which the 
creditor must consider the applicant's age.
    ii. Programs under a Minority Enterprise Small Business Investment 
Corporation, for which a creditor must consider the applicant's minority 
status.
    8(d) Special rule in the case of financial need.
    1. Request of prohibited basis information. This section permits a 
creditor to request and consider certain information that would 
otherwise be prohibited by Sec. Sec. 202.5 and 202.6, and to require 
signatures that would otherwise be prohibited by Sec. 202.7(d).
    2. Examples. Examples of programs in which financial need is a 
criterion are:
    i. Subsidized housing programs for low- to moderate-income 
households, for which a creditor may have to consider the applicant's 
receipt of alimony or child support, the spouse's or parents' income, 
etc.
    ii. Student loan programs based on the family's financial need, for 
which a creditor may have to consider the spouse's or parents' financial 
resources.
    3. Student loans. In a guaranteed student loan program, a creditor 
may obtain the signature of a parent as a guarantor when required by 
federal or state law or agency regulation, or when the student does not 
meet the creditor's standards of creditworthiness. (See Sec. 
202.7(d)(1) and (5).) The creditor may not require an additional 
signature when a student has a work or credit history that satisfies the 
creditor's standards.

                      Section 202.9--Notifications

    1. Use of the term adverse action. The regulation does not require 
that a creditor use the term adverse action in communicating to an 
applicant that a request for an extension of credit has not been 
approved. In notifying an applicant of adverse action as defined by 
Sec. 202.2(c)(1), a creditor may use any words or phrases that describe 
the action taken on the application.
    2. Expressly withdrawn applications. When an applicant expressly 
withdraws a credit application, the creditor is not required to comply 
with the notification requirements under Sec. 202.9. (The creditor must 
comply, however, with the record retention requirements of the 
regulation. See Sec. 202.12(b)(3).)
    3. When notification occurs. Notification occurs when a creditor 
delivers or mails a notice to the applicant's last known address or, in 
the case of an oral notification, when the creditor communicates the 
credit decision to the applicant.
    4. Location of notice. The notifications required under Sec. 202.9 
may appear on either or both sides of a form or letter.
    5. Prequalification requests. Whether a creditor must provide a 
notice of action taken

[[Page 61]]

for a prequalification request depends on the creditor's response to the 
request, as discussed in comment 2(f)-3. For instance, a creditor may 
treat the request as an inquiry if the creditor evaluates specific 
information about the consumer and tells the consumer the loan amount, 
rate, and other terms of credit the consumer could qualify for under 
various loan programs, explaining the process the consumer must follow 
to submit a mortgage application and the information the creditor will 
analyze in reaching a credit decision. On the other hand, a creditor has 
treated a request as an application, and is subject to the adverse 
action notice requirements of Sec. 202.9 if, after evaluating 
information, the creditor decides that it will not approve the request 
and communicates that decision to the consumer. For example, if the 
creditor tells the consumer that it would not approve an application for 
a mortgage because of a bankruptcy in the consumer's record, the 
creditor has denied an application for credit.
    9(a) Notification of action taken, ECOA notice, and statement of 
specific reasons.

                            Paragraph 9(a)(1)

    1. Timing of notice--when an application is complete. Once a 
creditor has obtained all the information it normally considers in 
making a credit decision, the application is complete and the creditor 
has 30 days in which to notify the applicant of the credit decision. 
(See also comment 2(f)-6.)
    2. Notification of approval. Notification of approval may be express 
or by implication. For example, the creditor will satisfy the 
notification requirement when it gives the applicant the credit card, 
money, property, or services requested.
    3. Incomplete application--denial for incompleteness. When an 
application is incomplete regarding information that the applicant can 
provide and the creditor lacks sufficient data for a credit decision, 
the creditor may deny the application giving as the reason for denial 
that the application is incomplete. The creditor has the option, 
alternatively, of providing a notice of incompleteness under Sec. 
202.9(c).
    4. Incomplete application--denial for reasons other than 
incompleteness. When an application is missing information but provides 
sufficient data for a credit decision, the creditor may evaluate the 
application, make its credit decision, and notify the applicant 
accordingly. If credit is denied, the applicant must be given the 
specific reasons for the credit denial (or notice of the right to 
receive the reasons); in this instance missing information or 
``incomplete application'' cannot be given as the reason for the denial.
    5. Length of counteroffer. Section 202.9(a)(1)(iv) does not require 
a creditor to hold a counteroffer open for 90 days or any other 
particular length of time.
    6. Counteroffer combined with adverse action notice. A creditor that 
gives the applicant a combined counteroffer and adverse action notice 
that complies with Sec. 202.9(a)(2) need not send a second adverse 
action notice if the applicant does not accept the counteroffer. A 
sample of a combined notice is contained in form C-4 of Appendix C to 
the regulation.
    7. Denial of a telephone application. When an application is made by 
telephone and adverse action is taken, the creditor must request the 
applicant's name and address in order to provide written notification 
under this section. If the applicant declines to provide that 
information, then the creditor has no further notification 
responsibility.

                            Paragraph 9(a)(3)

    1. Coverage. In determining which rules in this paragraph apply to a 
given business credit application, a creditor may rely on the 
applicant's assertion about the revenue size of the business. 
(Applications to start a business are governed by the rules in Sec. 
202.9(a)(3)(i).) If an applicant applies for credit as a sole 
proprietor, the revenues of the sole proprietorship will determine which 
rules govern the application. However, if an applicant applies for 
business credit as an individual, the rules in Sec. 202.9(a)(3)(i) 
apply unless the application is for trade or similar credit.
    2. Trade credit. The term trade credit generally is limited to a 
financing arrangement that involves a buyer and a seller--such as a 
supplier who finances the sale of equipment, supplies, or inventory; it 
does not apply to an extension of credit by a bank or other financial 
institution for the financing of such items.
    3. Factoring. Factoring refers to a purchase of accounts receivable, 
and thus is not subject to the Act or regulation. If there is a credit 
extension incident to the factoring arrangement, the notification rules 
in Sec. 202.9(a)(3)(ii) apply, as do other relevant sections of the Act 
and regulation.
    4. Manner of compliance. In complying with the notice provisions of 
the Act and regulation, creditors offering business credit may follow 
the rules governing consumer credit. Similarly, creditors may elect to 
treat all business credit the same (irrespective of revenue size) by 
providing notice in accordance with Sec. 202.9(a)(3)(i).
    5. Timing of notification. A creditor subject to Sec. 
202.9(a)(3)(ii)(A) is required to notify a business credit applicant, 
orally or in writing, of action taken on an application within a 
reasonable time of receiving a completed application. Notice provided in 
accordance with the timing requirements of Sec. 202.9(a)(1) is deemed 
reasonable in all instances.
    9(b) Form of ECOA notice and statement of specific reasons.

[[Page 62]]

                            Paragraph 9(b)(1)

    1. Substantially similar notice. The ECOA notice sent with a 
notification of a credit denial or other adverse action will comply with 
the regulation if it is ``substantially similar'' to the notice 
contained in Sec. 202.9(b)(1). For example, a creditor may add a 
reference to the fact that the ECOA permits age to be considered in 
certain credit scoring systems, or add a reference to a similar state 
statute or regulation and to a state enforcement agency.

                            Paragraph 9(b)(2)

    1. Number of specific reasons. A creditor must disclose the 
principal reasons for denying an application or taking other adverse 
action. The regulation does not mandate that a specific number of 
reasons be disclosed, but disclosure of more than four reasons is not 
likely to be helpful to the applicant.
    2. Source of specific reasons. The specific reasons disclosed under 
Sec. Sec. 202.9(a)(2) and (b)(2) must relate to and accurately describe 
the factors actually considered or scored by a creditor.
    3. Description of reasons. A creditor need not describe how or why a 
factor adversely affected an applicant. For example, the notice may say 
``length of residence'' rather than ``too short a period of residence.''
    4. Credit scoring system. If a creditor bases the denial or other 
adverse action on a credit scoring system, the reasons disclosed must 
relate only to those factors actually scored in the system. Moreover, no 
factor that was a principal reason for adverse action may be excluded 
from disclosure. The creditor must disclose the actual reasons for 
denial (for example, ``age of automobile'') even if the relationship of 
that factor to predicting creditworthiness may not be clear to the 
applicant.
    5. Credit scoring--method for selecting reasons. The regulation does 
not require that any one method be used for selecting reasons for a 
credit denial or other adverse action that is based on a credit scoring 
system. Various methods will meet the requirements of the regulation. 
One method is to identify the factors for which the applicant's score 
fell furthest below the average score for each of those factors achieved 
by applicants whose total score was at or slightly above the minimum 
passing score. Another method is to identify the factors for which the 
applicant's score fell furthest below the average score for each of 
those factors achieved by all applicants. These average scores could be 
calculated during the development or use of the system. Any other method 
that produces results substantially similar to either of these methods 
is also acceptable under the regulation.
    6. Judgmental system. If a creditor uses a judgmental system, the 
reasons for the denial or other adverse action must relate to those 
factors in the applicant's record actually reviewed by the person making 
the decision.
    7. Combined credit scoring and judgmental system. If a creditor 
denies an application based on a credit evaluation system that employs 
both credit scoring and judgmental components, the reasons for the 
denial must come from the component of the system that the applicant 
failed. For example, if a creditor initially credit scores an 
application and denies the credit request as a result of that scoring, 
the reasons disclosed to the applicant must relate to the factors scored 
in the system. If the application passes the credit scoring stage but 
the creditor then denies the credit request based on a judgmental 
assessment of the applicant's record, the reasons disclosed must relate 
to the factors reviewed judgmentally, even if the factors were also 
considered in the credit scoring component. If the application is not 
approved or denied as a result of the credit scoring, but falls into a 
gray band, and the creditor performs a judgmental assessment and denies 
the credit after that assessment, the reasons disclosed must come from 
both components of the system. The same result applies where a 
judgmental assessment is the first component of the combined system. As 
provided in comment 9(b)(2)-1, disclosure of more than a combined total 
of four reasons is not likely to be helpful to the applicant.
    8. Automatic denial. Some credit decision methods contain features 
that call for automatic denial because of one or more negative factors 
in the applicant's record (such as the applicant's previous bad credit 
history with that creditor, the applicant's declaration of bankruptcy, 
or the fact that the applicant is a minor). When a creditor denies the 
credit request because of an automatic-denial factor, the creditor must 
disclose that specific factor.
    9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of 
the principal reasons for denying or taking other adverse action on an 
application for an extension of credit. The Fair Credit Reporting Act 
(FCRA) requires a creditor to disclose when it has based its decision in 
whole or in part on information from a source other than the applicant 
or its own files. Disclosing that a credit report was obtained and used 
in the denial of the application, as the FCRA requires, does not satisfy 
the ECOA requirement to disclose specific reasons. For example, if the 
applicant's credit history reveals delinquent credit obligations and the 
application is denied for that reason, to satisfy Sec. 202.9(b)(2) the 
creditor must disclose that the application was denied because of the 
applicant's delinquent credit obligations. To satisfy the FCRA 
requirement, the creditor

[[Page 63]]

must also disclose that a credit report was obtained and used in the 
denial of the application. Sample forms C-1 through C-5 of Appendix C of 
the regulation provide for the two disclosures.
    9(c) Incomplete applications.

                            Paragraph 9(c)(1)

    1. Exception for preapprovals. The requirement to provide a notice 
of incompleteness does not apply to preapprovals that constitute 
applications under Sec. 202.2(f).

                            Paragraph 9(c)(2)

    1. Reapplication. If information requested by a creditor is 
submitted by an applicant after the expiration of the time period 
designated by the creditor, the creditor may require the applicant to 
make a new application.

                            Paragraph 9(c)(3)

    1. Oral inquiries for additional information. If an applicant fails 
to provide the information in response to an oral request, a creditor 
must send a written notice to the applicant within the 30-day period 
specified in Sec. 202.9(c)(1) and (2). If the applicant provides the 
information, the creditor must take action on the application and notify 
the applicant in accordance with Sec. 202.9(a).
    9(g) Applications submitted through a third party.
    1. Third parties. The notification of adverse action may be given by 
one of the creditors to whom an application was submitted, or by a 
noncreditor third party. If one notification is provided on behalf of 
multiple creditors, the notice must contain the name and address of each 
creditor. The notice must either disclose the applicant's right to a 
statement of specific reasons within 30 days, or give the primary 
reasons each creditor relied upon in taking the adverse action--clearly 
indicating which reasons relate to which creditor.
    2. Third party notice--enforcement agency. If a single adverse 
action notice is being provided to an applicant on behalf of several 
creditors and they are under the jurisdiction of different federal 
enforcement agencies, the notice need not name each agency; disclosure 
of any one of them will suffice.
    3. Third-party notice--liability. When a notice is to be provided 
through a third party, a creditor is not liable for an act or omission 
of the third party that constitutes a violation of the regulation if the 
creditor accurately and in a timely manner provided the third party with 
the information necessary for the notification and maintains reasonable 
procedures adapted to prevent such violations.

            Section 202.10--Furnishing of Credit Information

    1. Scope. The requirements of Sec. 202.10 for designating and 
reporting credit information apply only to consumer credit transactions. 
Moreover, they apply only to creditors that opt to furnish credit 
information to credit bureaus or to other creditors; there is no 
requirement that a creditor furnish credit information on its accounts.
    2. Reporting on all accounts. The requirements of Sec. 202.10 apply 
only to accounts held or used by spouses. However, a creditor has the 
option to designate all joint accounts (or all accounts with an 
authorized user) to reflect the participation of both parties, whether 
or not the accounts are held by persons married to each other.
    3. Designating accounts. In designating accounts and reporting 
credit information, a creditor need not distinguish between accounts on 
which the spouse is an authorized user and accounts on which the spouse 
is a contractually liable party.
    4. File and index systems. The regulation does not require the 
creation or maintenance of separate files in the name of each 
participant on a joint or user account, or require any other particular 
system of recordkeeping or indexing. It requires only that a creditor be 
able to report information in the name of each spouse on accounts 
covered by Sec. 202.10. Thus, if a creditor receives a credit inquiry 
about the wife, it should be able to locate her credit file without 
asking the husband's name.
    10(a) Designation of accounts.
    1. New parties. When new parties who are spouses undertake a legal 
obligation on an account, as in the case of a mortgage loan assumption, 
the creditor must change the designation on the account to reflect the 
new parties and must furnish subsequent credit information on the 
account in the new names.
    2. Request to change designation of account. A request to change the 
manner in which information concerning an account is furnished does not 
alter the legal liability of either spouse on the account and does not 
require a creditor to change the name in which the account is 
maintained.

                  Section 202.11--Relation to State Law

    11(a) Inconsistent state laws.
    1. Preemption determination--New York. The Board has determined that 
the following provisions in the state law of New York are preempted by 
the federal law, effective November 11, 1988:
    i. Article 15, section 296a(1)(b)--Unlawful discriminatory practices 
in relation to credit on the basis of race, creed, color, national 
origin, age, sex, marital status, or disability. This provision is 
preempted to the extent that it bars taking a prohibited basis into

[[Page 64]]

account when establishing eligibility for certain special-purpose credit 
programs.
    ii. Article 15, section 296a(1)(c)'Unlawful discriminatory practice 
to make any record or inquiry based on race, creed, color, national 
origin, age, sex, marital status, or disability. This provision is 
preempted to the extent that it bars a creditor from requesting and 
considering information regarding the particular characteristics (for 
example, race, national origin, or sex) required for eligibility for 
special-purpose credit programs.
    2. Preemption determination--Ohio. The Board has determined that the 
following provision in the state law of Ohio is preempted by the federal 
law, effective July 23, 1990:
    i. Section 4112.021(B)(1)--Unlawful discriminatory practices in 
credit transactions. This provision is preempted to the extent that it 
bars asking or favorably considering the age of an elderly applicant; 
prohibits the consideration of age in a credit scoring system; permits 
without limitation the consideration of age in real estate transactions; 
and limits the consideration of age in special-purpose credit programs 
to certain government-sponsored programs identified in the state law.

                    Section 202.12--Record Retention

    12(a) Retention of prohibited information.
    1. Receipt of prohibited information. Unless the creditor 
specifically requested such information, a creditor does not violate 
this section when it receives prohibited information from a consumer 
reporting agency.
    2. Use of retained information. Although a creditor may keep in its 
files prohibited information as provided in Sec. 202.12(a), the 
creditor may use the information in evaluating credit applications only 
if permitted to do so by Sec. 202.6.
    12(b) Preservation of records.
    1. Copies. Copies of the original record include carbon copies, 
photocopies, microfilm or microfiche copies, or copies produced by any 
other accurate retrieval system, such as documents stored and reproduced 
by computer. A creditor that uses a computerized or mechanized system 
need not keep a paper copy of a document (for example, of an adverse 
action notice) if it can regenerate all pertinent information in a 
timely manner for examination or other purposes.
    2. Computerized decisions. A creditor that enters information items 
from a written application into a computerized or mechanized system and 
makes the credit decision mechanically, based only on the items of 
information entered into the system, may comply with Sec. 202.12(b) by 
retaining the information actually entered. It is not required to store 
the complete written application, nor is it required to enter the 
remaining items of information into the system. If the transaction is 
subject to Sec. 202.13, however, the creditor is required to enter and 
retain the data on personal characteristics in order to comply with the 
requirements of that section.

                           Paragraph 12(b)(3)

    1. Withdrawn and brokered applications. In most cases, the 25-month 
retention period for applications runs from the date a notification is 
sent to the applicant granting or denying the credit requested. In 
certain transactions, a creditor is not obligated to provide a notice of 
the action taken. (See, for example, comment 9-2.) In such cases, the 
25-month requirement runs from the date of application, as when:
    i. An application is withdrawn by the applicant.
    ii. An application is submitted to more than one creditor on behalf 
of the applicant, and the application is approved by one of the other 
creditors.
    12(b)(6) Self-tests
    1. The rule requires all written or recorded information about a 
self-test to be retained for 25 months after a self-test has been 
completed. For this purpose, a self-test is completed after the creditor 
has obtained the results and made a determination about what corrective 
action, if any, is appropriate. Creditors are required to retain 
information about the scope of the self-test, the methodology used and 
time period covered by the self-test, the report or results of the self-
test including any analysis or conclusions, and any corrective action 
taken in response to the self-test.
    12(b)(7) Preapplication marketing information.
    1. Prescreened credit solicitations. The rule requires creditors to 
retain copies of prescreened credit solicitations. For purposes of this 
regulation, a prescreened solicitation is an ``offer of credit'' as 
described in 15 U.S.C. 1681a(1) of the Fair Credit Reporting Act. A 
creditor complies with this rule if it retains a copy of each 
solicitation mailing that contains different terms, such as the amount 
of credit offered, annual percentage rate, or annual fee.
    2. List of criteria. A creditor must retain the list of criteria 
used to select potential recipients. This includes the criteria used by 
the creditor both to determine the potential recipients of the 
particular solicitation and to determine who will actually be offered 
credit.
    3. Correspondence. A creditor may retain correspondence relating to 
consumers' complaints about prescreened solicitations in any manner that 
is reasonably accessible and is understandable to examiners. There is no 
requirement to establish a separate database or set of files for such 
correspondence, or to match consumer complaints with specific 
solicitation programs.

[[Page 65]]

           Section 202.13--Information for Monitoring Purposes

    13(a) Information to be requested.
    1. Natural person. Section 202.13 applies only to applications from 
natural persons.
    2. Principal residence. The requirements of Sec. 202.13 apply only 
if an application relates to a dwelling that is or will be occupied by 
the applicant as the principal residence. A credit application related 
to a vacation home or a rental unit is not covered. In the case of a 
two- to four-unit dwelling, the application is covered if the applicant 
intends to occupy one of the units as a principal residence.
    3. Temporary financing. An application for temporary financing to 
construct a dwelling is not subject to Sec. 202.13. But an application 
for both a temporary loan to finance construction of a dwelling and a 
permanent mortgage loan to take effect upon the completion of 
construction is subject to Sec. 202.13.
    4. New principal residence. A person can have only one principal 
residence at a time. However, if a person buys or builds a new dwelling 
that will become that person's principal residence within a year or upon 
completion of construction, the new dwelling is considered the principal 
residence for purposes of Sec. 202.13.
    5. Transactions not covered. The information-collection requirements 
of this section apply to applications for credit primarily for the 
purchase or refinancing of a dwelling that is or will become the 
applicant's principal residence. Therefore, applications for credit 
secured by the applicant's principal residence but made primarily for a 
purpose other than the purchase or refinancing of the principal 
residence (such as loans for home improvement and debt consolidation) 
are not subject to the information-collection requirements. An 
application for an open-end home equity line of credit is not subject to 
this section unless it is readily apparent to the creditor when the 
application is taken that the primary purpose of the line is for the 
purchase or refinancing of a principal dwelling.
    6. Refinancings. A refinancing occurs when an existing obligation is 
satisfied and replaced by a new obligation undertaken by the same 
borrower. A creditor that receives an application to refinance an 
existing extension of credit made by that creditor for the purchase of 
the applicant's dwelling may request the monitoring information again 
but is not required to do so if it was obtained in the earlier 
transaction.
    7. Data collection under Regulation C. See comment 5(a)(2)-2.
    13(b) Obtaining of information.
    1. Forms for collecting data. A creditor may collect the information 
specified in Sec. 202.13(a) either on an application form or on a 
separate form referring to the application. The applicant must be 
offered the option to select more than one racial designation.
    2. Written applications. The regulation requires written 
applications for the types of credit covered by Sec. 202.13. A creditor 
can satisfy this requirement by recording on paper or by means of 
computer the information that the applicant provides orally and that the 
creditor normally considers in a credit decision.
    3. Telephone, mail applications.
    i. A creditor that accepts an application by telephone or mail must 
request the monitoring information.
    ii. A creditor that accepts an application by mail need not make a 
special request for the monitoring information if the applicant has 
failed to provide it on the application form returned to the creditor.
    iii. If it is not evident on the face of an application that it was 
received by mail, telephone, or via an electronic medium, the creditor 
should indicate on the form or other application record how the 
application was received.
    4. Video and other electronic-application processes.
    i. If a creditor takes an application through an electronic medium 
that allows the creditor to see the applicant, the creditor must treat 
the application as taken in person. The creditor must note the 
monitoring information on the basis of visual observation or surname, if 
the applicant chooses not to provide the information.
    ii. If an applicant applies through an electronic medium without 
video capability, the creditor treats the application as if it were 
received by mail.
    5. Applications through loan-shopping services. When a creditor 
receives an application through an unaffiliated loan-shopping service, 
it does not have to request the monitoring information for purposes of 
the ECOA or Regulation B. Creditors subject to the Home Mortgage 
Disclosure Act should be aware, however, that data collection may be 
called for under Regulation C (12 CFR part 203), which generally 
requires creditors to report, among other things, the sex and race of an 
applicant on brokered applications or applications received through a 
correspondent.
    6. Inadvertent notation. If a creditor inadvertently obtains the 
monitoring information in a dwelling-related transaction not covered by 
Sec. 202.13, the creditor may process and retain the application 
without violating the regulation.
    13(c) Disclosure to applicants.
    1. Procedures for providing disclosures. The disclosure to an 
applicant regarding the monitoring information may be provided in 
writing. Appendix B contains a sample disclosure. A creditor may devise 
its own disclosure so long as it is substantially similar. The creditor 
need not orally request the

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monitoring information if it is requested in writing.
    13(d) Substitute monitoring program.
    1. Substitute program. An enforcement agency may adopt, under its 
established rulemaking or enforcement procedures, a program requiring 
creditors under its jurisdiction to collect information in addition to 
information required by this section.

          Section 202.14--Rules on Providing Appraisal Reports

    14(a) Providing appraisals.
    1. Coverage. This section covers applications for credit to be 
secured by a lien on a dwelling, as that term is defined in Sec. 
202.14(c), whether the credit is for a business purpose (for example, a 
loan to start a business) or a consumer purpose (for example, a loan to 
finance a child's education).
    2. Renewals. This section applies when an applicant requests the 
renewal of an existing extension of credit and the creditor obtains a 
new appraisal report. This section does not apply when a creditor uses 
the appraisal report previously obtained to evaluate the renewal 
request.
    14(a)(2)(i) Notice.
    1. Multiple applicants. When an application that is subject to this 
section involves more than one applicant, the notice about the appraisal 
report need only be given to one applicant, but it must be given to the 
primary applicant where one is readily apparent.
    14(a)(2)(ii) Delivery.
    1. Reimbursement. Creditors may charge for photocopy and postage 
costs incurred in providing a copy of the appraisal report, unless 
prohibited by state or other law. If the consumer has already paid for 
the report--for example, as part of an application fee--the creditor may 
not require additional fees for the appraisal (other than photocopy and 
postage costs).
    14(c) Definitions.
    1. Appraisal reports. Examples of appraisal reports are:
    i. A report prepared by an appraiser (whether or not licensed or 
certified), including written comments and other documents submitted to 
the creditor in support of the appraiser's estimate or opinion of the 
property's value.
    ii. A document prepared by the creditor's staff that assigns value 
to the property, if a third-party appraisal report has not been used.
    iii. An internal review document reflecting that the creditor's 
valuation is different from a valuation in a third party's appraisal 
report (or different from valuations that are publicly available or 
valuations such as manufacturers' invoices for mobile homes).
    2. Other reports. The term ``appraisal report'' does not cover all 
documents relating to the value of the applicant's property. Examples of 
reports not covered are:
    i. Internal documents, if a third-party appraisal report was used to 
establish the value of the property.
    ii. Governmental agency statements of appraised value.
    iii. Valuations lists that are publicly available (such as published 
sales prices or mortgage amounts, tax assessments, and retail price 
ranges) and valuations such as manufacturers' invoices for mobile homes.

     Section 202.15--Incentives for Self-Testing and Self-Correction

    15(a) General rules.
    15(a)(1) Voluntary self-testing and correction.
    1. Activities required by any governmental authority are not 
voluntary self-tests. A governmental authority includes both 
administrative and judicial authorities for federal, state, and local 
governments.
    15(a)(2) Corrective action required.
    1. To qualify for the privilege, appropriate corrective action is 
required when the results of a self-test show that it is more likely 
than not that there has been a violation of the ECOA or this regulation. 
A self-test is also privileged when it identifies no violations.
    2. In some cases, the issue of whether certain information is 
privileged may arise before the self-test is complete or corrective 
actions are fully under way. This would not necessarily prevent a 
creditor from asserting the privilege. In situations where the self-test 
is not complete, for the privilege to apply the lender must satisfy the 
regulation's requirements within a reasonable period of time. To assert 
the privilege where the self-test shows a likely violation, the rule 
requires, at a minimum, that the creditor establish a plan for 
corrective action and a method to demonstrate progress in implementing 
the plan. Creditors must take appropriate corrective action on a timely 
basis after the results of the self-test are known.
    3. A creditor's determination about the type of corrective action 
needed, or a finding that no corrective action is required, is not 
conclusive in determining whether the requirements of this paragraph 
have been satisfied. If a creditor's claim of privilege is challenged, 
an assessment of the need for corrective action or the type of 
corrective action that is appropriate must be based on a review of the 
self-testing results, which may require an in camera inspection of the 
privileged documents.
    15(a)(3) Other privileges.
    1. A creditor may assert the privilege established under this 
section in addition to asserting any other privilege that may apply, 
such as the attorney-client privilege or the work-product privilege. 
Self-testing data may be privileged under this section whether or not 
the creditor's assertion of another privilege is upheld.
    15(b) Self-test defined.

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    15(b)(1) Definition.

                          Paragraph 15(b)(1)(i)

    1. To qualify for the privilege, a self-test must be sufficient to 
constitute a determination of the extent or effectiveness of the 
creditor's compliance with the Act and Regulation B. Accordingly, a 
self-test is only privileged if it was designed and used for that 
purpose. A self-test that is designed or used to determine compliance 
with other laws or regulations or for other purposes is not privileged 
under this rule. For example, a self-test designed to evaluate employee 
efficiency or customers' satisfaction with the level of service provided 
by the creditor is not privileged even if evidence of discrimination is 
uncovered incidentally. If a self-test is designed for multiple 
purposes, only the portion designed to determine compliance with the 
ECOA is eligible for the privilege.

                         Paragraph 15(b)(1)(ii)

    1. The principal attribute of self-testing is that it constitutes a 
voluntary undertaking by the creditor to produce new data or factual 
information that otherwise would not be available and could not be 
derived from loan or application files or other records related to 
credit transactions. Self-testing includes, but is not limited to, the 
practice of using fictitious applicants for credit (testers), either 
with or without the use of matched pairs. A creditor may elect to test a 
defined segment of its business, for example, loan applications 
processed by a specific branch or loan officer, or applications made for 
a particular type of credit or loan program. A creditor also may use 
other methods of generating information that is not available in loan 
and application files, such as surveying mortgage loan applicants. To 
the extent permitted by law, creditors might also develop new methods 
that go beyond traditional pre-application testing, such as hiring 
testers to submit fictitious loan applications for processing.
    2. The privilege does not protect a creditor's analysis performed as 
part of processing or underwriting a credit application. A creditor's 
evaluation or analysis of its loan files, Home Mortgage Disclosure Act 
data, or similar types of records (such as broker or loan officer 
compensation records) does not produce new information about a 
creditor's compliance and is not a self-test for purposes of this 
section. Similarly, a statistical analysis of data derived from existing 
loan files is not privileged.
    15(b)(3) Types of information not privileged.

                          Paragraph 15(b)(3)(i)

    1. The information listed in this paragraph is not privileged and 
may be used to determine whether the prerequisites for the privilege 
have been satisfied. Accordingly, a creditor might be asked to identify 
the self-testing method, for example, whether preapplication testers 
were used or data were compiled by surveying loan applicants. 
Information about the scope of the self-test (such as the types of 
credit transactions examined, or the geographic area covered by the 
test) also is not privileged.

                         Paragraph 15(b)(3)(ii)

    1. Property appraisal reports, minutes of loan committee meetings or 
other documents reflecting the basis for a decision to approve or deny 
an application, loan policies or procedures, underwriting standards, and 
broker compensation records are examples of the types of records that 
are not privileged. If a creditor arranges for testers to submit loan 
applications for processing, the records are not related to actual 
credit transactions for purposes of this paragraph and may be privileged 
self-testing records.
    15(c) Appropriate corrective action.
    1. The rule only addresses the corrective actions required for a 
creditor to take advantage of the privilege in this section. A creditor 
may be required to take other actions or provide additional relief if a 
formal finding of discrimination is made.
    15(c)(1) General requirement.
    1. Appropriate corrective action is required even though no 
violation has been formally adjudicated or admitted by the creditor. In 
determining whether it is more likely than not that a violation 
occurred, a creditor must treat testers as if they are actual applicants 
for credit. A creditor may not refuse to take appropriate corrective 
action under this section because the self-test used fictitious loan 
applicants. The fact that a tester's agreement with the creditor waives 
the tester's legal right to assert a violation does not eliminate the 
requirement for the creditor to take corrective action, although no 
remedial relief for the tester is required under paragraph 15(c)(3).
    15(c)(2) Determining the scope of appropriate corrective action.
    1. Whether a creditor has taken or is taking corrective action that 
is appropriate will be determined on a case-by-case basis. Generally, 
the scope of the corrective action that is needed to preserve the 
privilege is governed by the scope of the self-test. For example, a 
creditor that self-tests mortgage loans and discovers evidence of 
discrimination may focus its corrective actions on mortgage loans, and 
is not required to expand its testing to other types of loans.
    2. In identifying the policies or practices that are a likely cause 
of the violation, a creditor might identify inadequate or improper 
lending policies, failure to implement established policies, employee 
conduct, or other causes. The extent and scope of a likely violation may 
be assessed by determining

[[Page 68]]

which areas of operations are likely to be affected by those policies 
and practices, for example, by determining the types of loans and stages 
of the application process involved and the branches or offices where 
the violations may have occurred.
    3. Depending on the method and scope of the self-test and the 
results of the test, appropriate corrective action may include one or 
more of the following:
    i. If the self-test identifies individuals whose applications were 
inappropriately processed, offering to extend credit if the application 
was improperly denied and compensating such persons for out-of-pocket 
costs and other compensatory damages;
    ii. Correcting institutional policies or procedures that may have 
contributed to the likely violation, and adopting new policies as 
appropriate;
    iii. Identifying and then training and/or disciplining the employees 
involved;
    iv. Developing outreach programs, marketing strategies, or loan 
products to serve more effectively segments of the lender's markets that 
may have been affected by the likely discrimination; and
    v. Improving audit and oversight systems to avoid a recurrence of 
the likely violations.
    15(c)(3) Types of relief.

                         Paragraph 15(c)(3)(ii)

    1. The use of pre-application testers to identify policies and 
practices that illegally discriminate does not require creditors to 
review existing loan files for the purpose of identifying and 
compensating applicants who might have been adversely affected.
    2. If a self-test identifies a specific applicant who was 
discriminated against on a prohibited basis, to qualify for the 
privilege in this section the creditor must provide appropriate remedial 
relief to that applicant; the creditor is not required to identify other 
applicants who might also have been adversely affected.

                         Paragraph 15(c)(3)(iii)

    1. A creditor is not required to provide remedial relief to an 
applicant that would not be available by law. An applicant might also be 
ineligible for certain types of relief due to changed circumstances. For 
example, a creditor is not required to offer credit to a denied 
applicant if the applicant no longer qualifies for the credit due to a 
change in financial circumstances, although some other type of relief 
might be appropriate.
    15(d)(1) Scope of privilege.
    1. The privilege applies with respect to any examination, 
investigation or proceeding by federal, state, or local government 
agencies relating to compliance with the Act or this regulation. 
Accordingly, in a case brought under the ECOA, the privilege established 
under this section preempts any inconsistent laws or court rules to the 
extent they might require disclosure of privileged self-testing data. 
The privilege does not apply in other cases (such as in litigation filed 
solely under a state's fair lending statute). In such cases, if a court 
orders a creditor to disclose self-test results, the disclosure is not a 
voluntary disclosure or waiver of the privilege for purposes of 
paragraph 15(d)(2); a creditor may protect the information by seeking a 
protective order to limit availability and use of the self-testing data 
and prevent dissemination beyond what is necessary in that case. 
Paragraph 15(d)(1) precludes a party who has obtained privileged 
information from using it in a case brought under the ECOA, provided the 
creditor has not lost the privilege through voluntary disclosure under 
paragraph 15(d)(2).
    15(d)(2) Loss of privilege.

                          Paragraph 15(d)(2)(i)

    1. A creditor's corrective action, by itself, is not considered a 
voluntary disclosure of the self-test report or results. For example, a 
creditor does not disclose the results of a self-test merely by offering 
to extend credit to a denied applicant or by inviting the applicant to 
reapply for credit. Voluntary disclosure could occur under this 
paragraph, however, if the creditor disclosed the self-test results in 
connection with a new offer of credit.
    2. The disclosure of self-testing results to an independent 
contractor acting as an auditor or consultant for the creditor on 
compliance matters does not result in loss of the privilege.

                         Paragraph 15(d)(2)(ii)

    1. The privilege is lost if the creditor discloses privileged 
information, such as the results of the self-test. The privilege is not 
lost if the creditor merely reveals or refers to the existence of the 
self-test.

                         Paragraph 15(d)(2)(iii)

    1. A creditor's claim of privilege may be challenged in a court or 
administrative law proceeding with appropriate jurisdiction. In 
resolving the issue, the presiding officer may require the creditor to 
produce privileged information about the self-test.

Paragraph 15(d)(3) Limited use of privileged information

    1. A creditor may be required to produce privileged documents for 
the purpose of determining a penalty or remedy after a violation of the 
ECOA or Regulation B has been formally adjudicated or admitted. A 
creditor's compliance with such a requirement does not evidence the 
creditor's intent to forfeit the privilege.

[[Page 69]]

       Section 202.16--Requirements for Electronic Communication.

    16(b) General Rule.
    1. Relationship to the E-Sign Act. The E-Sign Act authorizes the use 
of electronic disclosures. It does not affect any requirement imposed 
under this part other than a provision that requires disclosures to be 
in paper form, and it does not affect the content or timing of 
disclosures. Electronic disclosures are subject to the regulation's 
format, timing, and retainability rules and the clear and conspicuous 
standard. For example, to satisfy the clear and conspicuous standard for 
disclosures, electronic disclosures must use visual text. The clear and 
conspicuous standard and retainability requirements apply to all 
disclosures provided electronically--those expressly required by the Act 
and regulation to be in writing, and those provided in writing where the 
creditor has the option to give the disclosure orally or in writing.
    2. Clear and conspicuous standard. A creditor must provide 
electronic disclosures using a clear and conspicuous format. Also, in 
accordance with the E-Sign Act:
    i. The creditor must disclose the requirements for accessing and 
retaining disclosures in that format;
    ii. The applicant must demonstrate the ability to access the 
information electronically and affirmatively consent to electronic 
delivery; and
    iii. The creditor must provide the disclosures in accordance with 
the specified requirements.
    3. Timing and effective delivery. i. When an applicant applies for 
credit on-line. When a creditor permits an applicant to apply for credit 
on-line, the applicant must be required to access the disclosures 
required at application before submitting the application. A link to the 
disclosures satisfies the timing rule if the applicant cannot bypass the 
disclosures before submitting the application. Or the disclosures must 
automatically appear on the screen, even if multiple screens are 
required to view all of the information. The creditor is not required to 
confirm that the applicant has read the disclosures.
    ii. Appraisals and adverse action. Disclosures provided by e-mail 
are timely based on when the disclosures are sent. Disclosures posted at 
an Internet Web site, such as adverse action notices or copies of 
appraisals, are timely when the creditor has both made the disclosures 
available and sent a notice alerting the applicant that the disclosures 
have been posted. For example, under Sec. 202.9, a creditor must 
provide a notice of action taken within 30 days of receiving a completed 
application. For an adverse action notice posted on the Internet, a 
creditor must post the notice and notify the applicant of its 
availability within 30 days of receiving the applicant's completed 
application.
    4. Retainability of disclosures. Creditors satisfy the requirement 
that disclosures be in a form that the applicant may keep if electronic 
disclosures are delivered in a format that is capable of being retained 
(such as by printing or storing electronically). The format must also be 
consistent with the information required to be provided under section 
101(c)(1)(C)(i) of the E-Sign Act (15 U.S.C. 7001(c)(1)(C)(i)) about the 
hardware and software requirements for accessing and retaining 
electronic disclosures.
    5. Disclosures provided on creditor's equipment. A creditor that 
controls the equipment providing electronic disclosures to applicants 
(for example, a computer terminal in a creditor's lobby or an automated 
loan machine at a public kiosk) must ensure that the equipment satisfies 
the regulation's requirements to provide timely disclosures in a clear 
and conspicuous format and in a form that the applicant may keep. For 
example, if disclosures are required at the time of an on-line 
application, the disclosures must be sent to the applicant's e-mail 
address or must be made available at another location such as the 
creditor's Internet Web site, unless the creditor provides a printer 
that automatically prints the disclosures.
    16(d) Address or Location to Receive Electronic Communication.

                           Paragraph 16(d)(1)

    1. Electronic address. An applicant's electronic address is an e-
mail address that is not limited to receiving communication transmitted 
solely by the creditor.

                           Paragraph 16(d)(2)

    1. Identifying account involved. A creditor may identify a specific 
account in a variety of ways and is not required to identify an account 
by reference to the account number. For example, where the applicant has 
only one credit card account, and no confusion would result, the 
creditor may refer to ``your credit card account.'' If the applicant has 
two credit card accounts, the creditor may, for example, differentiate 
accounts based on the card program or by using a truncated account 
number.
    2. 90-day rule. The actual disclosures provided to an applicant must 
be available for at least 90 days, but the creditor has discretion to 
determine whether they should be available at the same location for the 
entire period.
    16(e) Redelivery.
    1. E-mail returned as undeliverable. If an e-mail to the applicant 
(containing an alert notice or other disclosure) is returned as 
undeliverable, the redelivery requirement is satisfied if, for example, 
the creditor sends the disclosure to a different e-mail address

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or postal address that the creditor has on file for the applicant. 
Sending the disclosures a second time to the same electronic address is 
not sufficient if the creditor has a different address for the applicant 
on file.
    16(f) Electronic Signatures.
    1. Relationship to the E-Sign Act. The E-Sign Act provides that 
electronic signatures have the same validity as handwritten signatures. 
Section 106 of the E-Sign Act (15 U.S.C. 7006) defines an electronic 
signature. To comply with the E-Sign Act, an electronic signature must 
be executed or adopted by an applicant with the intent to sign the 
record. Accordingly, regardless of the technology used to meet this 
requirement, the process must evidence the applicant's identity.

         Section 202.17--Enforcement, Penalties, and Liabilities

    17(c) Failure of compliance.
    1. Inadvertent errors. Inadvertent errors include, but are not 
limited to, clerical mistake, calculation error, computer malfunction, 
and printing error. An error of legal judgment is not an inadvertent 
error under the regulation.
    2. Correction of error. For inadvertent errors that occur under 
Sec. Sec. 202.12 and 202.13, this section requires that they be 
corrected prospectively.

                   Appendix B--Model Application Forms

    1. Freddie Mac/Fannie Mae form--residential loan application. The 
uniform residential loan application form (Freddie Mac 65/Fannie Mae 
1003), including supplemental form (Freddie Mac 65A/Fannie Mae 1003A), 
prepared by the Federal Home Loan Mortgage Corporation and the Federal 
National Mortgage Association and dated October 1992 may be used by 
creditors without violating this regulation. Creditors that are governed 
by the monitoring requirements of this regulation (which limits 
collection to applications primarily for the purchase or refinancing of 
the applicant's principal residence) should delete, strike, or modify 
the data-collection section on the form when using it for transactions 
not covered by Sec. 202.13(a) to ensure that they do not collect the 
information. Creditors that are subject to more extensive collection 
requirements by a substitute monitoring program under Sec. 202.13(d) or 
by the Home Mortgage Disclosure Act (HMDA) may use the form as issued, 
in compliance with the substitute program or HMDA.
    2. FHLMC/FNMA form--home improvement loan application. The home-
improvement and energy loan application form (FHLMC 703/FNMA 1012), 
prepared by the Federal Home Loan Mortgage Corporation and the Federal 
National Mortgage Association and dated October 1986, complies with the 
requirements of the regulation for some creditors but not others because 
of the form's section ``Information for Government Monitoring 
Purposes.'' Creditors that are governed by Sec. 202.13(a) of the 
regulation (which limits collection to applications primarily for the 
purchase or refinancing of the applicant's principal residence) should 
delete, strike, or modify the data-collection section on the form when 
using it for transactions not covered by Sec. 202.13(a) to ensure that 
they do not collect the information. Creditors that are subject to more 
extensive collection requirements by a substitute monitoring program 
under Sec. 202.13(d) may use the form as issued, in compliance with 
that substitute program.

                  Appendix C--Sample Notification Forms

    1. Form C-9. Creditors may design their own form, add to, or modify 
the model form to reflect their individual policies and procedures. For 
example, a creditor may want to add:
    i. A telephone number that applicants may call to leave their name 
and the address to which an appraisal report should be sent.
    ii. A notice of the cost the applicant will be required to pay the 
creditor for the appraisal or a copy of the report.



PART 203_HOME MORTGAGE DISCLOSURE (REGULATION C)--Table of Contents




Sec.
203.1 Authority, purpose, and scope.
203.2 Definitions.
203.3 Exempt institutions.
203.4 Compilation of loan data.
203.5 Disclosure and reporting.
203.6 Enforcement.

Appendix A to Part 203--Form and Instructions for Completion of HMDA 
          Loan/Application Register
Appendix B to Part 203--Form and Instructions for Data Collection on 
          Ethnicity, Race, and Sex
Supplement I to Part 203--Staff Commentary

    Authority: 12 U.S.C. 2801-2810.

    Source:  67 FR 7236, Feb. 15, 2002, unless otherwise noted.



Sec. 203.1  Authority, purpose, and scope.

    (a) Authority. This regulation is issued by the Board of Governors 
of the Federal Reserve System (``Board'') pursuant to the Home Mortgage 
Disclosure Act (``HMDA'') (12 U.S.C. 2801 et seq.), as amended. The 
information-collection requirements have been approved by the U.S. 
Office of Management and Budget (``OMB'') under 44 U.S.C. 3501 et seq. 
and have been assigned OMB numbers for institutions

[[Page 71]]

reporting data to the Office of the Comptroller of the Currency (1557-
0159), the Federal Deposit Insurance Corporation (3064-0046), the Office 
of Thrift Supervision (1550-0021), the Federal Reserve System (7100-
0247), and the Department of Housing and Urban Development (``HUD'') 
(2502-0529). A number for the National Credit Union Administration is 
pending.
    (b) Purpose. (1) This regulation implements the Home Mortgage 
Disclosure Act, which is intended to provide the public with loan data 
that can be used:
    (i) To help determine whether financial institutions are serving the 
housing needs of their communities;
    (ii) To assist public officials in distributing public-sector 
investment so as to attract private investment to areas where it is 
needed; and
    (iii) To assist in identifying possible discriminatory lending 
patterns and enforcing antidiscrimination statutes.
    (2) Neither the act nor this regulation is intended to encourage 
unsound lending practices or the allocation of credit.
    (c) Scope. This regulation applies to certain financial 
institutions, including banks, savings associations, credit unions, and 
other mortgage lending institutions, as defined in Sec. 203.2(e). The 
regulation requires an institution to report data to its supervisory 
agency about home purchase loans, home improvement loans, and 
refinancings that it originates or purchases, or for which it receives 
applications; and to disclose certain data to the public.



Sec. 203.2  Definitions.

    In this regulation:
    (a) Act means the Home Mortgage Disclosure Act (``HMDA'') (12 U.S.C. 
2801 et seq.), as amended.
    (b) Application. (1) In general. Application means an oral or 
written request for a home purchase loan, a home improvement loan, or a 
refinancing that is made in accordance with procedures used by a 
financial institution for the type of credit requested.
    (2) Preapproval programs. A request for preapproval for a home 
purchase loan is an application under paragraph (b)(1) of this section 
if the request is reviewed under a program in which the financial 
institution, after a comprehensive analysis of the creditworthiness of 
the applicant, issues a written commitment to the applicant valid for a 
designated period of time to extend a home purchase loan up to a 
specified amount. The written commitment may not be subject to 
conditions other than:
    (i) Conditions that require the identification of a suitable 
property;
    (ii) Conditions that require that no material change has occurred in 
the applicant's financial condition or creditworthiness prior to 
closing; and
    (iii) Limited conditions that are not related to the financial 
condition or creditworthiness of the applicant that the lender 
ordinarily attaches to a traditional home mortgage application (such as 
certification of a clear termite inspection).
    (c) Branch office means:
    (1) Any office of a bank, savings association, or credit union that 
is approved as a branch by a federal or state supervisory agency, but 
excludes free-standing electronic terminals such as automated teller 
machines; and
    (2) Any office of a for-profit mortgage-lending institution (other 
than a bank, savings association, or credit union) that takes 
applications from the public for home purchase loans, home improvement 
loans, or refinancings. A for-profit mortgage-lending institution is 
also deemed to have a branch office in an MSA or in a Metropolitan 
Division, if, in the preceding calendar year, it received applications 
for, originated, or purchased five or more home purchase loans, home 
improvement loans, or refinancings related to property located in that 
MSA or Metropolitan Division, respectively.
    (d) Dwelling means a residential structure (whether or not attached 
to real property) located in a state of the United States of America, 
the District of Columbia, or the Commonwealth of Puerto Rico. The term 
includes an individual condominium unit, cooperative unit, or mobile or 
manufactured home.
    (e) Financial institution means:
    (1) A bank, savings association, or credit union that:
    (i) On the preceding December 31 had assets in excess of the asset 
threshold established and published annually by

[[Page 72]]

the Board for coverage by the act, based on the year-to-year change in 
the average of the Consumer Price Index for Urban Wage Earners and 
Clerical Workers, not seasonally adjusted, for each twelve month period 
ending in November, with rounding to the nearest million;
    (ii) On the preceding December 31, had a home or branch office in an 
MSA;
    (iii) In the preceding calendar year, originated at least one home 
purchase loan (excluding temporary financing such as a construction 
loan) or refinancing of a home purchase loan, secured by a first lien on 
a one-to four-family dwelling; and
    (iv) Meets one or more of the following three criteria:
    (A) The institution is federally insured or regulated;
    (B) The mortgage loan referred to in paragraph (e)(1)(iii) of this 
section was insured, guaranteed, or supplemented by a federal agency; or
    (C) The mortgage loan referred to in paragraph (e)(1)(iii) of this 
section was intended by the institution for sale to Fannie Mae or 
Freddie Mac; and
    (2) A for-profit mortgage-lending institution (other than a bank, 
savings association, or credit union) that:
    (i) In the preceding calendar year, either:
    (A) Originated home purchase loans, including refinancings of home 
purchase loans, that equaled at least 10 percent of its loan-origination 
volume, measured in dollars; or
    (B) Originated home purchase loans, including refinancings of home 
purchase loans, that equaled at least $25 million; and
    (ii) On the preceding December 31, had a home or branch office in an 
MSA; and
    (iii) Either:
    (A) On the preceding December 31, had total assets of more than $10 
million, counting the assets of any parent corporation; or
    (B) In the preceding calendar year, originated at least 100 home 
purchase loans, including refinancings of home purchase loans.
    (f) Home-equity line of credit means an open-end credit plan secured 
by a dwelling as defined in Regulation Z (Truth in Lending), 12 CFR part 
226.
    (g) Home improvement loan means:
    (1) A loan secured by a lien on a dwelling that is for the purpose, 
in whole or in part, of repairing, rehabilitating, remodeling, or 
improving a dwelling or the real property on which it is located; and
    (2) A non-dwelling secured loan that is for the purpose, in whole or 
in part, of repairing, rehabilitating, remodeling, or improving a 
dwelling or the real property on which it is located, and that is 
classified by the financial institution as a home improvement loan.
    (h) Home purchase loan means a loan secured by and made for the 
purpose of purchasing a dwelling.
    (i) Manufactured home means any residential structure as defined 
under regulations of the Department of Housing and Urban Development 
establishing manufactured home construction and safety standards (24 CFR 
3280.2).
    (j)(1) Metropolitan Statistical Area or MSA means a metropolitan 
statistical area as defined by the U.S. Office of Management and Budget.
    (2) Metropolitan Division or MD means a metropolitan division of an 
MSA, as defined by the U.S. Office of Management and Budget.
    (k) Refinancing means a new obligation that satisfies and replaces 
an existing obligation by the same borrower, in which:
    (1) For coverage purposes, the existing obligation is a home 
purchase loan (as determined by the lender, for example, by reference to 
available documents; or as stated by the applicant), and both the 
existing obligation and the new obligation are secured by first liens on 
dwellings; and
    (2) For reporting purposes, both the existing obligation and the new 
obligation are secured by liens on dwellings.

[67 FR 7236, Feb. 15, 2002, as amended at 68 FR 74830, Dec. 29, 2003]



Sec. 203.3  Exempt institutions.

    (a) Exemption based on state law. (1) A state-chartered or state-
licensed financial institution is exempt from the requirements of this 
regulation if the Board determines that the institution is subject to a 
state disclosure law that contains requirements substantially

[[Page 73]]

similar to those imposed by this regulation and that contains adequate 
provisions for enforcement.
    (2) Any state, state-chartered or state-licensed financial 
institution, or association of such institutions, may apply to the Board 
for an exemption under paragraph (a) of this section.
    (3) An institution that is exempt under paragraph (a) of this 
section shall use the disclosure form required by its state law and 
shall submit the data required by that law to its state supervisory 
agency for purposes of aggregation.
    (b) Loss of exemption. An institution losing a state-law exemption 
under paragraph (a) of this section shall comply with this regulation 
beginning with the calendar year following the year for which it last 
reported loan data under the state disclosure law.



Sec. 203.4  Compilation of loan data.

    (a) Data format and itemization. A financial institution shall 
collect data regarding applications for, and originations and purchases 
of, home purchase loans, home improvement loans, and refinancings for 
each calendar year. An institution is required to collect data regarding 
requests under a preapproval program (as defined in Sec. 203.2(b)) only 
if the preapproval request is denied or results in the origination of a 
home purchase loan. All reportable transactions shall be recorded, 
within thirty calendar days after the end of the calendar quarter in 
which final action is taken (such as origination or purchase of a loan, 
or denial or withdrawal of an application), on a register in the format 
prescribed in Appendix A of this part. The data recorded shall include 
the following items:
    (1) An identifying number for the loan or loan application, and the 
date the application was received.
    (2) The type of loan or application.
    (3) The purpose of the loan or application.
    (4) Whether the application is a request for preapproval and whether 
it resulted in a denial or in an origination.
    (5) The property type to which the loan or application relates.
    (6) The owner-occupancy status of the property to which the loan or 
application relates.
    (7) The amount of the loan or the amount applied for.
    (8) The type of action taken, and the date.
    (9) The location of the property to which the loan or application 
relates, by MSA or by Metropolitan Division, by state, by county, and by 
census tract, if the institution has a home or branch office in that MSA 
or Metropolitan Division.
    (10) The ethnicity, race, and sex of the applicant or borrower, and 
the gross annual income relied on in processing the application.
    (11) The type of entity purchasing a loan that the institution 
originates or purchases and then sells within the same calendar year 
(this information need not be included in quarterly updates).
    (12) For originated loans subject to Regulation Z, 12 CFR part 226, 
the difference between the loan's annual percentage rate (APR) and the 
yield on Treasury securities having comparable periods of maturity, if 
that difference is equal to or greater than 3 percentage points for 
loans secured by a first lien on a dwelling, or equal to or greater than 
5 percentage points for loans secured by a subordinate lien on a 
dwelling. The lender shall use the yield on Treasury securities as of 
the 15th day of the preceding month if the rate is set between the 1st 
and the 14th day of the month and as of the 15th day of the current 
month if the rate is set on or after the 15th day, as prescribed in 
appendix A to this part.
    (13) Whether the loan is subject to the Home Ownership and Equity 
Protection Act of 1994.
    (14) The lien status of the loan or application (first lien, 
subordinate lien, or not secured by a lien on a dwelling).
    (b) Collection of data on ethnicity, race, sex, and income. (1) A 
financial institution shall collect data about the ethnicity, race, and 
sex of the applicant or borrower as prescribed in Appendix B of this 
part.
    (2) Ethnicity, race, sex, and income data may but need not be 
collected for loans purchased by the financial institution.

[[Page 74]]

    (c) Optional data. A financial institution may report:
    (1) The reasons it denied a loan application;
    (2) Requests for preapproval that are approved by the institution 
but not accepted by the applicant; and
    (3) Home-equity lines of credit made in whole or in part for the 
purpose of home improvement or home purchase.
    (d) Excluded data. A financial institution shall not report:
    (1) Loans originated or purchased by the financial institution 
acting in a fiduciary capacity (such as trustee);
    (2) Loans on unimproved land;
    (3) Temporary financing (such as bridge or construction loans);
    (4) The purchase of an interest in a pool of loans (such as 
mortgage-participation certificates, mortgage-backed securities, or real 
estate mortgage investment conduits);
    (5) The purchase solely of the right to service loans; or
    (6) Loans acquired as part of a merger or acquisition, or as part of 
the acquisition of all of the assets and liabilities of a branch office 
as defined in Sec. 203.2(c)(1).
    (e) Data reporting for banks and savings associations that are 
required to report data on small business, small farm, and community 
development lending under CRA. Banks and savings associations that are 
required to report data on small business, small farm, and community 
development lending under regulations that implement the Community 
Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) shall also collect the 
location of property located outside MSAs and Metropolitan Divisions in 
which the institution has a home or branch office, or outside any MSA.

[ 67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43223, June 27, 2002; 
68 FR 74830, Dec. 29, 2003]



Sec. 203.5  Disclosure and reporting.

    (a) Reporting to agency. (1) By March 1 following the calendar year 
for which the loan data are compiled, a financial institution shall send 
its complete loan/application register to the agency office specified in 
Appendix A of this part. The institution shall retain a copy for its 
records for at least three years.
    (2) A subsidiary of a bank or savings association shall complete a 
separate loan/application register. The subsidiary shall submit the 
register, directly or through its parent, to the agency that supervises 
its parent.
    (b) Public disclosure of statement. (1) The Federal Financial 
Institutions Examination Council (``FFIEC'') will prepare a disclosure 
statement from the data each financial institution submits.
    (2) An institution shall make its disclosure statement (prepared by 
the FFIEC) available to the public at its home office no later than 
three business days after receiving it from the FFIEC.
    (3) In addition, an institution shall either:
    (i) Make its disclosure statement available to the public, within 
ten business days of receiving it, in at least one branch office in each 
other MSA and each other Metropolitan Division where the institution has 
offices (the disclosure statement need only contain data relating to the 
MSA or Metropolitan Division where the branch is located); or
    (ii) Post the address for sending written requests in the lobby of 
each branch office in other MSAs and Metropolitan Divisions where the 
institution has offices; and mail or deliver a copy of the disclosure 
statement within fifteen calendar days of receiving a written request 
(the disclosure statement need only contain data relating to the MSA or 
Metropolitan Division for which the request is made). Including the 
address in the general notice required under paragraph (e) of this 
section satisfies this requirement.
    (c) Public disclosure of modified loan/application register. A 
financial institution shall make its loan/application register available 
to the public after removing the following information regarding each 
entry: the application or loan number, the date that the application was 
received, and the date action was taken. An institution shall make its 
modified register available following the calendar year for which the 
data are compiled, by March 31 for a request received on or before March 
1, and within thirty calendar days for a request received after March 1. 
The

[[Page 75]]

modified register need only contain data relating to the MSA or 
Metropolitan Division for which the request is made.
    (d) Availability of data. A financial institution shall make its 
modified register available to the public for a period of three years 
and its disclosure statement available for a period of five years. An 
institution shall make the data available for inspection and copying 
during the hours the office is normally open to the public for business. 
It may impose a reasonable fee for any cost incurred in providing or 
reproducing the data.
    (e) Notice of availability. A financial institution shall post a 
general notice about the availability of its HMDA data in the lobby of 
its home office and of each branch office located in an MSA and 
Metropolitan Division. An institution shall provide promptly upon 
request the location of the institution's offices where the statement is 
available for inspection and copying, or it may include the location in 
the lobby notice.
    (f) Loan aggregation and central data depositories. Using the loan 
data submitted by financial institutions, the FFIEC will produce reports 
for individual institutions and reports of aggregate data for each MSA 
and Metropolitan Divison, showing lending patterns by property location, 
age of housing stock, and income level, sex, ethnicity, and race. These 
reports will be available to the public at central data depositories 
located in each MSA and Metropolitan Division. A listing of central data 
depositories can be obtained from the Federal Financial Institutions 
Examination Council, Washington, DC 20006.

[67 FR 7236, Feb. 15, 2002, as amended at 68 FR 74830, Dec. 29, 2003]



Sec. 203.6  Enforcement.

    (a) Administrative enforcement. A violation of the Act or this 
regulation is subject to administrative sanctions as provided in section 
305 of the Act, including the imposition of civil money penalties, where 
applicable. Compliance is enforced by the agencies listed in section 
305(b) of the Act (12 U.S.C. 2804(b).
    (b) Bona fide errors. (1) An error in compiling or recording loan 
data is not a violation of the act or this regulation if the error was 
unintentional and occurred despite the maintenance of procedures 
reasonably adapted to avoid such errors.
    (2) An incorrect entry for a census tract number is deemed a bona 
fide error, and is not a violation of the act or this regulation, 
provided that the institution maintains procedures reasonably adapted to 
avoid such errors.
    (3) If an institution makes a good-faith effort to record all data 
concerning covered transactions fully and accurately within thirty 
calendar days after the end of each calendar quarter, and some data are 
nevertheless inaccurate or incomplete, the error or omission is not a 
violation of the act or this regulation provided that the institution 
corrects or completes the information prior to submitting the loan/
application register to its regulatory agency.

  Appendix A to Part 203--Form and Instructions for Completion of HMDA 
                        Loan/Application Register

                     Paperwork Reduction Act Notice

    This report is required by law (12 U.S.C. 2801-2810 and 12 CFR 203). 
An agency may not conduct or sponsor, and an organization is not 
required to respond to, a collection of information unless it displays a 
valid Office of Management and Budget (OMB) Control Number. See 12 CFR 
203.1(a) for the valid OMB Control Numbers, applicable to this 
information collection. Send comments regarding this burden estimate or 
any other aspect of this collection of information, including 
suggestions for reducing the burden, to the respective agencies and to 
OMB, Office of Information and Regulatory Affairs, Paperwork Reduction 
Project, Washington, DC 20503. Be sure to reference the applicable 
agency and the OMB Control Number, as found in 12 CFR 203.1(a), when 
submitting comments to OMB.

       I. Instructions for Completion of Loan/Application Regsiter

                   A. Application or Loan Information

                      1. Application or Loan Number

    a. Enter an identifying loan number that can be used later to 
retrieve the loan or application file. It can be any number of your

[[Page 76]]

institution's choosing (not exceeding 25 characters). You may use 
letters, numerals, or a combination of both.

                      2. Date Application Received

    a. Enter the date the loan application was received by your 
institution by month, day, and year. If your institution normally 
records the date shown on the application form you may use that date 
instead. Enter ``NA'' for loans purchased by your institution. For paper 
submissions only, use numerals in the form MM/DD/CCYY (for example, 01/
15/2003). For submissions in electronic form, the proper format is 
CCYYMMDD.

                     3. Type of Loan or Application

    Indicate the type of loan or application by entering the applicable 
code from the following:

Code 1--Conventional (any loan other than FHA, VA, FSA, or RHS loans)
Code 2--FHA-insured (Federal Housing Administration)
Code 3--VA-guaranteed (Veterans Administration)
Code 4--FSA/RHS-guaranteed (Farm Service Agency or Rural Housing 
Service)

                            4. Property Type

    Indicate the property type by entering the applicable code from the 
following:

Code 1--One-to four-family dwelling (other than manufactured housing)
Code 2--Manufactured housing
Code 3--Multifamily dwelling

    a. Use Code 1, not Code 3, for loans on individual condominium or 
cooperative units.
    b. If you cannot determine (despite reasonable efforts to find out) 
whether the loan or application relates to a manufactured home, use Code 
1.

                    5. Purpose of Loan or Application

    Indicate the purpose of the loan or application by entering the 
applicable code from the following:

Code 1--Home purchase
Code 2--Home improvement
Code 3--Refinancing

    a. Do not report a refinancing if, under the loan agreement, you 
were unconditionally obligated to refinance the obligation, or you were 
obligated to refinance the obligation subject to conditions within the 
borrower's control.

                           6. Owner Occupancy

    Indicate whether the property to which the loan or loan application 
relates is to be owner-occupied as a principal residence by entering the 
applicable code from the following:

Code 1--Owner-occupied as a principal dwelling
Code 2--Not owner-occupied as a principal dwelling
Code 3--Not applicable

    a. For purchased loans, use Code 1 unless the loan documents or 
application indicate that the property will not be owner-occupied as a 
principal residence.
    b. Use Code 2 for second homes or vacation homes, as well as for 
rental properties.
    c. Use Code 3 if the property to which the loan relates is a 
multifamily dwelling; is not located in an MSA; or is located in an MSA 
or an MD in which your institution has neither a home nor a branch 
office. Alternatively, at your institution's option, you may report the 
actual occupancy status, using Code 1 or 2 as applicable.

                             7. Loan Amount

    Enter the amount of the loan or application. Do not report loans 
below $500. Show the amount in thousands, rounding to the nearest 
thousand (round $500 up to the next $1,000). For example, a loan for 
$167,300 should be entered as 167 and one for $15,500 as 16.
    a. For a home purchase loan that you originated, enter the principal 
amount of the loan.
    b. For a home purchase loan that you purchased, enter the unpaid 
principal balance of the loan at the time of purchase.
    c. For a home improvement loan, enter the entire amount of the 
loan--including unpaid finance charges if that is how such loans are 
recorded on your books--even if only a part of the proceeds is intended 
for home improvement.
    d. If you opt to report home-equity lines of credit, report only the 
portion of the line intended for home improvement or home purchase.
    e. For refinancings, indicate the total amount of the refinancing, 
including both the amount outstanding on the original loan and any 
amount of ``new money.''
    f. For a loan application that was denied or withdrawn, enter the 
amount applied for.
    8. Request for Preapproval of a Home Purchase Loan
    Indicate whether the application or loan involved a request for 
preapproval of a home purchase loan by entering the applicable code from 
the following:

Code 1--Preapproval requested
Code 2--Preapproval not requested
Code 3--Not applicable

    a. Enter code 2 if your institution has a covered preapproval 
program but the applicant does not request a preapproval.
    b. Enter code 3 if your institution does not have a preapproval 
program as defined in Sec. 203.2(b).

[[Page 77]]

    c. Enter code 3 for applications or loans for home improvement or 
refinancing, and for purchased loans.

                             B. Action Taken

                            1. Type of Action

    Indicate the type of action taken on the application or loan by 
using one of the following codes.

Code 1--Loan originated
Code 2--Application approved but not accepted
Code 3--Application denied
Code 4--Application withdrawn
Code 5--File closed for incompleteness
Code 6--Loan purchased by your institution
Code 7--Preapproval request denied
Code 8--Preapproval request approved but not accepted (optional 
reporting)

    a. Use Code 1 for a loan that is originated, including one resulting 
from a request for preapproval.
    b. For a counteroffer (your offer to the applicant to make the loan 
on different terms or in a different amount from the terms or amount 
applied for), use Code 1 if the applicant accepts. Use Code 3 if the 
applicant turns down the counteroffer or does not respond.
    c. Use Code 2 when the application is approved but the applicant (or 
the loan broker or correspondent) fails to respond to your notification 
of approval or your commitment letter within the specified time. Do not 
use this code for a preapproval request.
    d. Use Code 4 only when the application is expressly withdrawn by 
the applicant before a credit decision is made. Do not use code 4 if a 
request for preapproval is withdrawn; preapproval requests that are 
withdrawn are not reported under HMDA.
    e. Use Code 5 if you sent a written notice of incompleteness under 
Sec. 202.9(c)(2) of Regulation B (Equal Credit Opportunity) and the 
applicant did not respond to your request for additional information 
within the period of time specified in your notice. Do not use this code 
for requests for preapproval that are incomplete; these preapproval 
requests are not reported under HMDA.

                            2. Date of Action

    For paper submissions only, enter the date by month, day, and year, 
using numerals in the form MM/DD/CCYY (for example, 02/22/2003). For 
submissions in electronic form, the proper format is CCYYMMDD.
    a. For loans originated, enter the settlement or closing date.
    b. For loans purchased, enter the date of purchase by your 
institution.
    c. For applications and preapprovals denied, applications and 
preapprovals approved but not accepted by the applicant, and files 
closed for incompleteness, enter the date that the action was taken by 
your institution or the date the notice was sent to the applicant.
    d. For applications withdrawn, enter the date you received the 
applicant's express withdrawal, or enter the date shown on the 
notification from the applicant, in the case of a written withdrawal.
    e. For preapprovals that lead to a loan origination, enter the date 
of the origination.

    C. Property Location. Except as otherwise provided, enter in these 
columns the applicable codes for the MSA, or the MD if the MSA is 
divided into MDs, state, county, and census tract to indicate the 
location of the property to which a loan relates.
    1. MSA or Metropolitan Division. For each loan or loan application, 
enter the MSA, or the MD number if the MSA is divided into MDs. MSA and 
MD boundaries are defined by OMB; use the boundaries that were in effect 
on January 1 of the calendar year for which you are reporting. A listing 
of MSAs and MDs is available from your supervisory agency or the FFIEC.

                           2. State and County

    Use the Federal Information Processing Standard (FIPS) two-digit 
numerical code for the state and the three-digit numerical code for the 
county. These codes are available from your supervisory agency or the 
FFIEC.
    3. Census Tract. Indicate the census tract where the property is 
located. Notwithstanding paragraph 6, if the property is located in a 
county with a population of 30,000 or less in the 2000 Census, enter 
``NA'' (even if the population has increased above 30,000 since 2000), 
or enter the census tract number. County population data can be obtained 
from the U.S. Census Bureau.
    4. Census Tract Number. For the census tract number, consult the 
resources provided by the U.S. Census Bureau or the FFIEC.
    5. Property Located Outside MSAs or Metropolitan Divisions. For 
loans on property located outside the MSAs and MDs in which an 
institution has a home or branch office, or for property located outside 
of any MSA or MD, the institution may choose one of the following two 
options. Under option one, the institution may enter the MSA or MD, 
state and county codes and the census tract number; and if the property 
is not located in any MSA or MD, it may enter ``NA'' in the MSA or MD 
column. (Codes exist for all states and counties and numbers exist for 
all census tracts.) Under this first option, the codes and census tract 
number must accurately identify the property location. Under the second 
option, which is not available if paragraph 6 applies, an institution 
may enter ``NA'' in all four columns, whether or not the codes or 
numbers exist for the property location.

[[Page 78]]

    6. Data Reporting for Banks and Savings Associations Required to 
Report Data on Small Business, Small Farm, and Community Development 
Lending Under the CRA Regulations. If your institution is a bank or 
savings association that is required to report data under the 
regulations that implement the CRA, you must enter the property location 
on your HMDA/LAR even if the property is outside the MSAs or MDs in 
which you have a home or branch office, or is not located in any MSA.

                       7. Requests for Preapproval

    Notwithstanding paragraphs 1 through 6, if the application is a 
request for preapproval that is denied or that is approved but not 
accepted by the applicant, you may enter ``NA'' in all four columns.

       D. Applicant Information--Ethnicity, Race, Sex, and Income

    Appendix B contains instructions for the collection of data on 
ethnicity, race, and sex, and also contains a sample form for data 
collection.

                            1. Applicability

    Report this information for loans that you originate as well as for 
applications that do not result in an origination.
    a. You need not collect or report this information for loans 
purchased. If you choose not to, use the Codes for ``not applicable.''
    b. If the borrower or applicant is not a natural person (a 
corporation or partnership, for example), use the Codes for ``not 
applicable.''
    2. Mail, Internet, or Telephone Applications. All loan applications, 
including applications taken by mail, Internet, or telephone must use a 
collection form similar to that shown in appendix B regarding ethnicity, 
race, and sex. For applications taken by telephone, the information in 
the collection form must be stated orally by the lender, except for 
information that pertains uniquely to applications taken in writing. If 
the applicant does not provide these data in an application taken by 
mail or telephone or on the Internet, enter the code for ``information 
not provided by applicant in mail, Internet, or telephone application'' 
specified in paragraphs I.D.3., 4., and 5. of this appendix. (See 
appendix B for complete information on the collection of these data in 
mail, Internet, or telephone applications.)

                  3. Ethnicity of Borrower or Applicant

    Use the following codes to indicate the ethnicity of the applicant 
or borrower under column ``A'' and of any co-applicant or co-borrower 
under column ``CA.''

Code 1--Hispanic or Latino
Code 2--Not Hispanic or Latino
Code 3--Information not provided by applicant in mail, Internet, or 
telephone application
Code 4--Not applicable
Code 5--No co-applicant

                    4. Race of Borrower or Applicant

    Use the following Codes to indicate the race of the applicant or 
borrower under column ``A'' and of any co-applicant or co-borrower under 
column ``CA.''

Code 1--American Indian or Alaska Native
Code 2--Asian
Code 3--Black or African American
Code 4--Native Hawaiian or Other Pacific Islander
Code 5--White
Code 6--Information not provided by applicant in mail, Internet, or 
telephone application
Code 7--Not applicable
Code 8--No co-applicant

    a. If an applicant select more than one racial designation, enter 
all Codes corresponding to the applicant's selections.
    b. Use code 4 (for ethnicity) and code 7 (for race) for ``not 
applicable'' only when the applicant or co-applicant is not a natural 
person or when applicant or co-applicant information is unavailable 
because the loan has been purchased by your institution.
    c. If there is more than one co-applicant, provide the required 
information only for the first co-applicant listed on the application 
form. If there are no co-applicants or co-borrowers, use Code 5 (for 
ethnicity) and Code 8 (for race) for ``no co-applicant'' in the co-
applicant column.

                     5. Sex of Borrower or Applicant

    Use the following Codes to indicate the sex of the applicant or 
borrower under column ``A'' and of any co-applicant or co-borrower under 
column ``CA.''
Code 1--Male
Code 2--Female
Code 3--Information not provided by applicant in mail, Internet, or 
telephone application
Code 4--Not applicable
Code 5--No co-applicant or co-borrower

    a. Use code 4 for ``not applicable'' only when the applicant or co-
applicant is not a natural person or when applicant or co-applicant 
information is unavailable because the loan has been purchased by your 
institution.
    b. If there is more than one co-applicant, provide the required 
information only for the first co-applicant listed on the application 
form. If there are no co-applicants or co-borrowers, use Code 5 for ``no 
co-applicant'' in the co-applicant column.

[[Page 79]]

                                6. Income

    Enter the gross annual income that your institution relied on in 
making the credit decision.
    a. Round all dollar amounts to the nearest thousand (round $500 up 
to the next $1,000), and show in thousands. For example, report $35,500 
as 36.
    b. For loans on multifamily dwellings, enter ``NA.''
    c. If no income information is asked for or relied on in the credit 
decision, enter ``NA.''
    d. If the applicant or co-applicant is not a natural person or the 
applicant or co-applicant information is unavailable because the loan 
has been purchased by your institution, enter ``NA.''

                          E. Type of Purchaser

    Enter the applicable code to indicate whether a loan that your 
institution originated or purchased was then sold to a secondary market 
entity within the same calendar year:

Code 0--Loan was not originated or was not sold in calendar year covered 
by register
Code 1--Fannie Mae
Code 2--Ginnie Mae
Code 3--Freddie Mac
Code 4--Farmer Mac
Code 5--Private securitization
Code 6--Commercial bank, savings bank or savings association
Code 7--Life insurance company, credit union, mortgage bank, or finance 
company
Code 8--Affiliate institution
Code 9--Other type of purchaser

    a. Use Code 0 for applications that were denied, withdrawn, or 
approved but not accepted by the applicant; and for files closed for 
incompleteness.
    b. Use Code 0 if you originated or purchased a loan and did not sell 
it during that same calendar year. If you sell the loan in a succeeding 
year, you need not report the sale.
    c. Use Code 2 if you conditionally assign a loan to Ginnie Mae in 
connection with a mortgage-backed security transaction.
    d. Use Code 8 for loans sold to an institution affiliated with you, 
such as your subsidiary or a subsidiary of your parent corporation.

                          F. Reasons for Denial

    1. You may report the reason for denial, and you may indicate up to 
three reasons, using the following codes. Leave this column blank if the 
``action taken'' on the application is not a denial. For example, do not 
complete this column if the application was withdrawn or the file was 
closed for incompleteness.

Code 1--Debt-to-income ratio
Code 2--Employment history
Code 3--Credit history
Code 4--Collateral
Code 5--Insufficient cash (downpayment, closing costs)
Code 6--Unverifiable information
Code 7--Credit application incomplete
Code 8--Mortgage insurance denied
Code 9--Other

    2. If your institution uses the model form for adverse action 
contained in the Appendix to Regulation B (Form C-1 in Appendix C, 
Sample Notification Form), use the foregoing codes as follows:
    a. Code 1 for: Income insufficient for amount of credit requested, 
and Excessive obligations in relation to income.
    b. Code 2 for: Temporary or irregular employment, and Length of 
employment.
    c. Code 3 for: Insufficient number of credit references provided; 
Unacceptable type of credit references provided; No credit file; Limited 
credit experience; Poor credit performance with us; Delinquent past or 
present credit obligations with others; Garnishment, attachment, 
foreclosure, repossession, collection action, or judgment; and 
Bankruptcy.
    d. Code 4 for: Value or type of collateral not sufficient.
    e. Code 6 for: Unable to verify credit references; Unable to verify 
employment; Unable to verify income; and Unable to verify residence.
    f. Code 7 for: Credit application incomplete.
    g. Code 9 for: Length of residence; Temporary residence; and Other 
reasons specified on notice.

                         G. Pricing-Related Data

    1. Rate Spread
    a. For a home purchase loan, a refinancing, or a dwelling-secured 
home improvement loan that you originated, report the spread between the 
annual percentage rate (APR) and the applicable Treasury yield if the 
spread is equal to or greater than 3 percentage points for first-lien 
loans or 5 percentage points for subordinate-lien loans. To determine 
whether the rate spread meets this threshold, use the Treasury yield for 
securities of a comparable period of maturity as of the 15th day of a 
given month, depending on when the interest rate was set, and use the 
APR for the loan, as calculated and disclosed to the consumer under 
Sec. Sec. 226.6 or 226.18 of Regulation Z (12 CFR part 226). Use the 
15th day of a given month for any loan on which the interest rate was 
set on or after that 15th day through the 14th day of the next month. 
(For example, if the rate is set on September 17, 2004, use the Treasury 
yield as of September 15, 2004; if the interest rate is set on September 
3, 2004, use the Treasury yield as

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of August 15, 2004). To determine the applicable Treasury security 
yield, the financial institution must use the table published on the 
FFIEC's Web site (http://www.ffiec.gov/hmda) entitled ``Treasury 
Securities of Comparable Maturity under Regulation C.''
    b. If the loan is not subject to Regulation Z, or is a home 
improvement loan that is not dwelling-secured, or is a loan that you 
purchased, enter ``NA.''
    c. Enter ``NA'' in the case of an application that does not result 
in a loan origination.
    d. Enter the rate spread to two decimal places, and use a leading 
zero. For example, enter 03.29. If the difference between the APR and 
the Treasury yield is a figure with more than two decimal places, round 
the figure or truncate the digits beyond two decimal places.
    e. If the difference between the APR and the Treasury yield is less 
than 3 percentage points for a first-lien loan and less than 5 
percentage points for a subordinate-lien loan, enter ``NA.''
    2. Date the interest rate was set. The relevant date to use to 
determine the Treasury yield is the date on which the loan's interest 
rate was set by the financial institution for the final time before 
closing. If an interest rate is set pursuant to a ``lock-in'' agreement 
between the lender and the borrower, then the date on which the 
agreement fixes the interest rate is the date the rate was set. If a 
rate is re-set after a lock-in agreement is executed (for example, 
because the borrower exercises a float-down option or the agreement 
expires), then the relevant date is the date the rate is re-set for the 
final time before closing. If no lock-in agreement is executed, then the 
relevant date is the date on which the institution sets the rate for the 
final time before closing.

                             3. HOEPA Status

    a. For a loan that you originated or purchased that is subject to 
the Home Ownership and Equity Protection Act of 1994 (HOEPA), as 
implemented in Regulation Z (12 CFR 226.32), because the APR or the 
points and fees on the loan exceed the HOEPA triggers, enter Code 1.
    b. Enter code 2 in all other cases. For example, enter code 2 for a 
loan that you originated or purchased that is not subject to the 
requirements of HOEPA for any reason; also enter code 2 in the case of 
an application that does not result in a loan origination.

                             H. Lien Status

    Use the following codes for loans that you originate and for 
applications that do not result in an origination:

Code 1--Secured by a first lien.
Code 2--Secured by a subordinate lien.
Code 3--Not secured by a lien.
Code 4--Not applicable (purchased loan).

    a. Use Codes 1 through 3 for loans that you originate, as well as 
for applications that do not result in an origination (applications that 
are approved but not accepted, denied, withdrawn, or closed for 
incompleteness).
    b. Use Code 4 for loans that you purchase.

                    II. Federal Supervisory Agencies

    A. You are strongly encouraged to submit your loan/application 
register via Internet e-mail. If you elect to use this method of 
transmission and your institution is regulated by the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
the National Credit Union Administration, or the Office of Thrift 
Supervision, then you should submit your institution's files to the 
Internet e-mail address dedicated to that purpose by the Federal Reserve 
Board, which can be found on the Web site of the FFIEC. If your 
institution is regulated by one of the foregoing agencies and you elect 
to submit your data by regular mail, then use the following address: 
HMDA, Federal Reserve Board, Attention: HMDA Processing,(insert name of 
your institution's regulatory agency), 20th & Constitution Ave, NW., MS 
N502, Washington, DC 20551-0001.
    B. If your institution is regulated by the Federal Reserve System, 
you should use the Internet e-mail or regular mail address of your 
district bank indicated on the Web site of the FFIEC. If your 
institution is regulated by the Department of Housing and Urban 
Development, then you should use the Internet e-mail or regular mail 
address indicated on the Web site of the FFIEC.

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[67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43223, June 27, 2002; 68 
FR 74831, Dec. 29, 2003]

  Appendix B to Part 203--Form and Instructions for Data Collection on 
                        Ethnicity, Race, and Sex

    I. Instructions on Collection of Data on Ethnicity, Race, and Sex

    You may list questions regarding the ethnicity, race, and sex of the 
applicant on your loan application form, or on a separate form that 
refers to the application. (See the sample form below for model 
language.)

                             II. Procedures

    A. You must ask the applicant for this information (but you cannot 
require the applicant to provide it) whether the application is taken in 
person, by mail or telephone, or on the Internet. For applications taken 
by telephone, the information in the collection form must be stated 
orally by the lender, except for that information which pertains 
uniquely to applications taken in writing.
    B. Inform the applicant that the federal government requests this 
information in order to monitor compliance with federal statutes that 
prohibit lenders from discriminating against applicants on these bases. 
Inform the applicant that if the information is not provided where the 
application is taken in person, you are required to note the data on the 
basis of visual observation or surname.
    C. You must offer the applicant the option of selecting one or more 
racial designations.
    D. If the applicant chooses not to provide the information for an 
application taken in person, note this fact on the form and then note 
the applicant's ethnicity, race, and sex on the basis of visual 
observation and surname, to the extent possible.
    E. If the applicant declines to answer these questions or fails to 
provide the information on an application taken by mail or telephone or 
on the Internet, the data need not be provided. In such a case, indicate 
that the application was received by mail, telephone, or Internet, if it 
is not otherwise evident on the face of the application.

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[ 67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27, 2002]

               Supplement I to Part 203--Staff Commentary

                              Introduction

    1. Status. The commentary in this supplement is the vehicle by which 
the Division of Consumer and Community Affairs of the Federal Reserve 
Board issues formal staff interpretations of Regulation C (12 CFR part 
203).

              Section 203.1--Authority, Purpose, and Scope

    1(c) Scope. 1. General. The comments in this section address issues 
affecting coverage of institutions and exemptions from coverage.
    2. The broker rule and the meaning of ``broker'' and ``investor.'' 
For the purposes of the guidance given in this commentary, an 
institution that takes and processes a loan application and arranges for 
another institution to acquire the loan at or after closing is acting as 
a ``broker,'' and an institution that acquires a loan from a broker at 
or after closing is acting as an ``investor.'' (The terms used in this 
commentary may have different meanings in certain parts of the mortgage 
lending industry, and other terms may be used in place of these terms, 
for example in the Federal Housing Administration mortgage insurance 
programs.) Depending on the facts, a broker may or may not make a credit 
decision on an application (and thus it may or may not have reporting 
responsibilities). If the broker makes a credit decision, it reports 
that decision; if it does not make a credit decision, it does not 
report. If an investor reviews an application and makes a credit 
decision prior to closing, the investor reports that decision. If the 
investor does not review the application prior to closing, it reports 
only the loans that it purchases; it does not report the loans it does 
not purchase. An institution that makes a credit decision on an 
application prior to closing reports that decision regardless of whose 
name the loan closes in.
    3. Illustrations of the broker rule. Assume that, prior to closing, 
four investors receive the same application from a broker; two deny it, 
one approves it, and one approves it and acquires the loan. In these 
circumstances, the first two report denials, the third reports the 
transaction as approved but not accepted, and the fourth reports an 
origination (whether the loan closes in the name of the broker or the 
investor). Alternatively, assume that the broker denies a loan before 
sending it to an investor; in this situation, the broker reports a 
denial.
    4. Broker's use of investor's underwriting criteria. If a broker 
makes a credit decision based on underwriting criteria set by an 
investor, but without the investor's review prior to closing, the broker 
has made the credit decision. The broker reports as an origination a 
loan that it approves and closes, and reports as a denial an application 
that it turns down (either because the application does not meet the 
investor's underwriting guidelines or for some other reason). The 
investor reports as purchases only those loans it purchases.
    5. Insurance and other criteria. If an institution evaluates an 
application based on the criteria or actions of a third party other than 
an investor (such as a government or private insurer or guarantor), the 
institution must report the action taken on the application (loan 
originated, approved but not accepted, or denied, for example).
    6. Credit decision of agent is decision of principal. If an 
institution approves loans through the actions of an agent, the 
institution must report the action taken on the application (loan 
originated, approved but not accepted, or denied, for example). State 
law determines whether one party is the agent of another.
    7. Affiliate bank underwriting (250.250 review). If an institution 
makes an independent evaluation of the creditworthiness of an applicant 
(for example, as part of a preclosing review by an affiliate bank under 
12 CFR 250.250, which interprets section 23A of the Federal Reserve 
Act), the institution is making a credit decision. If the institution 
then acquires the loan, it reports the loan as an origination whether 
the loan closes in the name of the institution or its affiliate. An 
institution that does not acquire the loan but takes some other action 
reports that action.
    8. Participation loan. An institution that originates a loan and 
then sells partial interests to other institutions reports the loan as 
an origination. An institution that acquires only a partial interest in 
such a loan does not report the transaction even if it has participated 
in the underwriting and origination of the loan.
    9. Assumptions. An assumption occurs when an institution enters into 
a written agreement accepting a new borrower as the obligor on an 
existing obligation. An institution reports as a home purchase loan an 
assumption (or an application for an assumption) in the amount of the 
outstanding principal. If a transaction does not involve a written 
agreement between a new borrower and the institution, it is not an 
assumption for HMDA purposes and is not reported.

                       Section 203.2--Definitions

    2(b) Application. 1. Consistency with Regulation B. Board 
interpretations that appear in the official staff commentary to 
Regulation B (Equal Credit Opportunity, 12 CFR part 202, Supplement 1) 
are generally applicable to the definition of an application under 
Regulation C. However, under Regulation C

[[Page 87]]

the definition of an application does not include prequalification 
requests.
    2. Prequalification. A prequalification request is a request by a 
prospective loan applicant (other than a request for preapproval) for a 
preliminary determination on whether the prospective applicant would 
likely qualify for credit under an institution's standards, or for a 
determination on the amount of credit for which the prospective 
applicant would likely qualify. Some institutions evaluate 
prequalification requests through a procedure that is separate from the 
institution's normal loan application process; others use the same 
process. In either case, Regulation C does not require an institution to 
report prequalification requests on the HMDA/LAR, even though these 
requests may constitute applications under Regulation B for purposes of 
adverse action notices.
    3. Requests for preapproval. To be a covered preapproval program, 
the written commitment issued under the program must result from a full 
review of the creditworthiness of the applicant, including such 
verification of income, resources and other matters as is typically done 
by the institution as part of its normal credit evaluation program. In 
addition to conditions involving the identification of a suitable 
property and verification that no material change has occurred in the 
applicant's financial condition or creditworthiness, the written 
commitment may be subject only to other conditions (unrelated to the 
financial condition or creditworthiness of the applicant) that the 
lender ordinarily attaches to a traditional home mortgage application 
approval. These conditions are limited to conditions such as requiring 
an acceptable title insurance binder or a certificate indicating clear 
termite inspection, and, in the case where the applicant plans to use 
the proceeds from the sale of the applicant's present home to purchase a 
new home, a settlement statement showing adequate proceeds from the sale 
of the present home.
    2(c) Branch office. 1. Credit union. For purposes of Regulation C, a 
``branch'' of a credit union is any office where member accounts are 
established or loans are made, whether or not the office has been 
approved as a branch by a federal or state agency. (See 12 U.S.C. 1752.)
    2. Depository institution. A branch of a depository institution does 
not include a loan-production office, the office of an affiliate, or the 
office of a third party such as a loan broker. (But see Appendix A, 
paragraph I.C.6, which requires certain depository institutions to 
report property location even for properties located outside those MSAs 
or Metropolitan Divisions in which the institution has a home or branch 
office.)
    3. Nondepository institution. For a nondepository institution, 
``branch office'' does not include the office of an affiliate or other 
third party such as a loan broker. (But note that certain nondepository 
institutions must report property location even in MSAs or Metropolitan 
Divisions where they do not have a physical location.)
    2(d) Dwelling. 1. Coverage. The definition of ``dwelling'' is not 
limited to the principal or other residence of the applicant or 
borrower, and thus includes vacation or second homes and rental 
properties. A dwelling also includes a multifamily structure such as an 
apartment building.
    2. Exclusions. Recreational vehicles such as boats or campers are 
not dwellings for purposes of HMDA. Also excluded are transitory 
residences such as hotels, hospitals, and college dormitories--whose 
occupants have principal residences elsewhere.
    2(e) Financial institution. 1. General. An institution that met the 
test for coverage under HMDA in year 1, and then ceases to meet the test 
(for example, because its assets fall below the threshold on December 31 
of year 2) stops collecting HMDA data beginning with year 3. Similarly, 
an institution that did not meet the coverage test for a given year, and 
then meets the test in the succeeding year, begins collecting HMDA data 
in the calendar year following the year in which it meets the test for 
coverage. For example, a for-profit mortgage lending institution (other 
than a bank, savings association, or credit union) that, in year 1, 
falls below the thresholds specified in Sec. 203.2(e)(2)(ii)(A) and 
(B), but meets one of them in year 2, need not collect data in year 2, 
but begins collecting data in year 3.
    2. Adjustment of exemption threshold for depository institutions. 
For data collection in 2005, the asset-size exemption threshold is $34 
million. Depository institutions with assets at or below $34 million are 
exempt from collecting data for 2005.
    3. Coverage after a merger. Several scenarios of data-collection 
responsibilities for the calendar year of a merger are described below. 
Under all the scenarios, if the merger results in a covered institution, 
that institution must begin data collection January I of the following 
calendar year.
    i. Two institutions are not covered by Regulation C because of asset 
size. The institutions merge. No data collection is required for the 
year of the merger (even if the merger results in a covered 
institution).
    ii. A covered institution and an exempt institution merge. The 
covered institution is the surviving institution. For the year of the 
merger, data collection is required for the covered institution's 
transactions. Data collection is optional for transactions handled in 
offices of the previously exempt institution.
    iii. A covered institution and an exempt institution merge. The 
exempt institution is the surviving institution, or a new institution is 
formed. Data collection is required

[[Page 88]]

for transactions of the covered institution that take place prior to the 
merger. Data collection is optional for transactions taking place after 
the merger date.
    iv. Two covered institutions merge. Data collection is required for 
the entire year. The surviving or resulting institution files either a 
consolidated submission or separate submissions for that year.
    4. Originations. HMDA coverage depends in part on whether an 
institution has originated home purchase loans. To determine whether 
activities with respect to a particular loan constitute an origination, 
institutions should consult, among other parts of the staff commentary, 
the discussion of the broker rule under Sec. Sec. 203.1(c) and 
203.4(a).
    5. Branches of foreign banks--treated as banks. A federal branch or 
a state-licensed insured branch of a foreign bank is a ``bank'' under 
section 3(a)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(a)), and is covered by HMDA if it meets the tests for a depository 
institution found in Sec. 203.2(e)(1) of Regulation C.
    6. Branches and offices of foreign banks--treated as for-profit 
mortgage lending institutions. Federal agencies, state-licensed 
agencies, state-licensed uninsured branches of foreign banks, commercial 
lending companies owned or controlled by foreign banks, and entities 
operating under section 25 or 25A of the Federal Reserve Act, 12 U.S.C. 
601 and 611 (Edge Act and agreement corporations) are not ``banks'' 
under the Federal Deposit Insurance Act. These entities are nonetheless 
covered by HMDA if they meet the tests for a for-profit nondepository 
mortgage lending institution found in Sec. 203.2(e)(2) of Regulation C.
    2(g) Home improvement loan. 1. Classification requirement for loans 
not secured by a lien on a dwelling. An institution has ``classified'' a 
loan that is not secured by a lien on a dwelling as a home improvement 
loan if it has entered the loan on its books as a home improvement loan, 
or has otherwise coded or identified the loan as a home improvement 
loan. For example, an institution that has booked a loan or reported it 
on a ``call report'' as a home improvement loan has classified it as a 
home improvement loan. An institution may also classify loans as home 
improvement loans in other ways (for example, by color-coding loan 
files).
    2. Improvements to real property. Home improvements include 
improvements both to a dwelling and to the real property on which the 
dwelling is located (for example, installation of a swimming pool, 
construction of a garage, or landscaping).
    3. Commercial and other loans. A home improvement loan may include a 
loan originated outside an institution's residential mortgage lending 
division (such as a loan to improve an apartment building made through 
the commercial loan department).
    4. Mixed-use property. A loan to improve property used for 
residential and commercial purposes (for example, a building containing 
apartment units and retail space) is a home improvement loan if the loan 
proceeds are used primarily to improve the residential portion of the 
property. If the loan proceeds are used to improve the entire property 
(for example, to replace the heating system), the loan is a home 
improvement loan if the property itself is primarily residential. An 
institution may use any reasonable standard to determine the primary use 
of the property, such as by square footage or by the income generated. 
An institution may select the standard to apply on a case-by-case basis. 
If the loan is unsecured, to report the loan as a home improvement loan 
the institution must also have classified it as such.
    5. Multiple-category loans. If a loan is a home improvement loan as 
well as a refinancing, an institution reports the loan as a home 
improvement loan.
    2(h) Home purchase loan. 1. Multiple properties. A home purchase 
loan includes a loan secured by one dwelling and used to purchase 
another dwelling.
    2. Mixed-use property. A dwelling-secured loan to purchase property 
used primarily for residential purposes (for example, an apartment 
building containing a convenience store) is a home purchase loan. An 
institution may use any reasonable standard to determine the primary use 
of the property, such as by square footage or by the income generated. 
An institution may select the standard to apply on a case-by-case basis.
    3. Farm loan. A loan to purchase property used primarily for 
agricultural purposes is not a home purchase loan even if the property 
includes a dwelling. An institution may use any reasonable standard to 
determine the primary use of the property, such as by reference to the 
exemption from Regulation X (Real Estate Settlement Procedures, 24 CFR 
3500.5(b)(1)) for a loan on property of 25 acres or more. An institution 
may select the standard to apply on a case-by-case basis.
    4. Commercial and other loans. A home purchase loan may include a 
loan originated outside an institution's residential mortgage lending 
division (such as a loan for the purchase of an apartment building made 
through the commercial loan department).
    5. Construction and permanent financing. A home purchase loan 
includes both a combined construction/permanent loan and the permanent 
financing that replaces a construction-only loan. It does not include a 
construction-only loan, which is considered ``temporary financing'' 
under Regulation C and is not reported.
    6. Second mortgages that finance the downpayments on first 
mortgages. If an institution making a first mortgage loan to a home 
purchaser also makes a second mortgage loan to the same purchaser to 
finance part or

[[Page 89]]

all the home purchaser's downpayment, the institution reports each loan 
separately as a home purchase loan.
    7. Multiple-category loans. If a loan is a home purchase loan as 
well as a home improvement loan, or a refinancing, an institution 
reports the loan as a home purchase loan.
    2(i) Manufactured home. 1. Definition of a manufactured home. The 
definition in Sec. 203.2(i) refers to the federal building code for 
factory-built housing established by the Department of Housing and Urban 
Development (HUD). The HUD code requires generally that housing be 
essentially ready for occupancy upon leaving the factory and being 
transported to a building site. Modular homes that meet all of the HUD 
code standards are included in the definition because they are ready for 
occupancy upon leaving the factory. Other factory-built homes, such as 
panelized and pre-cut homes, generally do not meet the HUD code because 
they require a significant amount of construction on site before they 
are ready for occupancy. Loans and applications relating to manufactured 
homes that do not meet the HUD code should not be identified as 
manufactured housing under HMDA.
    2(j) Metropolitan Statistical Areas and Metropolitan Divisions. 1. 
Use of terms ``Metropolitan Statistical Area'' and ``Metropolitan 
Division.'' The U.S. Office of Management and Budget defines 
Metropolitan Statistical Areas and Metropolitan Divisions to provide 
nationally consistent definitions for collecting, tabulating, and 
publishing Federal statistics for a set of geographic areas. OMB divides 
every Metropolitan Statistical Area (MSA) with a population of 2.5 
million or more into Metropolitan Divisions (MDs); MSAs with populations 
under 2.5 million population are not so divided. 67 FR 82228 (December 
27, 2000). For all purposes under Regulation C, if an MSA is divided by 
OMB into MDs, the appropriate geographic unit to be used is the MD; if 
an MSA is not so divided by OMB into MDs, the appropriate geographic 
unit to be used is the MSA.

                 Section 203.4--Compilation of Loan Data

    4(a) Data Format and Itemization. 1. Reporting requirements.
    i. An institution reports data on loans that it originated and loans 
that it purchased during the calendar year described in the report. An 
institution reports these data even if the loans were subsequently sold 
by the institution.
    ii. An institution reports the data for loan applications that did 
not result in originations--for example, applications that the 
institution denied or that the applicant withdrew during the calendar 
year covered by the report.
    iii. In the case of brokered loan applications or applications 
forwarded through a correspondent, the institution reports as 
originations the loans that it approved and subsequently acquired per a 
pre-closing arrangement (whether or not they closed in the institution's 
name). Additionally, the institution reports the data for all 
applications that did not result in originations--for example, 
applications that the institution denied or that the applicant withdrew 
during the calendar year covered by the report (whether or not they 
would have closed in the institution's name). For all of these loans and 
applications, the institution reports the required data regarding the 
borrower's or applicant's ethnicity, race, sex, and income.
    iv. Loan originations are to be reported only once. If the 
institution is the loan broker or correspondent, it does not report as 
originations the loans that it forwarded to another lender for approval 
prior to closing, and that were approved and subsequently acquired by 
that lender (whether or not they closed in the institution's name).
    v. An institution reports applications that were received in the 
previous calendar year but were acted upon during the calendar year 
covered by the current register.
    vi. A financial institution submits all required data to its 
supervisory agency in one package, with the prescribed transmittal 
sheet. An officer of the institution certifies to the accuracy of the 
data.
    vii. The transmittal sheet states the total number of line entries 
contained in the accompanying data transmission.
    2. Updating--agency requirements. Certain state or federal 
regulations, such as the Federal Deposit Insurance Corporation's 
regulations, may require an institution to update its data more 
frequently than is required under Regulation C.
    3. Form of quarterly updating. An institution may maintain the 
quarterly updates of the HMDA/LAR in electronic or any other format, 
provided the institution can make the information available to its 
regulatory agency in a timely manner upon request.
    4. Transition rules for applications received before January 1, 
2004, when final action is taken on or after January 1, 2004. For 
applications received before January 1, 2004, on which final action is 
taken on or after January 1, 2004, data must be collected and reported 
on the HMDA/LAR under the revisions to Regulation C that take effect on 
January 1, 2004, subject to the exceptions for property type, loan 
purpose, requests for preapproval, applicant information, and rate 
spread set forth in this comment.
    i. Property type. Lenders need not determine whether an application 
received before January 1, 2004, involves a manufactured home, and may 
report the property type as 1-to 4-family.
    ii. Loan purpose. For applications received before January 1, 2004, 
lenders may use the

[[Page 90]]

definitions of a home improvement loan and a refinancing that were in 
effect in 2003. For example, a lender need not report data on an 
application received before January 1, 2004, for a dwelling-secured loan 
made for the purpose of home improvement, if the lender did not classify 
the loan as a home improvement loan. Similarly, a lender may report data 
on an application for a refinancing received in 2003, where the new 
obligation will be, but the existing obligation was not, secured by a 
lien on a dwelling.
    iii. Requests for preapproval. For requests received before January 
1, 2004, lenders need not report requests for preapproval (as that term 
is defined in Sec. 203.2(b)(2) of the revised Regulation C) that do not 
result in a traditional loan application. Lenders may, at their option, 
report requests for preapproval that are denied or that are approved but 
not accepted. In addition, lenders need not specify whether an 
application for a home purchase loan involved a request for preapproval, 
and should use code 3 (Not Applicable) in the preapproval field on the 
HMDA/LAR.
    iv. Applicant information. For applications received before January 
1, 2004, lenders must collect data on race or national origin using the 
categories in effect in 2003, and must convert the data to the codes in 
effect in 2004 for reporting, using the following conversion guide:
    (A) Ethnicity. The revised Regulation C requires lenders to request 
an applicant's ethnicity first (Hispanic or Latino, Not Hispanic or 
Latino), and then to request the applicant's race. The HMDA/LAR has been 
revised accordingly, so that ethnicity and race are distinct fields.
    (1) If the applicant's race was identified as Hispanic (code 4) in 
2003, use code 1 (Hispanic or Latino) for reporting ethnicity.
    (2) If the applicant's race was identified as American Indian or 
Alaskan Native, Asian or Pacific Islander, Black, White, Other, or Not 
Applicable (codes 1, 2, 3, 5, 6, or 8) in 2003, use code 4 (Not 
Applicable) for reporting ethnicity.
    (3) If the applicant did not provide information on race in a mail, 
Internet, or telephone application (code 7) in 2003, use code 3 
(information not provided by applicant in mail, Internet, or telephone 
application) for reporting ethnicity.
    (B) Race.
    (1) If the applicant's race was identified as American Indian or 
Alaskan Native, Black, or White in 2003, use the corresponding code for 
2004. For example, if the applicant's race was identified as Black (code 
3) in 2003, use code 3 (Black or African-American) for reporting race in 
2004.
    (2) If the applicant's race was identified as Asian or Pacific 
Islander in 2003, use code 2 (Asian).
    (3) If the applicant's race was identified as Hispanic in 2003, use 
code 7 (Not Applicable).
    (4) If the applicant's race was identified as Other in 2003, use 
code 7 (Not Applicable).
    (5) If the applicant did not provide information on race in a mail, 
Internet, or telephone application (code 7) in 2003, use code 6 
(Information not provided by applicant in mail, Internet, or telephone 
application).
    (6) If the applicant's race was identified as Not Applicable (code 
8) in 2003, use code 7 (Not Applicable).
    (C) Sex. For applications received before January 1, 2004, in which 
there is no co-applicant, the lender may use code 4 (Not Applicable) in 
the field provided for the co-applicant's sex.
    v. Rate Spread. For applications received before January 1, 2004, in 
which the rate lock occurred before January 1, 2004, lenders may report 
NA (Not Applicable) for rate spread. For applications received before 
January 1, 2004, for which the rate lock occurred after January 1, 2004, 
lenders must calculate and report the rate spread in accordance with the 
rules set forth in new section 202.4(a)(12) (see 67 FR 7222 (Feb. 15, 
2002); 67 FR 43223 (June 27, 2002)).
    (A) Example: Assume an application is received on December 1, 2003; 
the rate lock occurs on December 26, 2003, and the loan is originated on 
January 15, 2004. The lender may report NA (Not Applicable) for rate 
spread.
    (B) Example: Assume an application is received on December 15, 2003; 
the rate lock occurs on January 3, 2004, and the loan is originated on 
January 15, 2004. The lender must calculate and report the rate spread 
in accordance with the rules in new section 202.4(a)(12) (see 67 FR 7222 
(Feb. 15, 2002); 67 FR 43223 (June 27, 2002)).
    4(a)(1) Application number and application date. 1. Application 
date--consistency. In reporting the date of application, an institution 
reports the date the application was received or the date shown on the 
application. Although an institution need not choose the same approach 
for its entire HMDA submission, it should be generally consistent (such 
as by routinely using one approach within a particular division of the 
institution or for a category of loans).
    2. Application date--application forwarded by a broker. For an 
application forwarded by a broker, an institution reports the date the 
application was received by the broker, the date the application was 
received by the institution, or the date shown on the application. 
Although an institution need not choose the same approach for its entire 
HMDA submission, it should be generally consistent (such as by routinely 
using one approach within a particular division of the institution or 
for a category of loans).

[[Page 91]]

    3. Application date--reinstated application. If, within the same 
calendar year, an applicant asks an institution to reinstate a 
counteroffer that the applicant previously did not accept (or asks the 
institution to reconsider an application that was denied, withdrawn, or 
closed for incompleteness), the institution may treat that request as 
the continuation of the earlier transaction or as a new transaction. If 
the institution treats the request for reinstatement or reconsideration 
as a new transaction, it reports the date of the request as the 
application date.
    4. Application or loan number. An institution must ensure that each 
identifying number is unique within the institution. If an institution's 
register contains data for branch offices, for example, the institution 
could use a letter or a numerical code to identify the loans or 
applications of different branches, or could assign a certain series of 
numbers to particular branches to avoid duplicate numbers. Institutions 
are strongly encouraged not to use the applicant's or borrower's name or 
social security number, for privacy reasons.
    5. Application--year action taken. An institution must report an 
application in the calendar year in which the institution takes final 
action on the application.
    Paragraph 4(a)(3) Purpose.
    1. Purpose--statement of applicant. An institution may rely on the 
oral or written statement of an applicant regarding the proposed use of 
loan proceeds. For example, a lender could use a check-box, or a purpose 
line, on a loan application to determine whether or not the applicant 
intends to use loan proceeds for home improvement purposes.
    2. Purpose--multiple-purpose loan. If a loan is a home purchase loan 
as well as a home improvement loan, or a refinancing, an institution 
reports the loan as a home purchase loan. If a loan is a home 
improvement loan as well as a refinancing, an institution reports the 
loan as a home improvement loan.
    Paragraph 4(a)(6) Occupancy.
    1. Occupancy--multiple properties. If a loan relates to multiple 
properties, the institution reports the owner occupancy status of the 
property for which property location is being reported. (See the 
comments to paragraph 4(a)(9), Property location.)
    Paragraph 4(a)(7) Loan amount.
    1. Loan amount--counteroffer. If an applicant accepts a counteroffer 
for an amount different from the amount initially requested, the 
institution reports the loan amount granted. If an applicant does not 
accept a counteroffer or fails to respond, the institution reports the 
loan amount initially requested.
    2. Loan amount--multiple-purpose loan. Except in the case of a home-
equity line of credit, an institution reports the entire amount of the 
loan, even if only a part of the proceeds is intended for home purchase 
or home improvement.
    3. Loan amount--home-equity line. An institution that has chosen to 
report home-equity lines of credit reports only the part that is 
intended for home-improvement or home-purchase purposes.
    4. Loan amount--assumption. An institution that enters into a 
written agreement accepting a new party as the obligor on a loan reports 
the amount of the outstanding principal on the assumption as the loan 
amount.
    Paragraph 4(a)(8) Type of action taken and date.
    1. Action taken--counteroffers. If an institution makes a 
counteroffer to lend on terms different from the applicant's initial 
request (for example, for a shorter loan maturity or in a different 
amount) and the applicant does not accept the counteroffer or fails to 
respond, the institution reports the action taken as a denial on the 
original terms requested by the applicant.
    2. Action taken--rescinded transactions. If a borrower rescinds a 
transaction after closing, the institution may report the transaction 
either as an origination or as an application that was approved but not 
accepted.
    3. Action taken--purchased loans. An institution reports the loans 
that it purchased during the calendar year, and does not report the 
loans that it declined to purchase.
    4. Action taken--conditional approvals. If an institution issues a 
loan approval subject to the applicant's meeting underwriting conditions 
(other than customary loan commitment or loan-closing conditions, such 
as a clear-title requirement or an acceptable property survey) and the 
applicant does not meet them, the institution reports the action taken 
as a denial.
    5. Action taken date--approved but not accepted. For a loan approved 
by an institution but not accepted by the applicant, the institution 
reports any reasonable date, such as the approval date, the deadline for 
accepting the offer, or the date the file was closed. Although an 
institution need not choose the same approach for its entire HMDA 
submission, it should be generally consistent (such as by routinely 
using one approach within a particular division of the institution or 
for a category of loans).
    6. Action taken date--originations. For loan originations, an 
institution generally reports the settlement or closing date. For loan 
originations that an institution acquires through a broker, the 
institution reports either the settlement or closing date, or the date 
the institution acquired the loan from the broker. If the disbursement 
of funds takes place on a date later than the settlement or closing 
date, the institution may use the date of disbursement. For a 
construction/permanent loan, the institution reports either the 
settlement or closing date, or the

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date the loan converts to the permanent financing. Although an 
institution need not choose the same approach for its entire HMDA 
submission, it should be generally consistent (such as by routinely 
using one approach within a particular division of the institution or 
for a category of loans). Notwithstanding this flexibility regarding the 
use of the closing date in connection with reporting the date action was 
taken, the year in which an origination goes to closing is the year in 
which the institution must report the origination.
    7. Action taken--pending applications. An institution does not 
report any loan application still pending at the end of the calendar 
year; it reports that application on its register for the year in which 
final action is taken.
    Paragraph 4(a)(9) Property location.
    1. Property location--multiple properties (home improvement/
refinance of home improvement). For a home improvement loan, an 
institution reports the property being improved. If more than one 
property is being improved, the institution reports the location of one 
of the properties or reports the loan using multiple entries on its 
HMDA/LAR (with unique identifiers) and allocating the loan amount among 
the properties.
    2. Property location--multiple properties (home purchase/refinance 
of home purchase). For a home purchase loan, an institution reports the 
property taken as security. If an institution takes more than one 
property as security, the institution reports the location of the 
property being purchased if there is just one. If the loan is to 
purchase multiple properties and is secured by multiple properties, the 
institution reports the location of one of the properties or reports the 
loan using multiple entries on its HMDA/LAR (with unique identifiers) 
and allocating the loan amount among the properties.
    3. Property location--loans purchased from another institution. The 
requirement to report the property location by census tract in an MSA or 
Metropolitan Division where the institution has a home or branch office 
applies not only to loan applications and originations but also to loans 
purchased from another institution. This includes loans purchased from 
an institution that did not have a home or branch office in that MSA or 
Metropolitan Division and did not collect the property-location 
information.
    4. Property location--mobile or manufactured home. If information 
about the potential site of a mobile or manufactured home is not 
available, an institution reports using the code for ``not applicable.''
    Paragraph 4(a)(10) Applicant and income data.
    1. Applicant data--completion by applicant. An institution reports 
the monitoring information as provided by the applicant. For example, if 
an applicant checks the ``Asian'' box the institution reports using the 
``Asian'' code.
    2. Applicant data--completion by lender. If an applicant fails to 
provide the requested information for an application taken in person, 
the institution reports the data on the basis of visual observation or 
surname.
    3. Applicant data--application completed in person. When an 
applicant meets in person with a lender to complete an application that 
was begun by mail, Internet, or telephone, the institution must request 
the monitoring information. If the meeting occurs after the application 
process is complete, for example, at closing, the institution is not 
required to obtain monitoring information.
    4. Applicant data--joint applicant. A joint applicant may enter the 
government monitoring information on behalf of an absent joint 
applicant. If the information is not provided, the institution reports 
using the code for ``information not provided by applicant in mail, 
Internet, or telephone application.''
    5. Applicant data--video and other electronic-application processes. 
An institution that accepts applications through electronic media with a 
video component treats the applications as taken in person and collects 
the information about the ethnicity, race, and sex of applicants. An 
institution that accepts applications through electronic media without a 
video component (for example, the Internet or facsimile) treats the 
applications as accepted by mail.
    6. Income data--income relied on. An institution reports the gross 
annual income relied on in evaluating the creditworthiness of 
applicants. For example, if an institution relies on an applicant's 
salary to compute a debt-to-income ratio but also relies on the 
applicant's annual bonus to evaluate creditworthiness, the institution 
reports the salary and the bonus to the extent relied upon. Similarly, 
if an institution relies on the income of a cosigner to evaluate 
creditworthiness, the institution includes this income to the extent 
relied upon. But an institution does not include the income of a 
guarantor who is only secondarily liable.
    7. Income data--co-applicant. If two persons jointly apply for a 
loan and both list income on the application, but the institution relies 
only on the income of one applicant in computing ratios and in 
evaluating creditworthiness, the institution reports only the income 
relied on.
    8. Income data--loan to employee. An institution may report ``NA'' 
in the income field for loans to its employees to protect their privacy, 
even though the institution relied on their income in making its credit 
decisions.
    Paragraph 4(a)(11) Purchaser.
    1. Type of purchaser--loan-participation interests sold to more than 
one entity. An institution that originates a loan, and then sells it to 
more than one entity, reports the ``type of purchaser'' based on the 
entity purchasing

[[Page 93]]

the greatest interest, if any. If an institution retains a majority 
interest, it does not report the sale.
    2. Type of purchaser--swapped loans. Loans ``swapped'' for mortgage-
backed securities are to be treated as sales; the purchaser is the type 
of entity receiving the loans that are swapped.
    Paragraph 4(a)(12) Rate spread information.
    1. Treasury securities of comparable maturity. To determine the 
yield on a Treasury security, lenders must use the table entitled 
``Treasury Securities of Comparable Maturity under Regulation C,'' which 
will be published on the FFIEC's Web site (http://www.ffiec.gov/hmda) 
and made available in paper form upon request. This table will provide, 
for the 15th day of each month, Treasury security yields for every 
available loan maturity. The applicable Treasury yield date will depend 
on the date on which the financial institution set the interest rate on 
the loan for the final time before closing. See Appendix A, Paragraphs 
I.G.1. and 2.
    Paragraph 4(a)(14) Lien status.
    1. Determining lien status for applications and loans originated. i. 
Lenders are required to report lien status for loans they originate and 
applications that do not result in originations. Lien status is 
determined by reference to the best information readily available to the 
lender at the time final action is taken and to the lender's own 
procedures. Thus, lenders may rely on the title search they routinely 
perform as part of their underwriting procedures--for example, for home 
purchase loans. Regulation C does not require lenders to perform title 
searches solely to comply with HMDA reporting requirements. Lenders may 
rely on other information that is readily available to them at the time 
final action is taken and that they reasonably believe is accurate, such 
as the applicant's statement on the application or the applicant's 
credit report. For example, where the applicant indicates on the 
application that there is a mortgage on the property or where the 
applicant's credit report shows that the applicant has a mortgage--and 
that mortgage is not going to be paid off as part of the transaction--
the lender may assume that the loan it originates is secured by a 
subordinate lien. If the same application did not result in an 
origination--for example, because the application is denied or 
withdrawn--the lender would report the application as an application for 
a subordinate-lien loan.
    ii. Lenders may also consider their established procedures when 
determining lien status for applications that do not result in 
originations. For example, a consumer applies to a lender to refinance a 
$100,000 first mortgage; the consumer also has a home equity line of 
credit for $20,000. If the lender's practice in such a case is to ensure 
that it will have first-lien position--through a subordination agreement 
with the holder of the mortgage on the home equity line--then the lender 
should report the application as an application for a first-lien loan.
    Paragraph 4(c)(3) Optional data--home-equity lines of credit.
    1. An institution that opts to report home-equity lines reports the 
disposition of all applications, not just originations.
    Paragraph 4(d) Excluded data.
    1. Mergers, purchases in bulk, and branch acquisitions. If a covered 
institution acquires loans in bulk from another institution (for 
example, from the receiver for a failed institution) but no merger or 
acquisition of the institution, or acquisition of a branch, is involved, 
the institution reports the loans as purchased loans.

               Section 203.5(a)--Disclosure and Reporting

    Paragraph 5(a) Reporting to agency.
    1. Submission of data. Institutions submit data to their supervisory 
agencies in an automated, machine-readable form. The format must conform 
to that of the HMDA/LAR. An institution should contact its federal 
supervisory agency for information regarding procedures and technical 
specifications for automated data submission; in some cases, agencies 
also make software available for automated data submission. The data are 
edited before submission, using the edits included in the agency-
supplied software or equivalent edits in software available from vendors 
or developed in-house.
    2. Submission in paper form. Institutions that report twenty-five or 
fewer entries on their HMDA/LAR may collect and report the data in paper 
form. An institution that submits its register in nonautomated form 
sends two copies that are typed or computer printed and must use the 
format of the HMDA/LAR (but need not use the form itself). Each page 
must be numbered along with the total number of pages (for example, 
``Page 1 of 3'').
    3. Procedures for entering data. The required data are entered in 
the register for each loan origination, each application acted on, and 
each loan purchased during the calendar year. The institution should 
decide on the procedure it wants to follow--for example, whether to 
begin entering the required data, when an application is received, or to 
wait until final action is taken (such as when a loan goes to closing or 
an application is denied).
    4. Options for collection. An institution may collect data on 
separate registers at different branches, or on separate registers for 
different loan types (such as for home purchase or home improvement 
loans, or for loans on multifamily dwellings). Entries need not be 
grouped on the register by MSA or Metropolitan Division, or 
chronologically, or by census tract numbers, or in any other particular 
order.

[[Page 94]]

    5. Change in supervisory agency. If the supervisory agency for a 
covered institution changes (as a consequence of a merger or a change in 
the institution's charter, for example), the institution must report 
data to its new supervisory agency beginning with the year of the 
change.
    6. Subsidiaries. An institution is a subsidiary of a bank or savings 
association (for purposes of reporting HMDA data to the parent's 
supervisory agency) if the bank or savings association holds or controls 
an ownership interest that is greater than 50 percent of the 
institution.
    7. Transmittal sheet--additional data submissions. If an additional 
data submission becomes necessary (for example, because the institution 
discovers that data were omitted from the initial submission, or because 
revisions are called for, that submission must be accompanied by a 
transmittal sheet.
    8. Transmittal sheet--revisions or deletions. If a data submission 
involves revisions or deletions of previously submitted data, it must 
state the total of all line entries contained in that submission, 
including both those representing revisions or deletions of previously 
submitted entries, and those that are being resubmitted unchanged or are 
being submitted for the first time. Depository institutions must provide 
a list of the MSAs or Metropolitan Divisions in which they have home or 
branch offices.
    Paragraph 5(b) Public disclosure of statement.
    1. Business day. For purposes of Sec. 203.5, a business day is any 
calendar day other than a Saturday, Sunday, or legal public holiday.
    2. Format. An institution may make the disclosure statement 
available in paper form or, if the person requesting the data agrees, in 
automated form (such as by PC diskette or CD Rom).
    Paragraph 5(c) Public disclosure of modified loan/application 
register.
    1. Format. An institution may make the modified register available 
in paper or automated form (such as by PC diskette or computer tape). 
Although institutions are not required to make the modified register 
available in census tract order, they are strongly encouraged to do so 
in order to enhance its utility to users.
    Paragraph 5(e) Notice of availability.
    1. Poster--suggested text. An institution may use any text that 
meets the requirements of the regulation. Some of the federal financial 
regulatory agencies and HUD provide HMDA posters that an institution can 
use to inform the public of the availability of its HMDA data, or the 
institution may create its own posters. If an institution prints its 
own, the following language is suggested but is not required:

                   Home Mortgage Disclosure Act Notice

    The HMDA data about our residential mortgage lending are available 
for review. The data show geographic distribution of loans and 
applications; ethnicity, race, sex, and income of applicants and 
borrowers; and information about loan approvals and denials. Inquire at 
this office regarding the locations where HMDA data may be inspected.
    2. Additional language for institutions making the disclosure 
statement available on request. An institution that posts a notice 
informing the public of the address to which a request should be sent 
could include the following sentence, for example, in its general 
notice: ``To receive a copy of these data send a written request to 
[address].''

                       Section 203.6--Enforcement

    Paragraph 6(b) Bona fide errors.
    1. Bona fide error--information from third parties. An institution 
that obtains the property-location information for applications and 
loans from third parties (such as appraisers or vendors of ``geocoding'' 
services) is responsible for ensuring that the information reported on 
its HMDA/LAR is correct.

[67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27, 2002; 68 
FR 31592, May 28, 2003; 68 FR 74833, Dec. 29, 2003; 69 FR 77139, Dec. 
27, 2004]



PART 204_RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)
--Table of Contents




Sec.
204.1 Authority, purpose and scope.
204.2 Definitions.
204.3 Computation and maintenance.
204.4 Transitional adjustments in mergers.
204.5 Emergency reserve requirement.
204.6 Supplemental reserve requirement.
204.7 Penalties.
204.8 International banking facilities.
204.9 Reserve requirement ratios.

                             Interpretations

204.121 Bankers' banks.
204.122 Secondary market activities of international banking facilities.
204.123 Sale of Federal funds by investment companies or trusts in which 
          the entire beneficial interest is held exclusively by 
          depository institutions.
204.124 Repurchase agreement involving shares of a money market mutual 
          fund whose portfolio consists wholly of United States Treasury 
          and Federal agency securities.
204.125 Foreign, international, and supranational entities referred to 
          in Sec. Sec. 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).
204.126 Depository institution participation in ``Federal funds'' 
          market.
204.127 Nondepository participation in ``Federal funds'' market.

[[Page 95]]

204.128 Deposits at foreign branches guaranteed by domestic office of a 
          depository institution.
204.130 Eligibility for NOW accounts.
204.131 Participation by a depository institution in the secondary 
          market for its own time deposits.
204.132 Treatment of loan strip participations.
204.133 Multiple savings deposits treated as a transaction account.
204.134 Linked time deposits and transaction accounts.
204.135 Shifting funds between depository institutions to make use of 
          the low reserve tranche.
204.136 Treatment of trust overdrafts for reserve requirement reporting 
          purposes.

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 3105.



Sec. 204.1  Authority, purpose and scope.

    (a) Authority. This part is issued under the authority of section 19 
(12 U.S.C. 461 et seq.) and other provisions of the Federal Reserve Act 
and of section 7 of the International Banking Act of 1978 (12 U.S.C. 
3105).
    (b) Purpose. This part relates to reserves that depository 
institutions are required to maintain for the purpose of facilitating 
the implementation of monetary policy by the Federal Reserve System.
    (c) Scope. (1) The following depository institutions are required to 
maintain reserves in accordance with this part:
    (i) Any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(h)) or any bank that is eligible to apply 
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
    (ii) Any savings bank or mutual savings bank as defined in section 3 
of the Federal Deposit Insurance Act (12 U.S.C. 1813(f), (g));
    (iii) Any insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752(7)) or any credit union that is 
eligible to apply to become an insured credit union under section 201 of 
such Act (12 U.S.C. 1781);
    (iv) Any member as defined in section 2 of the Federal Home Loan 
Bank Act (12 U.S.C. 1422(4)); and
    (v) Any insured institution as defined in section 401 of the 
National Housing Act (12 U.S.C. 1724(a)) or any institution which is 
eligible to apply to become an insured institution under section 403 of 
such Act (12 U.S.C. 1726).
    (2) Except as may be otherwise provided by the Board, a foreign 
bank's branch or agency located in the United States is required to 
comply with the provisions of this part in the same manner and to the 
same extent as if the branch or agency were a member bank, if its parent 
foreign bank (i) has total worldwide consolidated bank assets in excess 
of $1 billion; or (ii) is controlled by a foreign company or by a group 
of foreign companies that own or control foreign banks that in the 
aggregate have total worldwide consolidated bank assets in excess of $1 
billion. In addition, any other foreign bank's branch located in the 
United States that is eligible to apply to become an insured bank under 
section 5 of the Federal Deposit Insurance Act (12 U.S.C. 1815) is 
required to maintain reserves in accordance with this part as a 
nonmember depository institution.
    (3) Except as may be otherwise provided by the Board, an Edge 
Corporation (12 U.S.C. 611 et seq.) or an Agreement Corporation (12 
U.S.C. 601 et seq.) is required to comply with the provisions of this 
part in the same manner and to the same extent as a member bank.
    (4) This part does not apply to any financial institution that (i) 
is organized solely to do business with other financial institutions; 
(ii) is owned primarily by the financial institutions with which it does 
business; and (iii) does not do business with the general public.
    (5) The provisions of this part do not apply to any deposit that is 
payable only at an office located outside the United States.

[45 FR 56018, Aug. 22, 1980]



Sec. 204.2  Definitions.

    For purposes of this part, the following definitions apply unless 
otherwise specified:
    (a)(1) Deposit means:
    (i) The unpaid balance of money or its equivalent received or held 
by a depository institution in the usual course of business and for 
which it has given or is obligated to give credit, either conditionally 
or unconditionally, to an account, including interest credited, or

[[Page 96]]

which is evidenced by an instrument on which the depository institution 
is primarily liable;
    (ii) Money received or held by a depository institution, or the 
credit given for money or its equivalent received or held by the 
depository institution in the usual course of business for a special or 
specific purpose, regardless of the legal relationships established 
thereby, including escrow funds, funds held as security for securities 
loaned by the depository institution, funds deposited as advance payment 
on subscriptions to United States government securities, and funds held 
to meet its acceptances;
    (iii) An outstanding teller's check, or an outstanding draft, 
certified check, cashier's check, money order, or officer's check drawn 
on the depository institution, issued in the usual course of business 
for any purpose, including payment for services, dividends or purchases;
    (iv) Any due bill or other liability or undertaking on the part of a 
depository institution to sell or deliver securities to, or purchase 
securities for the account of, any customer (including another 
depository institution), involving either the receipt of funds by the 
depository institution, regardless of the use of the proceeds, or a 
debit to an account of the customer before the securities are delivered. 
A deposit arises thereafter, if after three business days from the date 
of issuance of the obligation, the depository institution does not 
deliver the securities purchased or does not fully collateralize its 
obligation with securities similar to the securities purchased. A 
security is similar if it is of the same type and if it is of comparable 
maturity to that purchased by the customer;
    (v) Any liability of a depository institution's affiliate that is 
not a depository institution, on any promissory note, acknowledgment of 
advance, due bill, or similar obligation (written or oral), with a 
maturity of less than one and one-half years, to the extent that the 
proceeds are used to supply or to maintain the availability of funds 
(other than capital) to the depository institution, except any such 
obligation that, had it been issued directly by the depository 
institution, would not constitute a deposit. If an obligation of an 
affiliate of a depository institution is regarded as a deposit and is 
used to purchase assets from the depository institution, the maturity of 
the deposit is determined by the shorter of the maturity of the 
obligation issued or the remaining maturity of the assets purchased. If 
the proceeds from an affiliate's obligation are placed in the depository 
institution in the form of a reservable deposit, no reserves need be 
maintained against the obligation of the affiliate since reserves are 
required to be maintained against the deposit issued by the depository 
institution. However, the maturity of the deposit issued to the 
affiliate shall be the shorter of the maturity of the affiliate's 
obligation or the maturity of the deposit;
    (vi) Credit balances;
    (vii) Any liability of a depository institution on any promissory 
note, acknowledgment of advance, bankers' acceptance, or similar 
obligation (written or oral), including mortgage-backed bonds, that is 
issued or undertaken by a depository institution as a means of obtaining 
funds, except any such obligation that:
    (A) Is issued or undertaken and held for the account of:
    (1) An office located in the United States of another depository 
institution, foreign bank, Edge or Agreement Corporation, or New York 
Investment (Article XII) Company;
    (2) The United States government or an agency thereof; or
    (3) The Export-Import Bank of the United States, Minbanc Capital 
Corporation, the Government Development Bank for Puerto Rico, a Federal 
Reserve Bank, a Federal Home Loan Bank, or the National Credit Union 
Administration Central Liquidity Facility;
    (B) Arises from a transfer of direct obligations of, or obligations 
that are fully guaranteed as to principal and interest by, the United 
States Government or any agency thereof that the depository institution 
is obligated to repurchase;
    (C) Is not insured by a Federal agency, is subordinated to the 
claims of depositors, has a weighted average maturity of five years or 
more, and is issued

[[Page 97]]

by a depository institution with the approval of, or under the rules and 
regulations of, its primary Federal supervisor;
    (D) Arises from a borrowing by a depository institution from a 
dealer in securities, for one business day, of proceeds of a transfer of 
deposit credit in a Federal Reserve Bank or other immediately available 
funds (commonly referred to as Federal funds), received by such dealer 
on the date of the loan in connection with clearance of securities 
transactions; or
    (E) Arises from the creation, discount and subsequent sale by a 
depository institution of its bankers' acceptance of the type described 
in paragraph 7 of section 13 of the Federal Reserve Act (12 U.S.C. 372).
    (viii) Any liability of a depository institution that arises from 
the creation after June 20, 1983, of a bankers' acceptance that is not 
of the type described in paragraph 7 of section 13 of the Federal 
Reserve Act (12 U.S.C. 372) except any such liability held for the 
account of an entity specified in Sec. 204.2(a)(1)(vii)(A); or
    (2) Deposit does not include:
    (i) Trust funds received or held by the depository institution that 
it keeps properly segregated as trust funds and apart from its general 
assets or which it deposits in another institution to the credit of 
itself as trustee or other fiduciary. If trust funds are deposited with 
the commecial department of the depository institution or otherwise 
mingled with its general assets, a deposit liability of the institution 
is created;
    (ii) An obligation that represents a conditional, contingent or 
endorser's liability;
    (iii) Obligations, the proceeds of which are not used by the 
depository institution for purposes of making loans, investments, or 
maintaining liquid assets such as cash or ``due from'' depository 
institutions or other similar purposes. An obligation issued for the 
purpose of raising funds to purchase business premises, equipment, 
supplies, or similar assets is not a deposit;
    (iv) Accounts payable;
    (v) Hypothecated deposits created by payments on an installment loan 
where (A) the amounts received are not used immediately to reduce the 
unpaid balance due on the loan until the sum of the payments equals the 
entire amount of loan principal and interest; (B) and where such amounts 
are irrevocably assigned to the depository institution and cannot be 
reached by the borrower or creditors of the borrower;
    (vi) Dealer reserve and differential accounts that arise from the 
financing of dealer installment accounts receivable, and which provide 
that the dealer may not have access to the funds in the account until 
the installment loans are repaid, as long as the depository institution 
is not actually (as distinguished from contingently) obligated to make 
credit or funds available to the dealer;
    (vii) A dividend declared by a depository institution for the period 
intervening between the date of the declaration of the dividend and the 
date on which it is paid;
    (viii) An obligation representing a pass through account, as defined 
in this section;
    (ix) An obligation arising from the retention by the depository 
institution of no more than a 10 per cent interest in a pool of 
conventional 1-4 family mortgages that are sold to third parties;
    (x) An obligation issued to a State or municipal housing authority 
under a loan-to-lender program involving the issuance of tax exempt 
bonds and the subsequent lending of the proceeds to the depository 
institution for housing finance purposes;
    (xi) Shares of a credit union held by the National Credit Union 
Administration or the National Credit Union Administration Central 
Liquidity Facility under a statutorily authorized assistance program; 
and
    (xii) Any liability of a United States branch or agency of a foreign 
bank to another United States branch or agency of the same foreign bank, 
or the liability of the United States office of an Edge Corporation to 
another United States office of the same Edge Corporation.
    (b)(1) Demand deposit means a deposit that is payable on demand, or 
a deposit issued with an original maturity or required notice period of 
less than seven days, or a deposit representing funds for which the 
depository institution

[[Page 98]]

does not reserve the right to require at least seven days' written 
notice of an intended withdrawal. Demand deposits may be in the form of:
    (i) Checking accounts;
    (ii) Certified, cashier's, teller's, and officer's checks (including 
such checks issued in payment of dividends);
    (iii) Traveler's checks and money orders that are primary 
obligations of the issuing institution;
    (iv) Checks or drafts drawn by, or on behalf of, a non-United States 
office of a depository institution on an account maintained at any of 
the institution's United States offices;
    (v) Letters of credit sold for cash or its equivalent;
    (vi) Withheld taxes, withheld insurance and other withheld funds;
    (vii) Time deposits that have matured or time deposits upon which 
the contractually required notice of withdrawal as given and the notice 
period has expired and which have not been renewed (either by action of 
the depositor or automatically under the terms of the deposit 
agreement); and
    (viii) An obligation to pay, on demand or within six days, a check 
(or other instrument, device, or arrangement for the transfer of funds) 
drawn on the depository institution, where the account of the 
institution's customer already has been debited.
    (2) The term demand deposit also means deposits or accounts on which 
the depository institution has reserved the right to require at least 
seven days' written notice prior to withdrawal or transfer of any funds 
in the account and from which the depositor is authorized to make 
withdrawals or transfers in excess of the withdrawal or transfer 
limitations specified in paragraph (d)(2) of this section for such an 
account and the account is not a NOW account, or an ATS account or other 
account that meets the criteria specified in either paragraph (b)(3)(ii) 
or (iii) of this section.
    (3) Demand deposit does not include:
    (i) Any account that is a time deposit or a savings deposit under 
this part;
    (ii) Any deposit or account on which the depository institution has 
reserved the right to require at least seven days' written notice prior 
to withdrawal or transfer of any funds in the account and either--
    (A) Is subject to check, draft, negotiable order of withdrawal, 
share draft, or similar item, such as an account authorized by 12 U.S.C. 
1832(a) (NOW account) and a savings deposit described in Sec. 
204.2(d)(2), provided that the depositor is eligible to hold a NOW 
account; or
    (B) From which the depositor is authorized to make transfers by 
preauthorized transfer or telephonic (including data transmission) 
agreement, order or instruction to another account or to a third party, 
provided that the depositor is eligible to hold a NOW account;
    (iii) Any deposit or account on which the depository institution has 
reserved the right to require at least seven days' written notice prior 
to withdrawal or transfer of any funds in the account and from which 
withdrawals may be made automatically through payment to the depository 
institution itself or through transfer of credit to a demand deposit or 
other account in order to cover checks or drafts drawn upon the 
institution or to maintain a specified balance in, or to make periodic 
transfers to such other account, such as accounts authorized by 12 
U.S.C. 371a (automatic transfer account or ATS account), provided that 
the depositor is eligible to hold an ATS account; or
    (iv) IBF time deposits meeting the requirements of Sec. 
204.8(a)(2).
    (c)(1) Time deposit means:
    (i) A deposit that the depositor does not have a right and is not 
permitted to make withdrawals from within six days after the date of 
deposit unless the deposit is subject to an early withdrawal penalty of 
at least seven days' simple interest on amounts withdrawn within the 
first six days after deposit. \1\

[[Page 99]]

A time deposit from which partial early withdrawals are permitted must 
impose additional early withdrawal penalties of at least seven days' 
simple interest on amounts withdrawn within six days after each partial 
withdrawal. If such additional early withdrawal penalties are not 
imposed, the account ceases to be a time deposit. The account may become 
a savings deposit if it meets the requirements for a saving deposit; 
otherwise it becomes a transaction account. Time deposit includes 
funds--
---------------------------------------------------------------------------

    \1\ A time deposit, or a portion thereof, may be paid during the 
period when an early withdrawal penalty would otherwise be required 
under this part without imposing an early withdrawal penalty specified 
by this part:
    (a) Where the time deposit is maintained in an individual retirement 
account established in accordance with 26 U.S.C. 408 and is paid within 
seven days after establishment of the individual retirement account 
pursuant to 26 CFR 1.408-6(d)(4), where it is maintained in a Keogh 
(H.R. 10) plan, or where it is maintained in a 401(k) plan under 26 
U.S.C. 401(k); Provided that the depositor forfeits an amount at least 
equal to the simple interest earned on the amount withdrawn;
    (b) Where the depository institution pays all or a portion of a time 
deposit representing funds contributed to an individual retirement 
account or a Keogh (H.R.10) plan established pursuant to 26 U.S.C. 408 
or 26 U.S.C. 401 or to a 401(k) plan established pursuant to 26 U.S.C. 
401(k) when the individual for whose benefit the account is maintained 
attains age 59\1/2\ or is disabled (as defined in 26 U.S.C. 72(m)(7)) or 
thereafter;
    (c) Where the depository institution pays that portion of a time 
deposit on which federal deposit insurance has been lost as a result of 
the merger of two or more federally insured banks in which the depositor 
previously maintained separate time deposits, for a period of one year 
from the date of the merger;
    (d) Upon the death of any owner of the time deposit funds;
    (e) When any owner of the time deposit is determined to be legally 
incompetent by a court or other administrative body of competent 
jurisdiction; or
    (f) Where a time deposit is withdrawn within ten days after a 
specified maturity date even though the deposit contract provided for 
automatic renewal at the maturity date.
---------------------------------------------------------------------------

    (A) Payable on a specified date not less than seven days after the 
date of deposit;
    (B) Payable at the expiration of a specified time not less than 
seven days after the date of deposit;
    (C) Payable only upon written notice that is actually required to be 
given by the depositor not less than seven days prior to withdrawal;
    (D) Held in club accounts (such as Christmas club accounts and 
vacation club accounts that are not maintained as savings deposits) that 
are deposited under written contracts providing that no withdrawal shall 
be made until a certain number of periodic deposits have been made 
during a period of not less than three months even though some of the 
deposits may be made within six days from the end of the period; or
    (E) Share certificates and certificates of indebtedness issued by 
credit unions, and certificate accounts and notice accounts issued by 
savings and loan associations;
    (ii) A savings deposit;
    (iii) An IBF time deposit meeting the requirements of Sec. 
204.8(a)(2); and
    (iv) Borrowings, regardless of maturity, represented by a promissory 
note, an acknowledgment of advance, or similar obligation described in 
Sec. 204.2(a)(1)(vii) that is issued to, or any bankers' acceptance 
(other than the type described in 12 U.S.C. 372) of the depository 
institution held by--
    (A) Any office located outside the United States of another 
depository institution or Edge or agreement corporation organized under 
the laws of the United States;
    (B) Any office located outside the United States of a foreign bank;
    (C) A foreign national government, or an agency or instrumentality 
thereof,\2\ engaged principally in activities which are ordinarily 
performed in the United States by governmental entities;
---------------------------------------------------------------------------

    \2\ Other than states, provinces, municipalities, or other regional 
or local governmental units or agencies or instrumentalities thereof.
---------------------------------------------------------------------------

    (D) An international entity of which the United States is a member; 
or
    (E) Any other foreign, international, or supranational entity 
specifically designated by the Board.\3\
---------------------------------------------------------------------------

    \3\ The designated entities are specified in 12 CFR 204.125.
---------------------------------------------------------------------------

    (2) A time deposit may be represented by a transferable or 
nontransferable, or a negotiable or nonnegotiable, certificate, 
instrument, passbook, or statement, or by book entry or otherwise.
    (d)(1) Savings deposit means a deposit or account with respect to 
which the depositor is not required by the deposit contract but may at 
any time be required by the depository institution to give written 
notice of an intended withdrawal not less than seven days before 
withdrawal is made, and that is not payable on a specified date or at

[[Page 100]]

the expiration of a specified time after the date of deposit. The term 
savings deposit includes a regular share account at a credit union and a 
regular account at a savings and loan association.
    (2) The term savings deposit also means: A deposit or account, such 
as an account commonly known as a passbook savings account, a statement 
savings account, or as a money market deposit account (MMDA), that 
otherwise meets the requirements of Sec. 204.2(d)(1) and from which, 
under the terms of the deposit contract or by practice of the depository 
institution, the depositor is permitted or authorized to make no more 
than six transfers and withdrawals, or a combination of such transfers 
and withdrawals, per calendar month or statement cycle (or similar 
period) of at least four weeks, to another account (including a 
transaction account) of the depositor at the same institution or to a 
third party by means of a preauthorized or automatic transfer, or 
telephonic (including data transmission) agreement, order or 
instruction, and no more than three of the six such transfers may be 
made by check, draft, debit card, or similar order made by the depositor 
and payable to third parties. A preauthorized transfer includes any 
arrangement by the depository institution to pay a third party from the 
account of a depositor upon written or oral instruction (including an 
order received through an automated clearing house (ACH)) or any 
arrangement by a depository institution to pay a third party from the 
account of the depositor at a predetermined time or on a fixed schedule. 
Such an account is not a transaction account by virtue of an arrangement 
that permits transfers for the purpose of repaying loans and associated 
expenses at the same depository institution (as originator or servicer) 
or that permits transfers of funds from this account to another account 
of the same depositor at the same institution or permits withdrawals 
(payments directly to the depositor) from the account when such 
transfers or withdrawals are made by mail, messenger, automated teller 
machine, or in person or when such withdrawals are made by telephone 
(via check mailed to the depositor) regardless of the number of such 
transfers or withdrawals.\4\
---------------------------------------------------------------------------

    \4\ In order to ensure that no more than the permitted number of 
withdrawals or transfers are made, for an account to come within the 
definition in paragraph (d)(2) of this section, a depository institution 
must either:
    (a) Prevent withdrawals or transfers of funds from this account that 
are in excess of the limits established by paragraph (d)(2) of this 
section, or
    (b) Adopt procedures to monitor those transfers on an ex post basis 
and contact customers who exceed the established limits on more than an 
occasional basis.
    For customers who continue to violate those limits after they have 
been contacted by the depository institution, the depository institution 
must either close the account and place the funds in another account 
that the depositor is eligible to maintain, or take away the transfer 
and draft capacities of the account.
    An account that authorizes withdrawals or transfers in excess of the 
permitted number is a transaction account regardless of whether the 
authorized number of transactions are actually made. For accounts 
described in paragraph (d)(2) of this section, the institution at its 
option may use, on a consistent basis, either the date on the check, 
draft, or similar item, or the date the item is paid in applying the 
limits imposed by that section.
---------------------------------------------------------------------------

    (3) A deposit may continue to be classified as a savings deposit 
even if the depository institution exercises its right to require notice 
of withdrawal.
    (4) Savings deposit does not include funds deposited to the credit 
of the depository institution's own trust department where the funds 
involved are utilized to cover checks or drafts. Such funds are 
transaction accounts.
    (e) Transaction account means a deposit or account from which the 
depositor or account holder is permitted to make transfers or 
withdrawals by negotiable or transferable instrument, payment order of 
withdrawal, telephone transfer, or other similar device for the purpose 
of making payments or transfers to third persons or others or from which 
the depositor may make third party payments at an automated teller 
machine (ATM) or a remote service unit, or other electronic device, 
including by debit card, but the term does not include savings deposits 
or accounts described in paragraph (d)(2) of this section even though 
such accounts permit third party transfers. Transaction account 
includes:

[[Page 101]]

    (1) Demand deposits;
    (2) Deposits or accounts on which the depository institution has 
reserved the right to require at least seven days' written notice prior 
to withdrawal or transfer of any funds in the account and that are 
subject to check, draft, negotiable order of withdrawal, share draft, or 
other similar item, except accounts described in paragraph (d)(2) of 
this section (savings deposits), but including accounts authorized by 12 
U.S.C. 1832(a) (NOW accounts).
    (3) Deposits or accounts on which the depository institution has 
reserved the right to require at least seven days' written notice prior 
to withdrawal or transfer of any funds in the account and from which 
withdrawals may be made automatically through payment to the depository 
institution itself or through transfer or credit to a demand deposit or 
other account in order to cover checks or drafts drawn upon the 
institution or to maintain a specified balance in, or to make periodic 
transfers to such accounts, except accounts described in paragraph 
(d)(2) of this section, but including accounts authorized by 12 U.S.C. 
371a (automatic transfer accounts or ATS accounts).
    (4) Deposits or accounts on which the depository institution has 
reserved the right to require at least seven days' written notice prior 
to withdrawal or transfer of any funds in the account and under the 
terms of which, or by practice of the depository institution, the 
depositor is permitted or authorized to make more than six withdrawals 
per month or statement cycle (or similar period) of at least four weeks 
for the purposes of transferring funds to another account of the 
depositor at the same institution (including transaction account) or for 
making payment to a third party by means of a preauthorized transfer, or 
telephonic (including data transmission) agreement, order or 
instruction, except accounts described in paragraph (d)(2) of this 
section. An account that authorizes more than six such withdrawals in a 
calendar month, or statement cycle (or similar period) of at least four 
weeks, is a transaction account whether or not more than six such 
transfers are made during such period. A preauthorized transfer includes 
any arrangement by the depository institution to pay a third party from 
the account of a depositor upon written or oral instruction (including 
an order received through an automated clearing house (ACH)), or any 
arrangement by a depository institution to pay a third party from the 
account of the depositor at a predetermined time or on a fixed schedule. 
Such an account is not a transaction account by virtue of an arrangement 
that permits transfers for the purpose of repaying loans and associated 
expenses at the same depository institution (as originator or servicer) 
or that permits transfers of funds from this account to another account 
of the same depositor at the same institution or permits withdrawals 
(payments directly to the depositor) from the account when such 
transfers or withdrawals are made by mail, messenger, automated teller 
machine or in person or when such withdrawals are made by telephone (via 
check mailed to the depositor) regardless of the number of such 
transfers or withdrawals.
    (5) Deposits or accounts maintained in connection with an 
arrangement that permits the depositor to obtain credit directly or 
indirectly through the drawing of a negotiable or nonnegotiable check, 
draft, order or instruction or other similar device (including telephone 
or electronic order or instruction) on the issuing institution that can 
be used for the purpose of making payments or transfers to third persons 
or others or to a deposit account of the depositor.
    (6) All deposits other than time and savings accounts, including 
those accounts that are time and savings deposits in form but that the 
Board has determined, by rule or order, to be transaction accounts.
    (f)(1) Nonpersonal time deposit means:
    (i) A time deposit, including an MMDA or any other savings deposit, 
representing funds in which any beneficial interest is held by a 
depositor which is not a natural person;
    (ii) A time deposit, including an MMDA or any other savings deposit, 
that represents funds deposited to the credit of a depositor that is not 
a natural person, other than a deposit to the credit of a trustee or 
other fiduciary if

[[Page 102]]

the entire beneficial interest in the deposit is held by one or more 
natural persons;
    (iii) A transferable time deposit. A time deposit is transferable 
unless it contains a specific statement on the certificate, instrument, 
passbook, statement or other form representing the account that it is 
not transferable. A time deposit that contains a specific statement that 
it is not transferable is not regarded as transferable even if the 
following transactions can be effected: a pledge as collateral for a 
loan, a transaction that occurs due to circumstances arising from death, 
incompetency, marriage, divorce, attachment, or otherwise by operation 
of law or a transfer on the books or records of the institution; and
    (iv) A time deposit represented by a promissory note, an 
acknowledgment of advance, or similar obligation described in paragraph 
(a)(1)(vii) of this section that is issued to, or any bankers' 
acceptance (other than the type described in 12 U.S.C. 372) of the 
depository institution held by:
    (A) Any office located outside the United States of another 
depository institution or Edge or agreement corporation organized under 
the laws of the United States;
    (B) Any office located outside the United States of a foreign bank;
    (C) A foreign national government, or an agency or instrumentality 
thereof,\5\ engaged principally in activities which are ordinarily 
performed in the United States by governmental entities;
---------------------------------------------------------------------------

    \5\ Other than states, provinces, municipalities, or other regional 
or local governmental units or agencies or instrumentalities thereof.
---------------------------------------------------------------------------

    (D) An international entity of which the United States is a member; 
or
    (E) Any other foreign, international, or supranational entity 
specifically designated by the Board.\6\
---------------------------------------------------------------------------

    \6\ The designated entities are specified in 12 CFR 217.126.
---------------------------------------------------------------------------

    (2) Nonpersonal time deposit does not include nontransferable time 
deposits to the credit of or in which the entire beneficial interest is 
held by an individual pursuant to an individual retirement account or 
Keogh (H.R. 10) plan under 26 U.S.C. 408, 401, or non-transferable time 
deposits held by an employer as part of an unfunded deferred-
compensation plan established pursuant to subtitle D of the Revenue Act 
of 1978 (Pub. L. 95-600, 92 Stat. 2763), or a 401(k) plan under 26 
U.S.C. 401(k).
    (g) Natural person means an individual or a sole proprietorship. The 
term does not mean a corporation owned by an individual, a partnership 
or other association.
    (h) Eurocurrency liabilities means:
    (1) For a depository institution or an Edge or Agreement Corporation 
organized under the laws of the United States, the sum, if positive, of 
the following:
    (i) Net balances due to its non-United States offices and its 
international banking facilities (IBFs) from its United States offices;
    (ii)(A) For a depository institution organized under the laws of the 
United States, assets (including participations) acquired from its 
United States offices and held by its non-United States offices, by its 
IBF, or by non-United States offices of an affiliated Edge or Agreement 
Corporation; \7\ or
---------------------------------------------------------------------------

    \7\ This paragraph does not apply to assets that were acquired by an 
IBF from its establishing entity before the end of the second reserve 
computation period after its establishment.
---------------------------------------------------------------------------

    (B) For an Edge or Agreement Corporation, assets (including 
participations) acquired from its United States offices and held by its 
non-United States offices, by its IBF, by non-United States offices of 
its U.S. or foreign parent institution, or by non-United States offices 
of an affiliated Edge or Agreement Corporation; and
    (iii) Credit outstanding from its non-United States offices to 
United States residents (other than assets acquired and net balances due 
from its United States offices), except credit extended (A) from its 
non-United States offices in the aggregate amount of $100,000 or less to 
any United States resident, (B) by a non-United States office that at no 
time during the computation period had credit outstanding to United 
States residents exceeding $1 million, (C) to an international banking 
facility, or (D) to an institution that will be maintaining reserves on 
such credit pursuant to this part. Credit extended from non-United 
States offices or from

[[Page 103]]

IBFs to a foreign branch, office, subsidiary, affiliate of other foreign 
establishment (foreign affiliate) controlled by one or more domestic 
corporations is not regarded as credit extended to a United States 
resident if the proceeds will be used to finance the operations outside 
the United States of the borrower or of other foreign affiliates of the 
controlling domestic corporation(s).
    (2) For a United States branch or agency of a foreign bank, the sum, 
if positive, of the following:
    (i) Net balances due to its foreign bank (including offices thereof 
located outside the United States) and its international banking 
facility after deducting an amount equal to 8 per cent of the following: 
the United States branch's or agency's total assets less the sum of (A) 
cash items in process of collection; (B) unposted debits; (C) demand 
balances due from depository institutions organized under the laws of 
the United States and from other foreign banks; (D) balances due from 
foreign central banks; and (E) positive net balances due from its IBF, 
its foreign bank, and the foreign bank's United States and non-United 
States offices; and
    (ii) Assets (including participations) acquired from the United 
States branch or agency (other than assets required to be sold by 
Federal or State supervisory authorities) and held by its foreign bank 
(including offices thereof located outside the United States), by its 
parent holding company, by non-United States offices or an IBF of an 
affiliated Edge or Agreement Corporation, or by its IBFs.\8\
---------------------------------------------------------------------------

    \8\ See footnote 7.
---------------------------------------------------------------------------

    (i)(1) Cash item in process of collection means:
    (i) Checks in the process of collection, drawn on a bank or other 
depository institution that are payable immediately upon presentation in 
the United States, including checks forwarded to a Federal Reserve Bank 
in process of collection and checks on hand that will be presented for 
payment or forwarded for collection on the following business day;
    (ii) Government checks drawn on the Treasury of the United States 
that are in the process of collection; and
    (iii) Such other items in the process of collection, that are 
payable immediately upon presentation in the United States and that are 
customarily cleared or collected by depository institutions as cash 
items, including:
    (A) Drafts payable through another depository institution;
    (B) Matured bonds and coupons (including bonds and coupons that have 
been called and are payable on presentation);
    (C) Food coupons and certificates;
    (D) Postal and other money orders, and traveler's checks;
    (E) Amounts credited to deposit accounts in connection with 
automated payment arrangements where such credits are made one business 
day prior to the scheduled payment date to insure that funds are 
available on the payment date;
    (F) Commodity or bill of lading drafts payable immediately upon 
presentation in the United States;
    (G) Returned items and unposted debits; and
    (H) Broker security drafts.
    (2) Cash item in process of collection does not include items 
handled as noncash collections and credit card sales slips and drafts.
    (j) Net transaction accounts means the total amount of a depository 
institution's transaction accounts less the deductions allowed under the 
provisions of Sec. 204.3.
    (k)(1) Vault cash means United States currency and coin owned and 
held by a depository institution that may, at any time, be used to 
satisfy depositors' claims.
    (2) Vault cash includes United States currency and coin in transit 
to a Federal Reserve Bank or a correspondent depository institution for 
which the reporting depository institution has not yet received credit, 
and United States currency and coin in transit from a Federal Reserve 
Bank or a correspondent depository institution when the reporting 
depository institution's account at the Federal Reserve or correspondent 
bank has been charged for such shipment.

[[Page 104]]

    (3) Silver and gold coin and other currency and coin whose 
numismatic or bullion value is substantially in excess of face value is 
not vault cash for purposes of this part.
    (l) Pass through account means a balance maintained by a depository 
institution that is not a member bank, by a U.S. branch or agency of a 
foreign bank, or by an Edge or Agreement Corporation, (1) in an 
institution that maintains required reserve balances at a Federal 
Reserve Bank, (2) in a Federal Home Loan Bank, (3) in the National 
Credit Union Administration Central Liquidity Facility, or (4) in an 
institution that has been authorized by the Board to pass through 
required reserve balances if the institution, Federal Home Loan Bank, or 
National Credit Union Administration Central Liquidity Facility 
maintains the funds in the form of a balance in a Federal Reserve Bank 
of which it is a member or at which it maintains an account in 
accordance with rules and regulations of the Board.
    (m)(1) Depository institution means:
    (i) Any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(h)) or any bank that is eligible to apply 
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
    (ii) Any savings bank or mutual savings bank as defined in section 3 
of the Federal Deposit Insurance Act (12 U.S.C. 1813(f), (g));
    (iii) Any insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752(7)) or any credit union that is 
eligible to apply to become an insured credit union under section 201 of 
such Act (12 U.S.C. 1781);
    (iv) Any member as defined in section 2 of the Federal Home Loan 
Bank Act (12 U.S.C. 1422(4)); and
    (v) Any insured institution as defined in section 401 of the 
National Housing Act (12 U.S.C. 1724(a)) or any institution which is 
eligible to apply to become an insured institution under section 403 of 
such Act (12 U.S.C. 1726).
    (2) Depository institution does not include international 
organizations such as the World Bank, the Inter-American Development 
Bank, and the Asian Development Bank.
    (n) Member bank means a depository institution that is a member of 
the Federal Reserve System.
    (o) Foreign bank means any bank or other similar institution 
organized under the laws of any country other than the United States or 
organized under the laws of Puerto Rico, Guam, American Samoa, the 
Virgin Islands, or other territory or possession of the United States.
    (p) [Reserved]
    (q) Affiliate includes any corporation, association, or other 
organization:
    (1) Of which a depository institution, directly or indirectly, owns 
or controls either a majority of the voting shares or more than 50 
percent of the numbers of shares voted for the election of its 
directors, trustees, or other persons exercising similar functions at 
the preceding election, or controls in any manner the election of a 
majority of its directors, trustees, or other persons exercising similar 
functions;
    (2) Of which control is held, directly or indirectly, through stock 
ownership or in any other manner, by the shareholders of a depository 
institution who own or control either a majority of the shares of such 
depository institution or more than 50 percent of the number of shares 
voted for the election of directors of such depository institution at 
the preceding election, or by trustees for the benefit of the 
shareholders of any such depository institution;
    (3) Of which a majority of its directors, trustees, or other persons 
exercising similar functions are directors of any one depository 
institution; or
    (4) Which owns or controls, directly or indirectly, either a 
majority of the shares of capital stock of a depository institution or 
more than 50 percent of the number of shares voted for the election of 
directors, trustees or other persons exercising similar functions of a 
depository institution at the preceding election, or controls in any 
manner the election of a majority of the directors, trustees, or other 
persons exercising similar functions of a depository institution, or for 
the benefit of whose shareholders or members all or substantially all 
the capital stock of a depository institution is held by trustees.

[[Page 105]]

    (r) United States means the States of the United States and the 
District of Columbia.
    (s) United States resident means (1) any individual residing (at the 
time of the transaction) in the United States; (2) any corporation, 
partnership, association or other entity organized in the United States 
(domestic corporation); and (3) any branch or office located in the 
United States of any entity that is not organized in the United States.
    (t) Any deposit that is payable only at an office located outside 
the United States means (1) a deposit of a United States resident \9\ 
that is in a denomination of $100,000 or more, and as to which the 
depositor is entitled, under the agreement with the institution, to 
demand payment only outside the United States or (2) a deposit of a 
person who is not a United States resident \9\ as to which the depositor 
is entitled, under the agreement with the institution, to demand payment 
only outside the United States.
---------------------------------------------------------------------------

    \9\ A deposit of a foreign branch, office, subsidiary, affiliate or 
other foreign establishment (foreign affiliate) controlled by one or 
more domestic corporations is not regarded as a deposit of a United 
States resident if the funds serve a purpose in connection with its 
foreign or international business or that of other foreign affiliates of 
the controlling domestic corporation(s).
---------------------------------------------------------------------------

    (u) Teller's check means a check drawn by a depository institution 
on another depository institution, a Federal Reserve Bank, or a Federal 
Home Loan Bank, or payable at or through a depository institution, a 
Federal Reserve Bank, or a Federal Home Loan Bank, and which the drawing 
depository institution engages or is obliged to pay upon dishonor.

[Reg. D, 45 FR 56018, Aug. 22, 1980, as amended at 46 FR 27092, May 18, 
1981; 46 FR 32428, June 23, 1981; 47 FR 44707, Oct. 12, 1982; 48 FR 
28973, June 24, 1983; 51 FR 9632, 9635, Mar. 20, 1986; 52 FR 47694, 
47695, Dec. 16, 1987; 55 FR 50541, Dec. 7, 1990; 56 FR 15494, Apr. 17, 
1991; 57 FR 38427, Aug. 25, 1992; 57 FR 40598, Sept. 4, 1992; 61 FR 
69025, Dec. 31, 1996; 63 FR 64841, Nov. 24, 1998]



Sec. 204.3  Computation and maintenance.

    (a) Maintenance and reporting of required reserves. (1) Maintenance. 
A depository institution, a U.S. branch or agency of a foreign bank, and 
an Edge or Agreement corporation shall maintain reserves against its 
deposits and Eurocurrency liabilities in accordance with the procedures 
prescribed in this section and Sec. 204.4 and the ratios prescribed in 
Sec. 204.9. Reserve-deficiency charges shall be assessed for 
deficiencies in required reserves in accordance with the provisions of 
Sec. 204.7. For purposes of this part, the obligations of a majority-
owned (50 percent or more) U.S. subsidiary (except an Edge or Agreement 
corporation) of a depository institution shall be regarded as 
obligations of the parent depository institution.
    (2) Reporting. (i) Every depository institution, U.S. branch or 
agency of a foreign bank, and Edge or Agreement corporation shall file a 
report of deposits (or any other required form or statement) directly 
with the Federal Reserve Bank of its District, regardless of the manner 
in which it chooses to maintain required reserve balances. A foreign 
bank's U.S. branches and agencies and an Edge or Agreement corporation's 
offices operating within the same state and the same Federal Reserve 
District shall prepare and file a report of deposits on an aggregated 
basis.
    (ii) A Federal Reserve Bank shall notify the reporting institution 
of its reserve requirements. Where a pass-through arrangement exists, 
the Reserve Bank will also notify the pass-through correspondent of its 
respondent's required reserve balances.
    (iii) The Board and the Federal Reserve Banks will not hold a pass-
through correspondent responsible for guaranteeing the accuracy of the 
reports of deposits submitted by its respondents.
    (3) Allocation of low reserve tranche and exemption from reserve 
requirements. A depository institution, a foreign bank, or an Edge or 
Agreement corporation shall, if possible, assign the low reserve tranche 
and reserve requirement exemption prescribed in Sec. 204.9(a) to only 
one office or to a group of offices filing a single aggregated report of 
deposits. The amount of the reserve requirement exemption allocated to 
an office or group of offices may not exceed the amount of the low

[[Page 106]]

reserve tranche allocated to such office or offices. If the low reserve 
tranche or reserve requirement exemption cannot be fully utilized by a 
single office or by a group of offices filing a single report of 
deposits, the unused portion of the tranche or exemption may be assigned 
to other offices or groups of offices of the same institution until the 
amount of the tranche (or net transaction accounts) or exemption (or 
reservable liabilities) is exhausted. The tranche or exemption may be 
reallocated each year concurrent with implementation of the indexed 
tranche and exemption, or, if necessary during the course of the year to 
avoid underutilization of the tranche or exemption, at the beginning of 
a reserve computation period.
    (b) Form and location of reserves. (1) A depository institution, a 
U.S. branch or agency of a foreign bank, and an Edge or Agreement 
corporation shall hold reserves in the form of vault cash, a balance 
maintained directly with the Federal Reserve Bank in the Federal Reserve 
District in which it is located, or, in the case of nonmember 
institutions, with a pass-through correspondent in accordance with Sec. 
204.3(i).
    (2) (i) For purposes of this section, a depository institution, a 
U.S. branch or agency of a foreign bank, or an Edge or Agreement 
corporation is located in the Federal Reserve District that contains the 
location specified in the institution's charter, organizing certificate, 
or license or, if no such location is specified, the location of its 
head office, unless otherwise determined by the Board under paragraph 
(b)(2)(ii) of this section.
    (ii) If the location specified in paragraph (b)(2)(i) of this 
section, in the Board's judgment, is ambiguous, would impede the ability 
of the Board or the Federal Reserve Banks to perform their functions 
under the Federal Reserve Act, or would impede the ability of the 
institution to operate efficiently, the Board will determine the Federal 
Reserve District in which the institution is located, after consultation 
with the institution and the relevant Federal Reserve Banks. The 
relevant Federal Reserve Banks are the Federal Reserve Bank whose 
District contains the location specified in paragraph (b)(2)(i) of this 
section and the Federal Reserve Bank in whose District the institution 
is proposed to be located. In making this determination, the Board will 
consider any applicable laws, the business needs of the institution, the 
location of the institution's head office, the locations where the 
institution performs its business, and the locations that would allow 
the institution, the Board, and the Federal Reserve Banks to perform 
their functions efficiently and effectively.
    (c) Computation of required reserves for institutions that report on 
a weekly basis. (1) Required reserves are computed on the basis of daily 
average balances of deposits and Eurocurrency liabilities during a 14-
day period ending every second Monday (the computation period). Reserve 
requirements are computed by applying the ratios prescribed in Sec. 
204.9 to the classes of deposits and Eurocurrency liabilities of the 
institution. In determining the reserve balance that is required to be 
maintained with the Federal Reserve, the average daily vault cash held 
during the computation period is deducted from the amount of the 
institution's required reserves.
    (2) The reserve balance that is required to be maintained with the 
Federal Reserve shall be maintained during a 14-day period (the 
``maintenance period'') that begins on the third Thursday following the 
end of a given computation period.
    (d) Computation of required reserves for institutions that report on 
a quarterly basis. For a depository institution that is permitted to 
report quarterly, required reserves are computed on the basis of the 
depository institution's daily average deposit balances during a seven-
day computation period that begins on the third Tuesday of March, June, 
September, and December. In determining the reserve balance that such a 
depository institution is required to maintain with the Federal Reserve, 
the daily average vault cash held during the computation period is 
deducted from the amount of the institution's required reserves. The 
reserve balance that is required to be maintained with the Federal 
Reserve shall be maintained during a corresponding

[[Page 107]]

period that begins on the fourth Thursday following the end of the 
institution's computation period and ends on the fourth Wednesday after 
the close of the institution's next computation period.
    (e) Computation of transaction accounts. Overdrafts in demand 
deposit or other transaction accounts are not to be treated as negative 
demand deposits or negative transaction accounts and shall not be netted 
since overdrafts are properly reflected on an institution's books as 
assets. However, where a customer maintains multiple transaction 
accounts with a depository institution, overdrafts in one account 
pursuant to a bona fide cash management arrangement are permitted to be 
netted against balances in other related transaction accounts for 
reserve requirement purposes.
    (f) Deductions allowed in computing reserves. (1) In determining the 
reserve balance required under this part, the amount of cash items in 
process of collection and balances subject to immediate withdrawal due 
from other depository institutions located in the United States 
(including such amounts due from United States branches and agencies of 
foreign banks and Edge and agreement corporations) may be deducted from 
the amount of gross transaction accounts. The amount that may be 
deducted may not exceed the amount of gross transaction accounts.
    (2) United States branches and agencies of a foreign bank may not 
deduct balances due from another United States branch or agency of the 
same foreign bank, and United States offices of an Edge or Agreement 
Corporation may not deduct balances due from another United States 
office of the same Edge Corporation.
    (3) Balances ``due from other depository institutions'' do not 
include balances due from Federal Reserve Banks, pass through accounts, 
or balances (payable in dollars or otherwise) due from banking offices 
located outside the United States. An institution exercising fiduciary 
powers may not include in ``balances due from other depository 
institutions'' amounts of trust funds deposited with other banks and due 
to it as a trustee or other fiduciary.
    (g) Availability of cash items as reserves. Cash items forwarded to 
a Federal Reserve Bank for collection and credit shall not be counted as 
part of the reserve balance to be carried with the Federal Reserve until 
the expiration of the time specified in the appropriate time schedule 
established under Regulation J, ``Collection of Checks and Other Items 
and Transfers of Funds'' (12 CFR part 210). If a depository institution 
draws against items before that time, the charge will be made to its 
reserve account if the balance is sufficient to pay it; any resulting 
impairment of reserve balances will be subject to the penalties provided 
by law and to the reserve deficiency charges provided by this part. 
However, the Federal Reserve Bank may, at its discretion, refuse to 
permit the withdrawal or other use of credit given in a reserve account 
for any time for which the Federal Reserve bank has not received payment 
in actually and finally collected funds.
    (h) Carryover of excesses or deficiencies. Any excess or deficiency 
in a depository institution's account that is held directly or 
indirectly with a Federal Reserve Bank shall be carried over and applied 
to that account in the next maintenance period as specified in this 
paragraph. The amount of any such excess or deficiency that is carried 
over shall not exceed the greater of:
    (1) The amount obtained by multiplying .04 times the sum of the 
depository institution's required reserves and the depository 
institution's required clearing balance, if any, and then subtracting 
from this product the depository institution's required charge-free 
band, if any; or
    (2) $50,000, minus the depository institution's required charge-free 
band, if any. Any carryover not offset during the next period may not be 
carried over to subsequent periods.
    (i) Pass-through rules. (1) Procedure. (i) A nonmember depository 
institution, a U.S. branch or agency of a foreign bank, or an Edge or 
Agreement corporation required to maintain reserve balances (respondent) 
may select only one institution to pass through its required reserve 
balances, unless otherwise permitted by Federal Reserve Bank in whose 
district the respondent

[[Page 108]]

is located. Eligible institutions through which respondent required 
reserve balances may be passed (correspondents) are Federal Home Loan 
Banks, the National Credit Union Administration Central Liquidity 
Facility, and depository institutions, U.S. branches or agencies of 
foreign banks, and Edge and Agreement corporations that maintain 
required reserve balances at a Federal Reserve office. In addition, the 
Board reserves the right to permit other institutions, on a case-by-case 
basis, to serve as pass-through correspondents. The correspondent chosen 
must subsequently pass through the required reserve balances of its 
respondents directly to a Federal Reserve Bank. The correspondent 
placing funds with a Federal Reserve Bank on behalf of respondents will 
be responsible for account maintenance as described in paragraphs (i)(2) 
and (i)(3) of this section.
    (ii) Respondents or correspondents may institute, terminate, or 
change pass-through arrangements for the maintenance of required reserve 
balances by providing all documentation required for the establishment 
of the new arrangement or termination of the existing arrangement to the 
Federal Reserve Banks involved within the time period provided for such 
a change by those Reserve Banks.
    (2) Account maintenance. A correspondent that passes through 
required reserve balances of respondents shall maintain such balances, 
along with the correspondent's own required reserve balances (if any), 
in a single commingled account at the Federal Reserve Bank in whose 
District the correspondent is located, unless otherwise permitted by the 
Reserve Bank. The balances held by the correspondent in an account at a 
Reserve Bank are the property of the correspondent and represent a 
liability of the Reserve Bank solely to the correspondent, regardless of 
whether the funds represent the reserve balances of another institution 
that have been passed through the correspondent.
    (3) Responsibilities of parties. (i) Each individual depository 
institution, U.S. branch or agency of a foreign bank, or Edge or 
Agreement corporation is responsible for maintaining its required 
reserve balance either directly with a Federal Reserve Bank or through a 
pass-through correspondent.
    (ii) A pass-through correspondent shall be responsible for assuring 
the maintenance of the appropriate aggregate level of its respondents' 
required reserve balances. A Federal Reserve Bank will compare the total 
reserve balance required to be maintained in each account with the total 
actual reserve balance held in such account for purposes of determining 
required reserve deficiencies, imposing or waiving charges for 
deficiencies in required reserves, and for other reserve maintenance 
purposes. A charge for a deficiency in the aggregate level of the 
required reserve balance will be imposed by the Reserve Bank on the 
correspondent maintaining the account.
    (iii) Each correspondent is required to maintain detailed records 
for each of its respondents in a manner that permits Federal Reserve 
Banks to determine whether the respondent has provided a sufficient 
required reserve balance to the correspondent. A correspondent passing 
through a respondent's reserve balance shall maintain records and make 
such reports as the Board or Reserve Bank requires in order to insure 
the correspondent's compliance with its responsibilities for the 
maintenance of a respondent's reserve balance. Such records shall be 
available to the Reserve Banks as required.
    (iv) The Federal Reserve Bank may terminate any pass-through 
relationship in which the correspondent is deficient in its 
recordkeeping or other responsibilities.
    (v) Interest paid on supplemental reserves (if such reserves are 
required under Sec. 204.6) held by a respondent will be credited to the 
account maintained by the correspondent.

[45 FR 56018, Aug. 22, 1980, as amended at 45 FR 58100, Sept. 2, 1980; 
45 FR 81537, Dec. 11, 1980; 46 FR 32430, June 23, 1981; 47 FR 44707, 
Oct. 12, 1982; 47 FR 55206, Dec. 8, 1982; 48 FR 17335, 17336, Apr. 22, 
1983; 51 FR 9635, Mar. 20, 1986; 55 FR 50541, Dec. 7, 1990; 57 FR 38417, 
38427, Aug. 25, 1992; 61 FR 69025, Dec. 31, 1996; 62 FR 34616, June 27, 
1997; 62 FR 59778, Nov. 5, 1997; 63 FR 15071, Mar. 30, 1998]

[[Page 109]]



Sec. 204.4  Transitional adjustments in mergers.

    In cases of mergers and consolidations of depository institutions, 
the amount of reserves that shall be maintained by the surviving 
institution shall be reduced by an amount determined by multiplying the 
amount by which the required reserves during the computation period 
immediately preceding the date of the merger (computed as if the 
depository institutions had merged) exceeds the sum of the actual 
required reserves of each depository institution during the same 
computation period, times the appropriate percentage as specified in the 
following schedule:

------------------------------------------------------------------------
                                                              Percentage
                                                              applied to
                                                              difference
   Maintenance periods occurring during quarters following    to compute
                   merger or consolidation                     amount to
                                                                  be
                                                              subtracted
------------------------------------------------------------------------
1...........................................................        87.5
2...........................................................        75.0
3...........................................................        62.5
4...........................................................        50.0
5...........................................................        37.5
6...........................................................        25.0
7...........................................................        12.5
8 and succeeding............................................         0
------------------------------------------------------------------------


[61 FR 69025, Dec. 31, 1996]



Sec. 204.5  Emergency reserve requirement.

    (a) Finding by Board. The Board may impose, after consulting with 
the appropriate committees of Congress, additional reserve requirements 
on depository institutions at any ratio on any liability upon a finding 
by at least five members of the Board that extraordinary circumstances 
require such action.
    (b) Term. Any action taken under this section shall be valid for a 
period not exceeding 180 days, and may be extended for further periods 
of up to 180 days each by affirmative action of at least five members of 
the Board for each extension.
    (c) Reports to Congress. The Board shall transmit promptly to 
Congress a report of any exercise of its authority under this paragraph 
and the reasons for the exercise of authority.
    (d) Reserve requirements. At present, there are no emergency reserve 
requirements imposed under this section.

[45 FR 56018, Aug. 22, 1980]



Sec. 204.6  Supplemental reserve requirement.

    (a) Finding by Board. Upon the affirmative vote of at least five 
members of the Board and after consultation with the Board of Directors 
of the Federal Deposit Insurance Corporation, the Federal Home Loan Bank 
Board, and the National Credit Union Administration Board, the Board may 
impose a supplemental reserve requirement on every depository 
institution of not more than 4 percent of its total transaction 
accounts. A supplemental reserve requirement may be imposed if:
    (1) The sole purpose of the requirement is to increase the amount of 
reserves maintained to a level essential for the conduct of monetary 
policy;
    (2) The requirement is not imposed for the purpose of reducing the 
cost burdens resulting from the imposition of basic reserve 
requirements;
    (3) Such requirement is not imposed for the purpose of increasing 
the amount of balances needed for clearing purposes; and
    (4) On the date on which supplemental reserve requirements are 
imposed, the total amount of basic reserve requirements is not less than 
the amount of reserves that would be required on transaction accounts 
and nonpersonal time deposits under the initial reserve ratios 
established by the Monetary Control Act of 1980 (Pub. L. 96-221) in 
effect on September 1, 1980.
    (b) Term. (1) If a supplemental reserve requirement has been imposed 
for a period of one year or more, the Board shall review and determine 
the need for continued maintenance of supplemental reserves and shall 
transmit annual reports to the Congress regarding the need for 
continuing such requirement.
    (2) Any supplemental reserve requirement shall terminate at the 
close of the first 90-day period after the requirement is imposed during 
which the average amount of supplemental reserves required are less than 
the

[[Page 110]]

amount of reserves which would be required if the ratios in effect on 
September 1, 1980, were applied.
    (c) Earnings Participation Account. A depository institutions's 
supplemental reserve requirement shall be maintained by the Federal 
Reserve Banks in an Earnings Participation Account. Such balances shall 
receive earnings to be paid by the Federal Reserve Banks during each 
calendar quarter at a rate not to exceed the rate earned on the 
securities portfolio of the Federal Reserve System during the previous 
calendar quarter. Additional rules and regulations maybe prescribed by 
the Board concerning the payment of earnings on Earnings Participation 
Accounts by Federal Reserve Banks.
    (d) Report to Congress. The Board shall transmit promptly to the 
Congress a report stating the basis for exercising its authority to 
require a supplemental reserve under this section.
    (e) Reserve requirements. At present, there are no supplemental 
reserve requirements imposed under this section.

[45 FR 56018, Aug. 22, 1980, as amended at 45 FR 81537, Dec. 11, 1980]



Sec. 204.7  Penalties.

    (a) Charges for deficiencies--(1) Assessment of charges. 
Deficiencies in a depository institution's required reserve balance, 
after application of the carryover provided in Sec. 204.3(h) are 
subject to reserve deficiency charges. Federal Reserve Banks are 
authorized to assess charges for deficiencies in required reserves at a 
rate of 1 percentage point per year above the primary credit rate, as 
provided in Sec. 201.51(a) of this chapter, in effect for borrowings 
from the Federal Reserve Bank on the first day of the calendar month in 
which the deficiencies occurred. Charges shall be assessed on the basis 
of daily average deficiencies during each maintenance period. Reserve 
Banks may, as an alternative to levying monetary charges, after 
consideration of the circumstances involved, permit a depository 
institution to eliminate deficiencies in its required reserve balance by 
maintaining additional reserves during subsequent reserve maintenance 
periods.
    (2) Waivers. (i) Reserve Banks may waive the charges for reserve 
deficiencies except when the deficiency arises out of a depository 
institution's gross negligence or conduct that is inconsistent with the 
principles and purposes of reserve requirements. Each Reserve Bank has 
adopted guidelines that provide for waivers of small charges. The 
guidelines also provide for waiving the charge once during a two-year 
period for any deficiency that does not exceed a certain percentage of 
the depository institution's required reserves. Decisions by Reserve 
Banks to waive charges in other situations are based on an evaluation of 
the circumstances in each individual case and the depository 
institution's reserve maintenance record. If a depository institution 
has demonstrated a lack of due regard for the proper maintenance of 
required reserves, the Reserve Bank may decline to exercise the waiver 
privilege and assess all charges regardless of amount or reason for the 
deficiency.
    (ii) In individual cases, where a federal supervisory authority 
waives a liquidity requirement, or waives the penalty for failing to 
satisfy a liquidity requirement, the Reserve Bank in the District where 
the involved depository institution is located shall waive the reserve 
requirement imposed under this part for such depository institution when 
requested by the federal supervisory authority involved.
    (b) Penalties for Violations. Violations of this part may be subject 
to assessment of civil money penalties by the Board under authority of 
section 19(1) of the Federal Reserve Act (12 U.S.C 505) as implemented 
in 12 CFR part 263. In addition, the Board and any other Federal 
financial institution supervisory authority may enforce this part with 
respect to depository institutions subject to their jurisdiction under 
authority conferred by law to undertake cease and desist proceedings.

[Reg. D, 44 FR 56018, Aug. 22, 1980, as amended at 56 FR 15495, Apr. 17, 
1991; 61 FR 69025, Dec. 31, 1996; 67 FR 67787, Nov. 7, 2002]



Sec. 204.8  International banking facilities.

    (a) Definitions. For purposes of this part, the following 
definitions apply:
    (1) International banking facility or IBF means a set of asset and 
liability accounts segregated on the books and

[[Page 111]]

records of a depository institution, United States branch or agency of a 
foreign bank, or an Edge or Agreement Corporation that includes only 
international banking facility time deposits and international banking 
facility extensions of credit.
    (2) International banking facility time deposit or IBF time deposit 
means a deposit, placement, borrowing or similar obligation represented 
by a promissory note, acknowledgment of advance, or similar instrument 
that is not issued in negotiable or bearer form, and
    (i)(A) That must remain on deposit at the IBF at least overnight; 
and
    (B) That is issued to
    (1) Any office located outside the United States of another 
depository institution organized under the laws of the United States or 
of an Edge or Agreement Corporation;
    (2) Any office located outside the United States of a foreign bank;
    (3) A United States office or a non-United States office of the 
entity establishing the IBF;
    (4) Another IBF; or
    (5) A foreign national government, or an agency or instrumentality 
thereof,\10\ engaged principally in activities which are ordinarily 
performed in the United States by governmental entities; an 
international entity of which the United States is a member; or any 
other foreign international or supranational entity specifically 
designated by the Board;\11\ or
---------------------------------------------------------------------------

    \10\ Other than states, provinces, municipalities, or other regional 
or local governmental units or agencies or instrumentalities thereof.
    \11\ The designated entities are specified in 12 CFR 204.125.
---------------------------------------------------------------------------

    (ii) (A) That is payable
    (1) On a specified date not less than two business days after the 
date of deposit;
    (2) Upon expiration of a specified period of time not less than two 
business days after the date of deposit; or
    (3) Upon written notice that actually is required to be given by the 
depositor not less than two business days prior to the date of 
withdrawal;
    (B) That represents funds deposited to the credit of a non-United 
States resident or a foreign branch, office, subsidiary, affiliate, or 
other foreign establishment (foreign affiliate) controlled by one or 
more domestic corporations provided that such funds are used only to 
support the operations outside the United States of the depositor or of 
its affiliates located outside the United States; and
    (C) That is maintained under an agreement or arrangement under which 
no deposit or withdrawal of less than $100,000 is permitted, except that 
a withdrawal of less than $100,000 is permitted if such withdrawal 
closes an account.
    (3) International banking facility extension of credit or IBF loan 
means any transaction where an IBF supplies funds by making a loan, or 
placing funds in a deposit account. Such transactions may be represented 
by a promissory note, security, acknowledgment of advance, due bill, 
repurchase agreement, or any other form of credit transaction. Such 
credit may be extended only to:
    (i) Any office located outside the United States of another 
depository institution organized under the laws of the United States or 
of an Edge or Agreement Corporation;
    (ii) Any office located outside the United States of a foreign bank;
    (iii) A United States or a non-United States office of the 
institution establishing the IBF;
    (iv) Another IBF;
    (v) A foreign national government, or an agency or instrumentality 
thereof,\12\ engaged principally in activities which are ordinarily 
performed in the United States by governmental entities; an 
international entity of which the United States is a member; or any 
other foreign international or supranational entity specifically 
designated by the Board; \13\ or
---------------------------------------------------------------------------

    \12\ See footnote 10.
    \13\ See footnote 11.
---------------------------------------------------------------------------

    (vi) A non-United States resident or a foreign branch, office, 
subsidiary, affiliate or other foreign establishment (foreign affiliate) 
controlled by one or more domestic corporations provided that the funds 
are used only to finance the operations outside the United States of the 
borrower or of its affiliates located outside the United States.

[[Page 112]]

    (b) Acknowledgment of use of IBF deposits and extensions of credit. 
An IBF shall provide written notice to each of its customers (other than 
those specified in Sec. 204.8(a)(2)(i)(B) and Sec. 204.8(a)(3) (i) 
through (v)) at the time a deposit relationship or a credit relationship 
is first established that it is the policy of the Board of Governors of 
the Federal Reserve System that deposits received by international 
banking facilities may be used only to support the depositor's 
operations outside the United States as specified in Sec. 
204.8(a)(2)(ii)(B) and that extensions of credit by IBFs may be used 
only to finance operations outside of the United States as specified in 
Sec. 204.8(a)(3)(vi). In the case of loans to or deposits from foreign 
affiliates of U.S. residents, receipt of such notice must be 
acknowledged in writing whenever a deposit or credit relationship is 
first established with the IBF.
    (c) Exemption from reserve requirements. An institution that is 
subject to the reserve requirements of this part is not required to 
maintain reserves against its IBF time deposits or IBF loans. Deposit-
taking activities of IBFs are limited to accepting only IBF time 
deposits and lending activities of IBFs are restricted to making only 
IBF loans.
    (d) Establishment of an international banking facility. A depository 
institution, an Edge or Agreement Corporation or a United States branch 
or agency of a foreign bank may establish an IBF in any location where 
it is legally authorized to engage in IBF business. However, only one 
IBF may be established for each reporting entity that is required to 
submit a Report of Transaction Accounts, Other Deposits and Vault Cash 
(Form FR 2900).
    (e) Notification to Federal Reserve. At least fourteen days prior to 
the first reserve computation period that an institution intends to 
establish an IBF it shall notify the Federal Reserve Bank of the 
district in which it is located of its intent. Such notification shall 
include a statement of intention by the institution that it will comply 
with the rules of this part concerning IBFs, including restrictions on 
sources and uses of funds, and recordkeeping and accounting 
requirements. Failure to comply with the requirements of this part shall 
subject the institution to reserve requirements under this part or 
result in the revocation of the institution's ability to operate an IBF.
    (f) Recordkeeping requirements. A depository institution shall 
segregate on its books and records the asset and liability accounts of 
its IBF and submit reports concerning the operations of its IBF as 
required by the Board.

[46 FR 32429, June 23, 1981, as amended at 51 FR 9636, Mar. 20, 1986; 56 
FR 15495, Apr. 17, 1991; 61 FR 69025, Dec. 31, 1996]



Sec. 204.9  Reserve requirement ratios.

    The following reserve requirement ratios are prescribed for all 
depository institutions, banking Edge and agreement corporations, and 
United States branches and agencies of foreign banks:

------------------------------------------------------------------------
              Category                       Reserve requirement
------------------------------------------------------------------------
Net transaction accounts:
    $0 to $7.0 million.............  0 percent of amount.
    Over $7.0 million and up to      3 percent of amount.
     $47.6 million.
    Over $47.6 million.............  $1,218,000 plus 10 percent of
                                      amount over $47.6 million.
Nonpersonal time deposits..........  0 percent.
Eurocurrency liabilities...........  0 percent.
------------------------------------------------------------------------


[69 FR 60545, Oct. 12, 2004]

                             Interpretations



Sec. 204.121  Bankers' banks.

    (a)(1) The Federal Reserve Act, as amended by the Monetary Control 
Act of 1980 (title I of Pub. L. 96-221), imposes Federal reserve 
requirements on depository institutions that maintain transaction 
accounts or nonpersonal time deposits. Under section 19(b)(9), however, 
a depository institution is not required to maintain reserves if it:
    (i) Is organized solely to do business with other financial 
institutions;

[[Page 113]]

    (ii) Is owned primarily by the financial institutions with which it 
does business; and
    (iii) Does not do business with the general public.

Depository institutions that satisfy all of these requirements are 
regarded as bankers' banks.
    (2) In its application of these requirements to specific 
institutions, the Board will use the following standards:
    (i) A depository institution may be regarded as organized solely to 
do business with other depository institutions even if, as an incidental 
part to its activities, it does business to a limited extent with 
entities other than depository institutions. The extent to which the 
institution may do business with other entities and continue to be 
regarded as a bankers' bank is specified in paragraph (a)(2)(iii) of 
this section.
    (ii) A depository institution will be regarded as being owned 
primarily by the institutions with which it does business if 75 per cent 
or more of its capital is owned by other depository institutions. The 75 
per cent or more ownership rule applies regardless of the type of 
depository institution.
    (iii) A depository institution will not be regarded as doing 
business with the general public if it meets two conditions. First, the 
range of customers with which the institution does business must be 
limited to depository institutions, including subsidiaries or 
organizations owned by depository institutions; directors, officers or 
employees of the same or other depository institutions; individuals 
whose accounts are acquired at the request of the institution's 
supervisory authority due to the actual or impending failure of another 
depository institution; share insurance funds; and depository 
institution trade associations. Second, the extent to which the 
depository institution makes loans to, or investments in, the above 
entities (other than depository institutions) cannot exceed 10 per cent 
of total assets, and the extent to which it receives deposits (or shares 
if the institution does not receive deposits) from or issues other 
liabilities to the above entities (other than depository institutions) 
cannot exceed 10 per cent of total liabilities (or net worth if the 
institution does not receive deposits).

If a depository institution is unable to meet all of these requirements 
on a continuing basis, it will not be regarded as a bankers' bank and 
will be required to satisfy Federal reserve requirements on all of its 
transaction accounts and nonpersonal time deposits.
    (b) (1) Section 19(c)(1) of the Federal Reserve Act, as amended by 
the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides 
that Federal reserve requirements may be satisfied by the maintenance of 
vault cash or balances in a Federal Reserve Bank. Depository 
institutions that are not members of the Federal Reserve System may also 
satisfy reserve requirements by maintaining a balance in another 
depository institution that maintains required reserve balances at a 
Federal Reserve Bank, in a Federal Home Loan Bank, or in the National 
Credit Union Administration Central Liquidity Facility if the balances 
maintained by such institutions are subsequently passed through to the 
Federal Reserve Bank.
    (2) On August 27, 1980, the Board announced the procedures that will 
apply to such pass-through arrangements (45 FR 58099). Section 
204.3(i)(1) provides that the Board may permit, on a case-by-case basis, 
depository institutions that are not themselves required to maintain 
reserves (bankers' banks) to act as pass-through correspondents if 
certain criteria are satisfied. The Board has determined that a bankers' 
bank may act as a pass-through correspondent if it enters into an 
agreement with the Federal Reserve to accept responsibility for the 
maintenance of pass-through reserve accounts in accordance with 
Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied 
that the quality of management and financial resources of the 
institution are adequate in order to enable the institution to serve as 
a pass-through correspondent in accordance with Regulation D. 
Satisfaction of these criteria will assure that pass-through 
arrangements are maintained properly without additional financial risk 
to the Federal Reserve.
    (3) In order to determine uniformly the adequacy of managerial and 
financial resources, the Board will consult

[[Page 114]]

with the Federal supervisor for the type of institution under 
consideration. Because the Board does not possess direct experience with 
supervising depository institutions other than commerical banks, and 
does not intend to involve itself in the direct supervision of such 
institutions, it will request the National Credit Union Administration 
to review requests from credit unions that qualify as bankers' banks and 
the Federal Home Loan Bank Board to review requests from savings and 
loan associations that qualify as bankers' banks, regardless of charter 
or insurance status. (The Board, itself, will consider requests from all 
commercial banks that qualify as bankers' banks.) If the Federal 
supervisor does not find the institution's managerial or financial 
resources to be adequate, the Board will not permit the institution to 
act as a pass-through correspondent. In order to assure the continued 
adequacy of managerial and financial resources, it is anticipated that 
the appropriate Federal supervisor will, on a periodic basis, review and 
evaluate the managerial and financial resources of the institution in 
order to determine whether it should continue to be permitted to act as 
a pass-through correspondent. It is anticipated that, with respect to 
state chartered institutions, the Federal supervisor may discuss the 
request with the institute State supervisor. The Board believes that 
this procedure will promote uniformity of treatment for all types of 
bankers' banks, and provide consistent advice concerning managerial 
ability and financial strength from supervisory authorities that are in 
a better position to evaluate these criteria for depository institutions 
that are not commerical banks.
    (4) Requests for a determination as to whether a depository 
institution will be regarded as a bankers' bank for purposes of the 
Federal Reserve Act or for permission to act as a pass-through 
correspondent may be addressed to the Federal Reserve Bank in whose 
District the main office of the despository institution is located or to 
the Secretary, Board of Governors of the Federal Reserve System, 
Washington, DC 20551. The Board will act promptly on all requests 
received directly or through Federal Reserve Banks.

[45 FR 69879, Oct. 22, 1980]



Sec. 204.122  Secondary market activities of international banking 
facilities.

    (a) Questions have been raised concerning the extent to which 
international banking facilities may purchase (or sell) IBF-eligible 
assets such as loans (including loan participations), securities, CDs, 
and bankers' acceptances from (or to) third parties. Under the Board's 
regulations, as specified in Sec. 204.8 of Regulation D, IBFs are 
limited, with respect to making loans and accepting deposits, to dealing 
only with certain customers, such as other IBFs and foreign offices of 
other organizations, and with the entity establishing the IBF. In 
addition, an IBF may extend credit to a nonbank customer only to finance 
the borrower's non-U.S. operations and may accept deposits from a 
nonbank customer that are used only to support the depositor's non-U.S. 
business.
    (b) Consistent with the Board's intent, IBFs may purchase IBF-
eligible assets \1\ from, or sell such assets to, any domestic or 
foreign customer provided that the transactions are at arm's length 
without recourse. However, an IBF of a U.S. depository institution may 
not purchase assets from, or sell such assets to, any U.S. affiliate of 
the institution establishing the IBF; an IBF of an Edge or Agreement 
corporation may not purchase assets from, or sell assets to, any U.S. 
affiliate of the Edge or Agreement corporation or to U.S. branches of 
the Edge or Agreement corporation or to U.S. branches of the Edge or 
Agreement corporation other than the branch \2\ establishing the IBF; 
and an IBF of a U.S. branch or agency of a foreign bank may not purchase 
assets from, or sell assets to any

[[Page 115]]

U.S. affiliates of the foreign bank or to any other U.S. branch or 
agency of the same foreign bank.\2\ (This would not pevent an IBF from 
purchasing (or selling) assets directly from (or to) any IBF, including 
an IBF of an affiliate, or to the institution establishing the IBF; such 
purchases from the institution establishing the IBF would continue to be 
subject to Eurocurrency reserve requirements except during the initial 
four-week transition period.) Since repurchase agreements are regarded 
as loans, transactions involving repurchase agreements are permitted 
only with customers who are otherwise eligible to deal with IBFs, as 
specified in Regulation D.
---------------------------------------------------------------------------

    \1\ In order for an asset to be eligible to be held by an IBF, the 
obligor or issuer of the instrument, or in the case of bankers' 
acceptances, the customer and any endorser or acceptor, must be an IBF-
eligible customer.
    \2\ Branches of Edge or Agreement corporations and agencies and 
branches of foreign banks that file a consolidated report for reserve 
requirements purposes (FR 2900) are considered to be the establishing 
entity of an IBF.
---------------------------------------------------------------------------

    (c) In the case of purchases of assets, in order to determine that 
the Board's use-of-proceeds requirement has been met, it is necessary 
for the IBF (1) to ascertain that the applicable IBF notices and 
acknowledgments have been provided, or (2) in the case of loans or 
securities, to review the documentation underlying the loan or security, 
or accompanying the security (e.g., the prospectus or offering 
statement), to determine that the proceeds are being used only to 
finance the obligor's operations outside the U.S., or (3) in the case of 
loans, to obtain a statement from either the seller or borrower that the 
proceeds are being used only to finance operations outside the U.S., or 
in the case of securities, to obtain such a statement from the obligor, 
or (4) in the case of bankers' acceptances, to review the underlying 
documentation to determine that the proceeds are being used only to 
finance the parties' operations outside the United States.
    (d) Under the Board's regulations, IBFs are not permitted to issue 
negotiable Euro-CDs, bankers' acceptances, or similar instruments. 
Accordingly, consistent with the Board's intent in this area, IBFs may 
sell such instruments issued by third parties that qualify as IBF-
eligible assets provided that the IBF, its establishing institution and 
any affiliate of the institution establishing the IBF do not endorse, 
accept, or otherwise guarantee the instrument.

[46 FR 62812, Dec. 29, 1981, as amended at 52 FR 47694, Dec. 16, 1987]



Sec. 204.123  Sale of Federal funds by investment companies or trusts 

in which the entire beneficial interest is held exclusively by depository 
institutions.

    (a) The Federal Reserve Act, as amended by the Monetary Control Act 
of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements 
on transaction accounts and nonpersonnel time deposits held by 
depository institutions. The Board is empowered under the Act to 
determine what types of obligations shall be deemed a deposit. 
Regulation D--Reserve Requirements of Depository Institutions exempts 
from the definition of deposit those obligations of a depository 
institution that are issued or undertaken and held for the account of a 
domestic office of another depository institution (12 CFR 
204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of deposit 
are known collectively as the Federal funds or interbank exemption.
    (b) Title IV of the Depository Institutions Deregulation and 
Monetary Control Act of 1980 authorizes Federal savings and loan 
associations to invest in open-ended management investment companies 
provided the funds' investment portfolios are limited to the types of 
investments that a Federal savings and loan association could hold 
without limit as to percentage of assets (12 U.S.C. 1464(c)(1)(Q)). Such 
investments include mortgages, U.S. Government and agency securities, 
securities of states and political subdivisions, sales of Federal funds 
and deposits held at banks insured by the Federal Deposit Insurance 
Corporation. The Federal Credit Union Act authorizes Federal credit 
unions to aggregate their funds in trusts provided the trust is limited 
to such investments that Federal credit unions could otherwise make. 
Such investments include loans to credit union members, obligations of 
the U.S. government or secured by the U.S. government, loans to other 
credit unions, shares or accounts held at savings and loan associations 
or mutual savings banks insured by FSLIC or FDIC, sales of Federal funds 
and shares of any central credit union whose investments are 
specifically authorized by the board of directors of the Federal

[[Page 116]]

credit union making the investment (12 U.S.C. 1757(7)).
    (c) The Board has considered whether an investment company or trust 
whose entire beneficial interest is held by depository institutions, as 
defined in Regulation D, would be eligible for the Federal funds 
exemption from Reserve requirements and interest rate limitations. The 
Board has determined that such investment companies or trusts are 
eligible to participate in the Federal funds market because, in effect, 
they act as mere conduits for the holders of their beneficial interest. 
To be regarded by the Board as acting as a conduit and, thus, be 
eligible for participation in the Federal funds market, an investment 
company or trust must meet each of the following conditions:
    (1) The entire beneficial interest in the investment company or 
trust must be held by depository institutions, as defined in Regulation 
D. These institutions presently may participate directly in the Federal 
funds market. If the entire beneficial interest in the investment 
company or trust is held only by depository institutions, the Board will 
regard the investment company or trust as a mere conduit for the holders 
of its beneficial interest.
    (2) The assets of the investment company or trust must be limited to 
investments that all of the holders of the beneficial interest could 
make directly without limit.
    (3) Holders of the beneficial interest in the investment company or 
trust must not be allowed to make third party payments from their 
accounts with the investment company or trust. The Board does not regard 
an investment company or trust that offers third party payment 
capabilities or other similar services which actively transform the 
nature of the funds passing between the holders of the beneficial 
interest and the Federal funds market as mere conduits.

The Board expects that the above conditions will be included in 
materials filed by an investment company or trust with the appropriate 
regulatory agencies.

    (d) The Board believes that permitting sales of Federal funds by 
investment companies or trusts whose beneficial interests are held 
exclusively by depository institutions, that invest solely in assets 
that the holders of their beneficial interests can otherwise invest in 
without limit, and do not provide third party payment capabilities offer 
the potential for an increased yield for thrifts. This is consistent 
with Congressional intent to provide thrifts with convenient liquidity 
vehicles.

[47 FR 8987, Mar. 3, 1982, as amended at 52 FR 47695, Dec. 16, 1987]



Sec. 204.124  Repurchase agreement involving shares of a money market 

mutual fund whose portfolio consists wholly of United States Treasury 
and Federal agency securities.

    (a) The Federal Reserve Act, as amended by the Monetary Control Act 
of 1980 (title I of Pub. L. 96-221) imposes Federal reserve requirements 
on transaction accounts and nonpersonal time deposits held by depository 
institutions. The Board is empowered under the Act to determine what 
types of obligations shall be deemed a deposit (12 U.S.C. 461). 
Regulation D--Reserve Requirements of Depository Institutions exempts 
from the definition of deposit those obligations of a depository 
institution that arise from a transfer of direct obligations of, or 
obligations that are fully guaranteed as to principal and interest by, 
the United States government or any agency thereof that the depository 
institution is obligated to repurchase (12 CFR 204.2(a)(1)(vii)(B)).
    (b) The National Bank Act provides that a national bank may purchase 
for its own account investment securities under limitations and 
restrictions as the Comptroller may prescribe (12 U.S.C. 24, ]7). The 
statute defines investment securities to mean marketable obligations 
evidencing indebtedness of any person in the form of bonds, notes, and 
debentures. The Act further limits a national bank's holdings of any one 
security to no more than an amount equal to 10 percent of the bank's 
capital stock and surplus. However, these limitations do not apply to 
obligations issued by the United States, general obligations of any 
state and certain obligations of Federal agencies. In addition, 
generally a national bank is not permitted to purchase for its own 
account stock of any

[[Page 117]]

corporation. These restrictions also apply to state member banks (12 
U.S.C. 335).
    (c) The Comptroller of the Currency has permitted national banks to 
purchase for their own accounts shares of open-end investment companies 
that are purchased and sold at par (i.e., money market mutual funds) 
provided the portfolios of such companies consist solely of securities 
that a national bank may purchase directly (Banking Bulletin B-83-58). 
The Board of Governors has permitted state member banks to purchase, to 
the extent permitted under applicable state law, shares of money market 
mutual funds (MMMF) whose portfolios consist solely of securities that 
the state member bank may purchase directly (12 CFR 208.123).
    (d) The Board has determined that an obligation arising from a 
repurchase agreement involving shares of a MMMF whose portfolio consists 
wholly of securities of the United States government or any agency 
thereof \1\ would not be a deposit for purposes of Regulations D and Q. 
The Board believes that a repurchase agreement involving shares of such 
a MMMF is the functional equivalent of a repurchase agreement directly 
involving United States government or agency obligations. A purchaser of 
shares of a MMMF obtains an interest in a pro rata portion of the assets 
that comprise the MMMF's portfolio. Accordingly, regardless of whether 
the repurchase agreement involves United States government or agency 
obligations directly or shares in a MMMF whose portfolio consists 
entirely of United States government or agency obligations, an equitable 
and undivided interest in United States and agency government 
obligations is being transferred. Moreover, the Board believes that this 
interpretation will further the purpose of the exemption in Regulations 
D and Q for repurchase agreements involving United States government or 
Federal obligations by enhancing the market for such obligations.
---------------------------------------------------------------------------

    \1\ The term United States government or any agency thereof as used 
herein shall have the same meaning as in Sec. 204.2(a)(1)(vii)(B) of 
Regulation D, 12 CFR 204.2(a)(1)(vii)(B).

[50 FR 13011, Apr. 2, 1985, as amended at 52 FR 47695, Dec. 16, 1987]



Sec. 204.125  Foreign, international, and supranational entities 
referred to in Sec. Sec. 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).

    The entities referred to in Sec. Sec. 204.2(c)(1)(iv)(E) and 
204.8(a)(2)(i)(B)(5) are:

                                 Europe

Bank for International Settlements.
European Atomic Energy Community.
European Central Bank.
European Coal and Steel Community.
The European Communities.
European Development Fund.
European Economic Community.
European Free Trade Association.
European Fund.
European Investment Bank.

                              Latin America

Andean Development Corporation.
Andean Subregional Group.
Caribbean Development Bank.
Caribbean Free Trade Association
Caribbean Regional Development Agency.
Central American Bank for Economic Integration.
The Central American Institute for Industrial Research and Technology.
Central American Monetary Stabilization Fund.
East Caribbean Common Market.
Latin American Free Trade Association.
Organization for Central American States.
Permanent Secretariat of the Central American General Treaty of Economic 
Integration.
River Plate Basin Commission.

                                 Africa

African Development Bank.
Banque Centrale des Etats de l'Afrique Equatorial et du Cameroun.
Banque Centrale des Etats d`Afrique del'Ouest.
Conseil de l'Entente.
East African Community.
Organisation Commune Africaine et Malagache.
Organization of African Unity.
Union des Etats de l'Afrique Centrale.
Union Douaniere et Economique de l'Afrique Centrale.
Union Douaniere des Etats de l`Afrique de l'Ouest.

                                  Asia

Asia and Pacific Council.

[[Page 118]]

Association of Southeast Asian Nations.
Bank of Taiwan.
Korea Exchange Bank.

                               Middle East

Central Treaty Organization.
Regional Cooperation for Development.

[Reg. D, 52 FR 47695, Dec. 16, 1987, as amended at 56 FR 15495, Apr. 17, 
1991; 65 FR 12917, Mar. 10, 2000]



Sec. 204.126  Depository institution participation in ``Federal funds'' 
market.

    (a) Under Sec. 204.2(a)(1)(vii)(A), there is an exemption from 
Regulation D for member bank obligations in nondeposit form to another 
bank. To assure the effectiveness of the limitations on persons who sell 
Federal funds to depository institutions, Regulation D applies to 
nondocumentary obligations undertaken by a depository institution to 
obtain funds for use in its banking business, as well as to documentary 
obligations. Under Sec. 204.2(a)(1)(vii) of Regulation D, a depository 
institution's liability under informal arrangements as well as those 
formally embodied in a document are within the coverage of Regulation D.
    (b) The exemption in Sec. 204.2(a)(1)(vii)(A) applies to 
obligations owed by a depository institution to a domestic office of any 
entity listed in that section (the exempt institutions). The exempt 
institutions explicitly include another depository institution, foreign 
bank, Edge or agreement corporation, New York Investment (article XII) 
Company, the Export-Import Bank of the United States, Minbanc Capital 
Corp., and certain other credit sources. The term exempt institutions 
also includes subsidiaries of depository institutions:
    (1) That engage in businesses in which their parents are authorized 
to engage; or
    (2) The stock of which by statute is explicitly eligible for 
purchase by national banks.
    (c) To assure that this exemption for liabilities to exempt 
institutions is not used as a means by which nondepository institutions 
may arrange through an exempt institution to sell Federal funds to a 
depository institution, obligations within the exemption must be issued 
to an exempt institution for its own account. In view of this 
requirement, a depository institution that purchases Federal funds 
should ascertain the character (not necessarily the identity) of the 
actual seller in order to justify classification of its liability on the 
transaction as Federal funds purchased rather than as a deposit. Any 
exempt institution that has given general assurance to the purchasing 
depository institution that sales by it of Federal funds ordinarily will 
be for its own account and thereafter executes such transactions for the 
account of others, should disclose the nature of the actual lender with 
respect to each such transaction. If it fails to do so, the depository 
institution would be deemed by the Board as indirectly violating section 
19 of the Federal Reserve Act and Regulation D.

[52 FR 47695, Dec. 16, 1987]



Sec. 204.127  Nondepository participation in ``Federal funds'' market.

    (a) The Board has considered whether the use of interdepository 
institution loan participations (IDLPs) which involve participation by 
third parties other than depository institutions in Federal funds 
transactions, comes within the exemption from deposit classification for 
certain obligations owed by a depository institution to an institution 
exempt in Sec. 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction 
is one through which an institution that has sold Federal funds to a 
depository institution, subsequently sells or participates out that 
obligation to a nondepository third party without notifying the 
obligated institution.
    (b) The Board's interpretation regarding Federal funds transactions 
(12 CFR 204.126) clarified that a depository institutions's liability 
must be issued to an exempt institution described in Sec. 
204.2(a)(1)(vii)(A) of Regulation D for its own account in order to come 
within the nondeposit exemption for interdepository liabilities. The 
Board regards transactions which result in third parties gaining access 
to the Federal funds market as contrary to the exemption contained in 
Sec. 204.2(a)(1)(vii)(A) of Regulation D regardless of whether the 
nondepository institution third party is a party to the

[[Page 119]]

initial transaction or thereafter becomes a participant in the 
transaction through purchase of all or part of the obligation held by 
the selling depository institution.
    (c) The Board regards the notice requirements set out in 12 CFR 
204.126 as applicable to IDLP-type transactions as described herein so 
that a depository institution selling Federal funds must provide to the 
purchaser--
    (1) Notice of its intention, at the time of the initial transaction, 
to sell or participate out its loan contract to a nondepository third 
party, and
    (2) Full and prompt notice whenever it (the selling depository 
institution) subsequently sells or participates out its loan contract to 
a non-depository third party.

[52 FR 47695, Dec. 16, 1987]



Sec. 204.128  Deposits at foreign branches guaranteed by domestic office 
of a depository institution.

    (a) In accepting deposits at branches abroad, some depository 
institutions may enter into agreements from time to time with depositors 
that in effect guarantee payment of such deposits in the United States 
if the foreign branch is precluded from making payment. The question has 
arisen whether such deposits are subject to Regulation D, and this 
interpretation is intended as clarification.
    (b) Section 19 of the Federal Reserve Act which establishes reserve 
requirements does not apply to deposits of a depository institution 
``payable only at an office thereof located outside of the States of the 
United States and the District of Columbia'' (12 U.S.C. 371a; 12 CFR 
204.1(c)(5)). The Board rule in 1918 that the requirements of section 19 
as to reserves to be carried by member banks do not apply to foreign 
branches (1918 Fed. Res. Bull. 1123). The Board has also defined the 
phrase Any deposit that is payable only at an office located outside the 
United States, in Sec. 204.2(t) of Regulation D, 12 CFR 204.2(t).
    (c) The Board believes that this exemption from reserve requirements 
should be limited to deposits in foreign branches as to which the 
depositor is entitled, under his agreement with the depository 
institution, to demand payment only outside the United States, 
regardless of special circumstances. The exemption is intended 
principally to enable foreign branches of U.S. depository institutions 
to compete on a more nearly equal basis with banks in foreign countries 
in accordance with the laws and regulations of those countries. A 
customer who makes a deposit that is payable solely at a foreign branch 
of the depository institution assumes whatever risk may exist that the 
foreign country in which a branch is located might impose restrictions 
on withdrawals. When payment of a deposit in a foreign branch is 
guaranteed by a promise of payment at an office in the United States if 
not paid at the foreign office, the depositor no longer assumes this 
risk but enjoys substantially the same rights as if the deposit had been 
made in a U.S. office of the depository institution. To assure the 
effectiveness of Regulation D and to prevent evasions thereof, the Board 
considers that such guaranteed foreign-branch deposits must be subject 
to that regulation.
    (d) Accordingly, a deposit in a foreign branch of a depository 
institution that is guaranteed by a domestic office is subject to the 
reserve requirements of Regulation D the same as if the deposit had been 
made in the domestic office. This interpretation is not designed in any 
respect to prevent the head office of a U.S. bank from repaying 
borrowings from, making advances to, or supplying capital funds to its 
foreign branches, subject to Eurocurrency liability reserve 
requirements.

[52 FR 47696, Dec. 16, 1987]



Sec. 204.130  Eligibility for NOW accounts.

    (a) Summary. In response to many requests for rulings, the Board has 
determined to clarify the types of entities that may maintain NOW 
accounts at member banks.
    (b) Individuals. (1) Any individual may maintain a NOW account 
regardless of the purposes that the funds will serve. Thus, deposits of 
an individual used in his or her business including a sole proprietor or 
an individual doing business under a trade name is eligible to maintain 
a NOW account in the individual's name or in the ``DBA'' name. However, 
other entities organized or

[[Page 120]]

operated to make a profit such as corporations, partnerships, 
associations, business trusts, or other organizations may not maintain 
NOW accounts.
    (2) Pension funds, escrow accounts, security deposits, and other 
funds held under various agency agreements may also be classified as NOW 
accounts if the entire beneficial interest is held by individuals or 
other entities eligible to maintain NOW accounts directly. The Board 
believes that these accounts are similar in nature to trust accounts and 
should be accorded identical treatment. Therefore, such funds may be 
regarded as eligible for classification as NOW accounts.
    (c) Nonprofit organizations. (1) A nonprofit organization that is 
operated primarily for religious, philanthropic, charitable, 
educational, political or other similar purposes may maintain a NOW 
account. The Board regards the following kinds of organizations as 
eligible for NOW accounts under this standard if they are not operated 
for profit:
    (i) Organizations described in section 501(c)(3) through (13), and 
(19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 
501(c)(3) through (13) and (19));
    (ii) Political organizations described in section 527 of the 
Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 527); and
    (iii) Homeowners and condominium owners associations described in 
section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) 
section 528), including housing cooperative associations that perform 
similar functions.
    (2) All organizations that are operated for profit are not eligible 
to maintain NOW accounts at depository institutions.
    (3) The following types of organizations described in the cited 
provisions of the Internal Revenue Code are among those not eligible to 
maintain NOW accounts:
    (i) Credit unions and other mutual depository institutions described 
in section 501(c)(14) of the Internal Revenue Code (26 U.S.C. (I.R.C. 
1954) section 501(c)(14));
    (ii) Mutual insurance companies described in section 501(c)(15) of 
the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(15));
    (iii) Crop financing organizations described in section 501(c)(16) 
of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 
501(c)(16));
    (iv) Organizations created to function as part of a qualified group 
legal services plan described in section 501(c)(20) of the Internal 
Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(20)); or
    (v) Farmers' cooperatives described in section 521 of the Internal 
Revenue Code (26 U.S.C. (I.R.C. 1954) section 521).
    (d) Governmental units. Governmental units are generally eligible to 
maintain NOW accounts at member banks. NOW accounts may consist of funds 
in which the entire beneficial interest is held by the United States, 
any State of the United States, county, municipality, or political 
subdivision thereof, the District of Columbia, the Commonwealth of 
Puerto Rico, American Samoa, Guam, any territory or possession of the 
United States, or any political subdivision thereof.
    (e) Funds held by a fiduciary. Under current provisions, funds held 
in a fiduciary capacity (either by an individual fiduciary or by a 
corporate fiduciary such as a bank trust department or a trustee in 
bankruptcy), including those awaiting distribution or investment, may be 
held in the form of NOW accounts if all of the beneficiaries are 
otherwise eligible to maintain NOW accounts. The Board believes that 
such a classification should continue since fiduciaries are required to 
invest even temporarily idle balances to the greatest extent feasible in 
order to responsibly carry out their fiduciary duties. The availability 
of NOW accounts provides a convenient vehicle for providing a short-term 
return on temporarily idle trust funds of beneficiaries eligible to 
maintain accounts in their own names.
    (f) Grandfather provision. In order to avoid unduly disrupting 
account relationships, a NOW account established at a member bank on or 
before August 31, 1981, that represents funds of a nonqualifying entity 
that previously qualified to maintain a NOW account may

[[Page 121]]

continue to be maintained in a NOW account.

[52 FR 47697, Dec. 16, 1987]



Sec. 204.131  Participation by a depository institution in the 
secondary market for its own time deposits.

    (a) Background. In 1982, the Board issued an interpretation 
concerning the effect of a member bank's purchase of its own time 
deposits in the secondary market in order to ensure compliance with 
regulatory restrictions on the payment of interest on time deposits, 
with the prohibition against payment of interest on demand deposits, and 
with regulatory requirements designed to distinguish between time 
deposits and demand deposits for federal reserve requirement purposes 
(47 FR 37878, Aug. 27, 1982). The interpretation was designed to ensure 
that the regulatory early withdrawal penalties in Regulation Q used to 
achieve these three purposes were not evaded through the purchase by a 
member bank or its affiliate of a time deposit of the member bank prior 
to the maturity of the deposit.
    (b) Because the expiration of the Depository Institutions 
Deregulation Act (title II of Pub. L. 96-221) on April 1, 1986, removed 
the authority to set interest rate ceilings on deposits, one of the 
purposes for adopting the interpretation was eliminated. The removal of 
the authority to set interest rate ceilings on deposits required the 
Board to revise the early withdrawal penalties which were also used to 
distinguish between types of deposits for reserve requirement purposes. 
Effective April 1, 1986, the Board amended its Regulation D to 
incorporate early withdrawal penalties applicable to all depository 
institutions for this purpose (51 FR 9629, Mar. 20, 1986). Although the 
new early withdrawal penalties differ from the penalties used to enforce 
interest rate ceilings, secondary market purchases still effectively 
shorten the maturities of deposits and may be used to evade reserve 
requirements. This interpretation replaces the prior interpretation and 
states the application of the new early withdrawal penalties to 
purchases by depository institutions and their affiliates of the 
depository institution's time deposits. The interpretation applies only 
to situations in which the Board's regulatory penalties apply.
    (c) Secondary market purchases under the rule. The Board has 
determined that a depository institution purchasing a time deposit it 
has issued should be regarded as having paid the time deposit prior to 
maturity. The effect of the transaction is that the depository 
institution has cancelled a liability as opposed to having acquired an 
asset for its portfolio. Thus, the depository institution is required to 
impose any early withdrawal penalty required by Regulation D on the 
party from whom it purchases the instrument by deducting the amount of 
the penalty from the purchase price. The Board recognizes, however, that 
secondary market sales of time deposits are often done without regard to 
the identity of the original owner of the deposit. Such sales typically 
involve a pool of time deposits with the price based on the aggregate 
face value and average rate of return on the deposits. A depository 
institution purchasing time deposits from persons other than the person 
to whom the deposit was originally issued should be aware of the parties 
named on each of the deposits it is purchasing but through failure to 
inspect the deposits prior to the purchase may not be aware at the time 
it purchases a pool of time deposits that it originally issued one or 
more of the deposits in the pool. In such cases, if a purchasing 
depository institution does not wish to assess an applicable early 
withdrawal penalty, the deposit may be sold immediately in the secondary 
market as an alternative to imposing the early withdrawal penalty.
    (d) Purchases by affiliates. On a consolidated basis, if an 
affiliate (as defined in Sec. 204.2(q) of Regulation D) of a depository 
institution purchases a CD issued by the depository institution, the 
purchase does not reduce their consolidated liabilities and could be 
accomplished primarily to assist the depository institution in avoiding 
the requirements of the Board's Regulation D. Because the effect of the 
early withdrawal penalty rule could be easily circumvented by purchases 
of time deposits by affiliates, such purchases are also regarded as an 
early withdrawals of the time deposit, and the purchase

[[Page 122]]

should be treated as if the depository institution made the purchase 
directly. Thus, the regulatory requirements for early withdrawal 
penalties apply to affiliates of a depository institution as well as to 
the institution itself.
    (e) Depository institution acting as broker. The Board believes that 
it is permissible for a depository institution to facilitate the 
secondary market for its own time deposits by finding a purchaser for a 
time deposit that a customer is trying to sell. In such instances, the 
depository institution will not be paying out any of its own funds, and 
the depositor does not have a guarantee that the depository institution 
will actually be able to find a buyer.
    (f) Third-party market-makers. A depository institution may also 
establish and advertise arrangements whereby an unaffiliated third party 
agrees in advance to purchase time deposits issued by the institution. 
The Board would not regard these transactions as inconsistent with the 
purposes that the early withdrawal penalty is intended to serve unless a 
depository institution pays a fee to the third party purchaser as 
compensation for making the purchases or to remove the risk from 
purchasing the deposits. In this regard, any interim financing provided 
to such a third party by a depository institution in connection with the 
institution's secondary market activity involving the institution's time 
deposits must be made substantially on the same terms, including 
interest rates and collateral, as those prevailing at the same time for 
comparable transactions with other similarly situated persons and may 
not involve more than the normal risk of repayment.
    (g) Reciprocal arrangements. Finally, while a depository institution 
may enter into an arrangement with an unaffiliated third party wherein 
the third party agrees to stand ready to purchase time deposits held by 
the depository institution's customers, the Board will regard a 
reciprocal arrangement with another depository institution for purchase 
of each other's time deposits as a circumvention of the early withdrawal 
penalty rule and the purposes it is designed to serve.

[52 FR 47697, Dec. 16, 1987]



Sec. 204.132  Treatment of loan strip participations.

    (a) Effective March 31, 1988, the glossary section of the 
instructions for the Report of Condition and Income (FFIEC 031-034; OMB 
control number 7100-0036; available from a depository institution's 
primary federal regulator) (Call Report) was amended to clarify that 
certain short-term loan participation arrangements (sometimes known or 
styled as loan strips or strip participations) are regarded as 
borrowings rather than sales for Call Report purposes in certain 
circumstances. Through this interpretation, the Board is clarifying that 
such transactions should be treated as deposits for purposes of 
Regulation D.
    (b) These transactions involve the sale (or placement) of a short-
term loan by a depository institution that has been made under a long-
term commitment of the depository institution to advance funds. For 
example, a 90-day loan made under a five-year revolving line of credit 
may be sold to or placed with a third party by the depository 
institution originating the loan. The depository institution originating 
the loan is obligated to renew the 90-day note itself (by advancing 
funds to its customer at the end of the 90-day period) in the event the 
original participant does not wish to renew the credit. Since, under 
these arrangements, the depository institution is obligated to make 
another loan at the end of 90 days (absent any event of default on the 
part of the borrower), the depository institution selling the loan or 
participation in effect must buy back the loan or participation at the 
maturity of the 90-day loan sold to or funded by the purchaser at the 
option of the purchaser. Accordingly, these transactions bear the 
essential characteristics of a repurchase agreement and, therefore, are 
reportable and reservable under Regulation D.
    (c) Because many of these transactions give rise to deposit 
liabilities in the form of promissory notes, acknowledgments of advance 
or similar obligations (written or oral) as described in Sec. 
204.2(a)(1)(vii) of Regulation D, the exemptions from the definition of 
deposit incorporated in that section may apply to the liability incurred 
by

[[Page 123]]

a depository institution when it offers or originates a loan strip 
facility. Thus, for example, loan strips sold to domestic offices of 
other depository institutions are exempt from Regulation D under Sec. 
204.2(a)(1)(vii)(A)(1) because they are obligations issued or undertaken 
and held for the account of a U.S. office of another depository 
institution. Similarly, some of these transactions result in 
Eurocurrency liabilities and are reportable and reservable as such.

[53 FR 24931, July 1, 1988]



Sec. 204.133  Multiple savings deposits treated as a transaction account.

    (a) Authority. Under section 19(a) of the Federal Reserve Act, the 
Board is authorized to define the terms used in section 19, and to 
prescribe regulations to implement and prevent evasions of the 
requirements of that section. Section 19(b) establishes general reserve 
requirements on transaction accounts and nonpersonal time deposits. 
Under section 19(b)(1)(F), the Board also is authorized to determine, by 
regulation or order, that an account or deposit is a transaction account 
if such account is used directly or indirectly for the purpose of making 
payments to third persons or others. This interpretation is adopted 
under these authorities.
    (b) Background. Under Regulation D, 12 CFR 204.2(d)(2), the term 
``savings deposit'' includes a deposit or an account that meets the 
requirements of Sec. 204.2(d)(1) and from which, under the terms of the 
deposit contract or by practice of the depository institution, the 
depositor is permitted or authorized to make up to six transfers or 
withdrawals per month or statement cycle of at least four weeks. The 
depository institution may authorize up to three of these six transfers 
to be made by check, draft, debit card, or similar order drawn by the 
depositor and payable to third parties. If more than six transfers (or 
more than three third party transfers by check, etc.) are permitted or 
authorized per month or statement cycle, the depository institution may 
not classify the account as a savings deposit. If the depositor, during 
the period, makes more than six transfers or withdrawals (or more than 
three third party transfers by check, etc.), the depository institution 
may, depending upon the facts and circumstances, be required by 
Regulation D (Footnote 5 at Sec. 204.2(d)(2)) to reclassify or close 
the account.
    (c) Use of multiple savings deposits. Depository institutions have 
asked for guidance as to when a depositor may maintain more than one 
savings deposit and be permitted to make all the transfers or 
withdrawals authorized for savings deposits under Regulation D from each 
savings deposit. The Board has determined that, if a depository 
institution suggests or otherwise promotes the establishment of or 
operation of multiple savings accounts with transfer capabilities in 
order to permit transfers and withdrawals in excess of those permitted 
by Regulation D for an individual savings account, the accounts 
generally should be considered to be transaction accounts. This 
determination applies regardless of whether the deposits have entirely 
separate account numbers or are subsidiary accounts of a master deposit 
account. Multiple savings accounts, however, should not be considered to 
be transaction accounts if there is a legitimate purpose, other than 
increasing the number of transfers or withdrawals, for opening more than 
one savings deposit.
    (d) Examples. The distinction between appropriate and inappropriate 
uses of multiple accounts is illustrated by the following examples:

    Example 1. (i) X wishes to open an account that maximizes his 
interest earnings but also permits X to draw up to ten checks a month 
against the account. X's Bank suggests an arrangement under which X 
establishes four savings deposits at Bank. Under the arrangement, X 
deposits funds in the first account and then draws three checks against 
that account. X then instructs Bank to transfer all funds in excess of 
the amount of the three checks to the second account and draws an 
additional three checks. Funds are continually shifted between accounts 
when additional checks are drawn so that no more than three checks are 
drawn against each account each month.
    (ii) Suggesting the use of four savings accounts in the name of X in 
this example is designed solely to permit the customer to exceed the 
transfer limitations on savings accounts. Accordingly, the savings 
accounts should be classified as transaction accounts.

[[Page 124]]

    Example 2. (i) X is trustee of separate trusts for each of his four 
children. X's Bank suggests that X, as trustee, open a savings deposit 
in a depository institution for each of his four children in order to 
ensure an independent accounting of the funds held by each trust.
    (ii) X's Bank's suggestion to use four savings deposits in the name 
of X in this example is appropriate, and the third party transfers from 
one account should not be considered in determining whether the transfer 
and withdrawal limit was exceeded on any other account. X established a 
legitimate purpose, the segregation of the trust assets, for each 
account separate from the need to make third party transfers. 
Furthermore, there is no indication, such as by the direct or indirect 
transfer of funds from one account to another, that the accounts are 
being used for any purpose other than to make transfers to the 
appropriate trust.
    Example 3. (i) X opens four savings accounts with Bank. X regularly 
draws up to three checks against each account and transfers funds 
between the accounts in order to ensure that the checks on the separate 
accounts are covered. X's Bank did not suggest or otherwise promote the 
arrangement.
    (ii) X's Bank may treat the multiple accounts as savings deposits 
for Regulation D purposes, even if it discovers that X is using the 
accounts to increase the transfer limits applicable to savings accounts 
because X's Bank did not suggest or otherwise promote the establishment 
of or operation of the arrangement.

[57 FR 38427, Aug. 25, 1992]



Sec. 204.134  Linked time deposits and transaction accounts.

    (a) Authority. Under section 19(a) of the Federal Reserve Act (12 
U.S.C. 461(a)), the Board is authorized to define the terms used in 
section 19, and to prescribe regulations to implement and prevent 
evasions of the requirements of that section. Section 19(b)(2) 
establishes general reserve requirements on transaction accounts and 
nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is 
authorized to determine, by regulation or order, that an account or 
deposit is a transaction account if such account is used directly or 
indirectly for the purpose of making payments to third persons or 
others. This interpretation is adopted under these authorities.
    (b) Linked time deposits and transaction accounts. Some depository 
institutions are offering or proposing to offer account arrangements 
under which a group of participating depositors maintain transaction 
accounts and time deposits with a depository institution in an 
arrangement under which each depositor may draw checks up to the 
aggregate amount held by that depositor in these accounts. Under this 
account arrangement, at the end of the day funds over a specified 
balance in each depositor's transaction account are swept from the 
transaction account into a commingled time deposit. A separate time 
deposit is opened on each business day with the balance of deposits 
received that day, as well as the proceeds of any time deposit that has 
matured that day that are not used to pay checks or withdrawals from the 
transaction accounts. The time deposits, which generally have maturities 
of seven days, are staggered so that one or more time deposits mature 
each business day. Funds are apportioned among the various time deposits 
in a manner calculated to minimize the possibility that the funds 
available on any given day would be insufficient to pay all items 
presented.
    (1) The time deposits involved in such an arrangement may be held 
directly by the depositor or indirectly through a trust or other 
arrangement. The individual depositor's interest in time deposits may be 
identifiable, with an agreement by the depositors that balances held in 
the arrangement may be used to pay checks drawn by other depositors 
participating in the arrangement, or the depositor may have an undivided 
interest in a series of time deposits.
    (2) Each day funds from the maturing time deposits are available to 
pay checks or other charges to the depositor's transaction account. The 
depository institution's decision concerning whether to pay checks drawn 
on an individual depositor's transaction account is based on the 
aggregate amount of funds that the depositor has invested in the 
arrangement, including any amount that may be invested in unmatured time 
deposits. Only if checks drawn by all participants in the arrangement 
exceed the total balance of funds available that day (i.e. funds from 
the time deposit that has matured that day as well as any deposits

[[Page 125]]

made to participating accounts during the day) is a time deposit 
withdrawn prior to maturity so as to incur an early withdrawal penalty. 
The arrangement may be marketed as providing the customer unlimited 
access to its funds with a high rate of interest.
    (c) Determination. In these arrangements, the aggregate deposit 
balances of all participants generally vary by a comparatively small 
amount, allowing the time deposits maturing on any day safely to cover 
any charges to the depositors' transaction accounts and avoiding any 
early withdrawal penalties. Thus, this arrangement substitutes time 
deposit balances for transaction accounts balances with no practical 
restrictions on the depositors' access to their funds, and serves no 
business purpose other than to allow the payment of higher interest 
through the avoidance of reserve requirements. As the time deposits may 
be used to provide funds indirectly for the purposes of making payments 
or transfers to third persons, the Board has determined that the time 
deposits should be considered to be transaction accounts for the 
purposes of Regulation D.

[57 FR 38428, Aug. 25, 1992]



Sec. 204.135  Shifting funds between depository institutions to make 
use of the low reserve tranche.

    (a) Authority. Under section 19(a) of the Federal Reserve Act (12 
U.S.C. 461(a)) the Board is authorized to define terms used in section 
19, and to prescribe regulations to implement and to prevent evasions of 
the requirements of that section. Section 19(b)(2) establishes general 
reserve requirements on transaction accounts and nonpersonal time 
deposits. In addition to its authority to define terms under section 
19(a), section 19(g) of the Federal Reserve Act also give the Board the 
specific authority to define terms relating to deductions allowed in 
reserve computation, including ``balances due from other banks.'' This 
interpretation is adopted under these authorities.
    (b) Background. (1) Currently, the Board requires reserves of zero, 
three, or ten percent on transaction accounts, depending upon the amount 
of transaction deposits in the depository institution, and of zero 
percent on nonpersonal time deposits. In determining its reserve balance 
under Regulation D, a depository institution may deduct the balances it 
maintains in another depository institution located in the United States 
if those balances are subject to immediate withdrawal by the depositing 
depository institution (Sec. 204.3(f)). This deduction is commonly 
known as the ``due from'' deduction. In addition, Regulation D at Sec. 
204.2(a)(1)(vii)(A) exempts from the definition of ``deposit'' any 
liability of a depository institution on a promissory note or similar 
obligation that is issued or undertaken and held for the account of an 
office located in the United States of another depository institution. 
Transactions falling within this exemption from the definition of 
``deposit'' include federal funds or ``fed funds'' transactions.
    (2) Under section 19(b)(2) of the Federal Reserve Act (12 U.S.C. 
461(b)(2)), the Board is required to impose reserves of three percent on 
total transaction deposits at or below an amount determined under a 
formula. Transaction deposits falling within this amount are in the 
``low reserve tranche.'' Currently the low reserve tranche runs up to 
$42.2 million. Under section 19(b)(11) of the Federal Reserve Act (12 
U.S.C. 461(b)(11)) the Board is also required to impose reserves of zero 
percent on reservable liabilities at or below an amount determined under 
a formula. Currently that amount is $3.6 million.
    (c) Shifting funds between depository institutions. The Board is 
aware that certain depository institutions with transaction account 
balances in an amount greater than the low reserve tranche have entered 
into transactions with affiliated depository institutions that have 
transaction account balances below the maximum low reserve tranche 
amount. These transactions are intended to lower the transaction 
reserves of the larger depository institution and leave the economic 
position of the smaller depository institutions unaffected, and have no 
apparent purpose other than to reduce required reserves of the larger 
institution. The larger depository institution places funds in a demand 
deposit at a small domestic depository institution. The

[[Page 126]]

larger depository institution considers those funds to be subject to the 
``due from'' deduction, and accordingly reduces its transaction reserves 
in the amount of the demand deposit. The larger depository institution 
then reduces its transaction account reserves by 10 percent of the 
deposited amount. The small depository institution, because it is within 
the low reserve tranche, must maintain transaction account reserves of 3 
percent on the funds deposited by the larger depository institution. The 
small depository institution then transfers all but 3 percent of the 
funds deposited by the larger depository institution back to the larger 
depository institution in a transaction that qualifies as a ``fed 
funds'' transaction. The 3 percent not transferred to the larger 
depository institution is the amount of the larger depository 
institution's deposit that the small depository institution must 
maintain as transaction account reserves. Because the larger depository 
institution books this second part of the transaction as a ``fed funds'' 
transaction, the larger depository institution does not maintain 
reserves on the funds that it receives back from the small depository 
institution. As a consequence, the larger depository institution has 
available for its use 97 percent of the amount transferred to the small 
depository institution. Had the larger depository institution not 
entered into the transaction, it would have maintained transaction 
account reserves of 10 percent on that amount, and would have had only 
90 percent of that amount for use in its business.
    (d) Determination. The Board believes that the practice described 
above generally is a device to evade the reserves imposed by Regulation 
D. Consequently, the Board has determined that, in the circumstances 
described above, the larger depository institution depositing funds in 
the smaller institution may not take a ``due from'' deduction on account 
of the funds in the demand deposit account if, and to the extent that, 
funds flow back to the larger depository institution from the small 
depository institution by means of a transaction that is exempt from 
transaction account reserve requirements.

[57 FR 38429, Aug. 25, 1992]



Sec. 204.136  Treatment of trust overdrafts for reserve requirement 
reporting purposes.

    (a) Authority. Under section 19(a) of the Federal Reserve Act (12 
U.S.C. 461(a)), the Board is authorized to define the terms used in 
section 19, and to prescribe regulations to implement and prevent 
evasions of the requirements of that section. Section 19(b) establishes 
general reserve requirements on transaction accounts and nonpersonal 
time deposits. Under section 19(b)(1)(F), the Board also is authorized 
to determine, by regulation or order, that an account or deposit is a 
transaction account if such account is used directly or indirectly for 
the purpose of making payments to third persons or others. This 
interpretation is adopted under these authorities.
    (b) Netting of trust account balances. (1) Not all depository 
institutions have treated overdrafts in trust accounts administered by a 
trust department in the same manner when calculating the balance in a 
commingled transaction account in the depository institution for the 
account of the trust department of the institution. In some cases, 
depository institutions carry the aggregate of the positive balances in 
the individual trust accounts as the balance on which reserves are 
computed for the commingled account. In other cases depository 
institutions net positive balances in some trust accounts against 
negative balances in other trust accounts, thus reducing the balance in 
the commingled account and lowering the reserve requirements. Except in 
limited circumstances, negative balances in individual trust accounts 
should not be netted against positive balances in other trust accounts 
when determining the balance in a trust department's commingled 
transaction account maintained in a depository institution's commercial 
department. The netting of positive and negative balances has the effect 
of reducing the aggregate of a commingled transaction account reported 
by the depository institution to the Federal Reserve and reduces the 
reserves the institution must hold against transaction accounts under 
Regulation D. Unless the governing trust agreement or state law 
authorizes the depository institution,

[[Page 127]]

as trustee, to lend money in one trust to another trust, the negative 
balances in effect, for purposes of Regulation D, represent a loan from 
the depository institution. Consequently, negative balances in 
individual trust accounts should not be netted against positive balances 
in other individual trust accounts, and the balance in any transaction 
account containing commingled trust balances should reflect positive or 
zero balances for each individual trust.
    (2) For example, where a trust department engages in securities 
lending activities for trust accounts, overdrafts might occur because of 
the trust department's attempt to ``normalize'' the effects of timing 
delays between the depository institution's receipt of the cash 
collateral from the broker and the trust department's posting of the 
transaction to the lending trust account. When securities are lent from 
a trust customer to a broker that pledges cash as collateral, the broker 
usually transfers the cash collateral to the depository institution on 
the day that the securities are made available. While the institution 
has the use of the funds from the time of the transfer, the trust 
department's normal posting procedures may not reflect receipt of the 
cash collateral by the individual account until the next day. On the day 
that the loan is terminated, the broker returns the securities to the 
lending trust account and the trust customer's account is debited for 
the amount of the cash collateral that is returned by the depository 
institution to the broker. The trust department, however, often does not 
liquidate the investment made with the cash collateral until the day 
after the loan terminates, a delay that normally causes a one day 
overdraft in the trust account. Regulation D requires that, on the day 
the loan is terminated, the depository institution regard the negative 
balance in the customer's account as zero for reserve requirement 
reporting purposes and not net the overdraft against positive balances 
in other accounts.
    (c) Procedures. In order to meet the requirements of Regulation D, a 
depository institution must have procedures to determine the aggregate 
of trust department transaction account balances for Regulation D on a 
daily basis. The procedures must consider only the positive balances in 
individual trust accounts without netting negative balances except in 
those limited circumstances where loans are legally permitted from one 
trust to another, or where offsetting is permitted pursuant to trust law 
or written agreement, or where the amount that caused the overdraft is 
still available in a settlement, suspense or other trust account within 
the trust department and may be used to offset the overdraft.

[57 FR 38429, Aug. 25, 1992]



PART 205_ELECTRONIC FUND TRANSFERS (REGULATION E)--Table of Contents




Sec.
205.1 Authority and purpose.
205.2 Definitions.
205.3 Coverage.
205.4 General disclosure requirements; jointly offered services.
205.5 Issuance of access devices.
205.6 Liability of consumer for unauthorized transfers.
205.7 Initial disclosures.
205.8 Change in terms notice; error resolution notice.
205.9 Receipts at electronic terminals; periodic statements.
205.10 Preauthorized transfers.
205.11 Procedures for resolving errors.
205.12 Relation to other laws.
205.13 Administrative enforcement; record retention.
205.14 Electronic fund transfer service provider not holding consumer's 
          account.
205.15 Electronic fund transfer of government benefits.
205.16 Disclosures at automated teller machines.
205.17 Requirements for electronic communication.

Appendix A to Part 205--Model Disclosure Clauses and Forms
Appendix B to Part 205--Federal Enforcement Agencies
Appendix C to Part 205--Issuance of Staff Interpretations
Supplement I to Part 205--Official Staff Interpretations

    Authority: 15 U.S.C. 1693b.

    Source: Reg. E, 61 FR 19669, May 2, 1996, unless otherwise noted.



Sec. 205.1  Authority and purpose.

    (a) Authority. The regulation in this part, known as Regulation E, 
is issued

[[Page 128]]

by the Board of Governors of the Federal Reserve System pursuant to the 
Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.). The information-
collection requirements have been approved by the Office of Management 
and Budget under 44 U.S.C. 3501 et seq. and have been assigned OMB No. 
7100-0200.
    (b) Purpose. This part carries out the purposes of the Electronic 
Fund Transfer Act, which establishes the basic rights, liabilities, and 
responsibilities of consumers who use electronic fund transfer services 
and of financial institutions that offer these services. The primary 
objective of the act and this part is the protection of individual 
consumers engaging in electronic fund transfers.



Sec. 205.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a)(1) Access device means a card, code, or other means of access to 
a consumer's account, or any combination thereof, that may be used by 
the consumer to initiate electronic fund transfers.
    (2) An access device becomes an accepted access device when the 
consumer:
    (i) Requests and receives, or signs, or uses (or authorizes another 
to use) the access device to transfer money between accounts or to 
obtain money, property, or services;
    (ii) Requests validation of an access device issued on an 
unsolicited basis; or
    (iii) Receives an access device in renewal of, or in substitution 
for, an accepted access device from either the financial institution 
that initially issued the device or a successor.
    (b)(1) Account means a demand deposit (checking), savings, or other 
consumer asset account (other than an occasional or incidental credit 
balance in a credit plan) held directly or indirectly by a financial 
institution and established primarily for personal, family, or household 
purposes.
    (2) The term does not include an account held by a financial 
institution under a bona fide trust agreement.
    (c) Act means the Electronic Fund Transfer Act (title IX of the 
Consumer Credit Protection Act, 15 U.S.C. 1693 et seq.).
    (d) Business day means any day on which the offices of the 
consumer's financial institution are open to the public for carrying on 
substantially all business functions.
    (e) Consumer means a natural person.
    (f) Credit means the right granted by a financial institution to a 
consumer to defer payment of debt, incur debt and defer its payment, or 
purchase property or services and defer payment therefor.
    (g) Electronic fund transfer is defined in Sec. 205.3.
    (h) Electronic terminal means an electronic device, other than a 
telephone operated by a consumer, through which a consumer may initiate 
an electronic fund transfer. The term includes, but is not limited to, 
point-of-sale terminals, automated teller machines, and cash dispensing 
machines.
    (i) Financial institution means a bank, savings association, credit 
union, or any other person that directly or indirectly holds an account 
belonging to a consumer, or that issues an access device and agrees with 
a consumer to provide electronic fund transfer services.
    (j) Person means a natural person or an organization, including a 
corporation, government agency, estate, trust, partnership, 
proprietorship, cooperative, or association.
    (k) Preauthorized electronic fund transfer means an electronic fund 
transfer authorized in advance to recur at substantially regular 
intervals.
    (l) State means any state, territory, or possession of the United 
States; the District of Columbia; the Commonwealth of Puerto Rico; or 
any political subdivision of the above in this paragraph (l).
    (m) Unauthorized electronic fund transfer means an electronic fund 
transfer from a consumer's account initiated by a person other than the 
consumer without actual authority to initiate the transfer and from 
which the consumer receives no benefit. The term does not include an 
electronic fund transfer initiated:

[[Page 129]]

    (1) By a person who was furnished the access device to the 
consumer's account by the consumer, unless the consumer has notified the 
financial institution that transfers by that person are no longer 
authorized;
    (2) With fraudulent intent by the consumer or any person acting in 
concert with the consumer; or
    (3) By the financial institution or its employee.



Sec. 205.3  Coverage.

    (a) General. This part applies to any electronic fund transfer that 
authorizes a financial institution to debit or credit a consumer's 
account. Generally, this part applies to financial institutions. For 
purposes of Sec. Sec. 205.10 (b), (d), and (e) and 205.13, this part 
applies to any person.
    (b) Electronic fund transfer. The term electronic fund transfer 
means any transfer of funds that is initiated through an electronic 
terminal, telephone, computer, or magnetic tape for the purpose of 
ordering, instructing, or authorizing a financial institution to debit 
or credit an account. The term includes, but is not limited to:
    (1) Point-of-sale transfers;
    (2) Automated teller machine transfers;
    (3) Direct deposits or withdrawals of funds;
    (4) Transfers initiated by telephone; and
    (5) Transfers resulting from debit card transactions, whether or not 
initiated through an electronic terminal.
    (c) Exclusions from coverage. The term electronic fund transfer does 
not include:
    (1) Checks. Any transfer of funds originated by check, draft, or 
similar paper instrument; or any payment made by check, draft, or 
similar paper instrument at an electronic terminal.
    (2) Check guarantee or authorization. Any transfer of funds that 
guarantees payment or authorizes acceptance of a check, draft, or 
similar paper instrument but that does not directly result in a debit or 
credit to a consumer's account.
    (3) Wire or other similar transfers. Any transfer of funds through 
Fedwire or through a similar wire transfer system that is used primarily 
for transfers between financial institutions or between businesses.
    (4) Securities and commodities transfers. Any transfer of funds the 
primary purpose of which is the purchase or sale of a security or 
commodity, if the security or commodity is:
    (i) Regulated by the Securities and Exchange Commission or the 
Commodity Futures Trading Commission;
    (ii) Purchased or sold through a broker-dealer regulated by the 
Securities and Exchange Commission or through a futures commission 
merchant regulated by the Commodity Futures Trading Commission; or
    (iii) Held in book-entry form by a Federal Reserve Bank or federal 
agency.
    (5) Automatic transfers by account-holding institution. Any transfer 
of funds under an agreement between a consumer and a financial 
institution which provides that the institution will initiate individual 
transfers without a specific request from the consumer:
    (i) Between a consumer's accounts within the financial institution;
    (ii) From a consumer's account to an account of a member of the 
consumer's family held in the same financial institution; or
    (iii) Between a consumer's account and an account of the financial 
institution, except that these transfers remain subject to Sec. 
205.10(e) regarding compulsory use and sections 915 and 916 of the act 
regarding civil and criminal liability.
    (6) Telephone-initiated transfers. Any transfer of funds that:
    (i) Is initiated by a telephone communication between a consumer and 
a financial institution making the transfer; and
    (ii) Does not take place under a telephone bill-payment or other 
written plan in which periodic or recurring transfers are contemplated.
    (7) Small institutions. Any preauthorized transfer to or from an 
account if the assets of the account-holding financial institution were 
$100 million or less on the preceding December 31. If assets of the 
account-holding institution subsequently exceed $100 million, the 
institution's exemption for preauthorized transfers terminates one

[[Page 130]]

year from the end of the calendar year in which the assets exceed $100 
million. Preauthorized transfers exempt under this paragraph (c)(7) 
remain subject to Sec. 205.10(e) regarding compulsory use and sections 
915 and 916 of the act regarding civil and criminal liability.



Sec. 205.4  General disclosure requirements; jointly offered services.

    (a)(1) Form of disclosures. Disclosures required under this part 
shall be clear and readily understandable, in writing, and in a form the 
consumer may keep. A financial institution may use commonly accepted or 
readily understandable abbreviations in complying with the disclosure 
requirements of this part.
    (2) Foreign language disclosures. Disclosures required under this 
part may be made in a language other than English, provided that the 
disclosures are made available in English upon the consumer's request.
    (b) Additional information; disclosures required by other laws. A 
financial institution may include additional information and may combine 
disclosures required by other laws (such as the Truth in Lending Act (15 
U.S.C. 1601 et seq.) or the Truth in Savings Act (12 U.S.C. 4301 et 
seq.)) with the disclosures required by this part.
    (c) Electronic communication. For rules governing the electronic 
delivery of disclosures, including the definition of electronic 
communication, see Sec. 205.17.
    (d) Multiple accounts and account holders--(1) Multiple accounts. A 
financial institution may combine the required disclosures into a single 
statement for a consumer who holds more than one account at the 
institution.
    (2) Multiple account holders. For joint accounts held by two or more 
consumers, a financial institution need provide only one set of the 
required disclosures and may provide them to any of the account holders.
    (e) Services offered jointly. Financial institutions that provide 
electronic fund transfer services jointly may contract among themselves 
to comply with the requirements that this part imposes on any or all of 
them. An institution need make only the disclosures required by 
Sec. Sec. 205.7 and 205.8 that are within its knowledge and within the 
purview of its relationship with the consumer for whom it holds an 
account.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 14532, Mar. 25, 
1998; 66 FR 17793, Apr. 4, 2001]



Sec. 205.5  Issuance of access devices.

    (a) Solicited issuance. Except as provided in paragraph (b) of this 
section, a financial institution may issue an access device to a 
consumer only:
    (1) In response to an oral or written request for the device; or
    (2) As a renewal of, or in substitution for, an accepted access 
device whether issued by the institution or a successor.
    (b) Unsolicited issuance. A financial institution may distribute an 
access device to a consumer on an unsolicited basis if the access device 
is:
    (1) Not validated, meaning that the institution has not yet 
performed all the procedures that would enable a consumer to initiate an 
electronic fund transfer using the access device;
    (2) Accompanied by a clear explanation that the access device is not 
validated and how the consumer may dispose of it if validation is not 
desired;
    (3) Accompanied by the disclosures required by Sec. 205.7, of the 
consumer's rights and liabilities that will apply if the access device 
is validated; and
    (4) Validated only in response to the consumer's oral or written 
request for validation, after the institution has verified the 
consumer's identity by a reasonable means.



Sec. 205.6  Liability of consumer for unauthorized transfers.

    (a) Conditions for liability. A consumer may be held liable, within 
the limitations described in paragraph (b) of this section, for an 
unauthorized electronic fund transfer involving the consumer's account 
only if the financial institution has provided the disclosures required 
by Sec. 205.7(b)(1), (2), and (3). If the unauthorized transfer 
involved an access device, it must be an accepted access device and the 
financial institution must have provided a means to identify the 
consumer to whom it was issued.

[[Page 131]]

    (b) Limitations on amount of liability. A consumer's liability for 
an unauthorized electronic fund transfer or a series of related 
unauthorized transfers shall be determined as follows:
    (1) Timely notice given. If the consumer notifies the financial 
institution within two business days after learning of the loss or theft 
of the access device, the consumer's liability shall not exceed the 
lesser of $50 or the amount of unauthorized transfers that occur before 
notice to the financial institution.
    (2) Timely notice not given. If the consumer fails to notify the 
financial institution within two business days after learning of the 
loss or theft of the access device, the consumer's liability shall not 
exceed the lesser of $500 or the sum of:
    (i) $50 or the amount of unauthorized transfers that occur within 
the two business days, whichever is less; and
    (ii) The amount of unauthorized transfers that occur after the close 
of two business days and before notice to the institution, provided the 
institution establishes that these transfers would not have occurred had 
the consumer notified the institution within that two-day period.
    (3) Periodic statement; timely notice not given. A consumer must 
report an unauthorized electronic fund transfer that appears on a 
periodic statement within 60 days of the financial institution's 
transmittal of the statement to avoid liability for subsequent 
transfers. If the consumer fails to do so, the consumer's liability 
shall not exceed the amount of the unauthorized transfers that occur 
after the close of the 60 days and before notice to the institution, and 
that the institution establishes would not have occurred had the 
consumer notified the institution within the 60-day period. When an 
access device is involved in the unauthorized transfer, the consumer may 
be liable for other amounts set forth in paragraphs (b)(1) or (b)(2) of 
this section, as applicable.
    (4) Extension of time limits. If the consumer's delay in notifying 
the financial institution was due to extenuating circumstances, the 
institution shall extend the times specified above to a reasonable 
period.
    (5) Notice to financial institution. (i) Notice to a financial 
institution is given when a consumer takes steps reasonably necessary to 
provide the institution with the pertinent information, whether or not a 
particular employee or agent of the institution actually receives the 
information.
    (ii) The consumer may notify the institution in person, by 
telephone, or in writing.
    (iii) Written notice is considered given at the time the consumer 
mails the notice or delivers it for transmission to the institution by 
any other usual means. Notice may be considered constructively given 
when the institution becomes aware of circumstances leading to the 
reasonable belief that an unauthorized transfer to or from the 
consumer's account has been or may be made.
    (6) Liability under state law or agreement. If state law or an 
agreement between the consumer and the financial institution imposes 
less liability than is provided by this section, the consumer's 
liability shall not exceed the amount imposed under the state law or 
agreement.



Sec. 205.7  Initial disclosures.

    (a) Timing of disclosures. A financial institution shall make the 
disclosures required by this section at the time a consumer contracts 
for an electronic fund transfer service or before the first electronic 
fund transfer is made involving the consumer's account.
    (b) Content of disclosures. A financial institution shall provide 
the following disclosures, as applicable:
    (1) Liability of consumer. A summary of the consumer's liability, 
under Sec. 205.6 or under state or other applicable law or agreement, 
for unauthorized electronic fund transfers.
    (2) Telephone number and address. The telephone number and address 
of the person or office to be notified when the consumer believes that 
an unauthorized electronic fund transfer has been or may be made.
    (3) Business days. The financial institution's business days.
    (4) Types of transfers; limitations. The type of electronic fund 
transfers that the consumer may make and any limitations on the 
frequency and dollar

[[Page 132]]

amount of transfers. Details of the limitations need not be disclosed if 
confidentiality is essential to maintain the security of the electronic 
fund transfer system.
    (5) Fees. Any fees imposed by the financial institution for 
electronic fund transfers or for the right to make transfers.
    (6) Documentation. A summary of the consumer's right to receipts and 
periodic statements, as provided in Sec. 205.9, and notices regarding 
preauthorized transfers as provided in Sec. Sec. 205.10(a), and 
205.10(d).
    (7) Stop payment. A summary of the consumer's right to stop payment 
of a preauthorized electronic fund transfer and the procedure for 
placing a stop-payment order, as provided in Sec. 205.10(c).
    (8) Liability of institution. A summary of the financial 
institution's liability to the consumer under section 910 of the act for 
failure to make or to stop certain transfers.
    (9) Confidentiality. The circumstances under which, in the ordinary 
course of business, the financial institution may provide information 
concerning the consumer's account to third parties.
    (10) Error resolution. A notice that is substantially similar to 
Model Form A-3 as set out in Appendix A of this part concerning error 
resolution.
    (11) ATM fees. A notice that a fee may be imposed by an automated 
teller machine operator as defined in Sec. 205.16(a)(1), when the 
consumer initiates an electronic fund transfer or makes a balance 
inquiry, and by any network used to complete the transaction.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 66 FR 13412, Mar. 6, 
2001]



Sec. 205.8  Change in terms notice; error resolution notice.

    (a) Change in terms notice--(1) Prior notice required. A financial 
institution shall mail or deliver a written notice to the consumer, at 
least 21 days before the effective date, of any change in a term or 
condition required to be disclosed under Sec. 205.7(b) if the change 
would result in:
    (i) Increased fees for the consumer;
    (ii) Increased liability for the consumer;
    (iii) Fewer types of available electronic fund transfers; or
    (iv) Stricter limitations on the frequency or dollar amount of 
transfers.
    (2) Prior notice exception. A financial institution need not give 
prior notice if an immediate change in terms or conditions is necessary 
to maintain or restore the security of an account or an electronic fund 
transfer system. If the institution makes such a change permanent and 
disclosure would not jeopardize the security of the account or system, 
the institution shall notify the consumer in writing on or with the next 
regularly scheduled periodic statement or within 30 days of making the 
change permanent.
    (b) Error resolution notice. For accounts to or from which 
electronic fund transfers can be made, a financial institution shall 
mail or deliver to the consumer, at least once each calendar year, an 
error resolution notice substantially similar to the model form set 
forth in Appendix A of this part (Model Form A-3). Alternatively, an 
institution may include an abbreviated notice substantially similar to 
the model form error resolution notice set forth in Appendix A of this 
part (Model Form A-3), on or with each periodic statement required by 
Sec. 205.9(b).



Sec. 205.9  Receipts at electronic terminals; periodic statements.

    (a) Receipts at electronic terminals. A financial institution shall 
make a receipt available to a consumer at the time the consumer 
initiates an electronic fund transfer at an electronic terminal. The 
receipt shall set forth the following information, as applicable:
    (1) Amount. The amount of the transfer. A transaction fee may be 
included in this amount, provided the amount of the fee is disclosed on 
the receipt and displayed on or at the terminal.
    (2) Date. The date the consumer initiates the transfer.
    (3) Type. The type of transfer and the type of the consumer's 
account(s) to or from which funds are transferred. The type of account 
may be omitted if the access device used is able to access only one 
account at that terminal.
    (4) Identification. A number or code that identifies the consumer's 
account

[[Page 133]]

or accounts, or the access device used to initiate the transfer. The 
number or code need not exceed four digits or letters to comply with the 
requirements of this paragraph (a)(4).
    (5) Terminal location. The location of the terminal where the 
transfer is initiated, or an identification such as a code or terminal 
number. Except in limited circumstances where all terminals are located 
in the same city or state, if the location is disclosed, it shall 
include the city and state or foreign country and one of the following:
    (i) The street address; or
    (ii) A generally accepted name for the specific location; or
    (iii) The name of the owner or operator of the terminal if other 
than the account-holding institution.
    (6) Third party transfer. The name of any third party to or from 
whom funds are transferred.
    (b) Periodic statements. For an account to or from which electronic 
fund transfers can be made, a financial institution shall send a 
periodic statement for each monthly cycle in which an electronic fund 
transfer has occurred; and shall send a periodic statement at least 
quarterly if no transfer has occurred. The statement shall set forth the 
following information, as applicable:
    (1) Transaction information. For each electronic fund transfer 
occurring during the cycle:
    (i) The amount of the transfer;
    (ii) The date the transfer was credited or debited to the consumer's 
account;
    (iii) The type of transfer and type of account to or from which 
funds were transferred;
    (iv) For a transfer initiated by the consumer at an electronic 
terminal (except for a deposit of cash or a check, draft, or similar 
paper instrument), the terminal location described in paragraph (a)(5) 
of this section; and
    (v) The name of any third party to or from whom funds were 
transferred.
    (2) Account number. The number of the account.
    (3) Fees. The amount of any fees assessed against the account during 
the statement period for electronic fund transfers, for the right to 
make transfers, or for account maintenance.
    (4) Account balances. The balance in the account at the beginning 
and at the close of the statement period.
    (5) Address and telephone number for inquiries. The address and 
telephone number to be used for inquiries or notice of errors, preceded 
by ``Direct inquiries to'' or similar language. The address and 
telephone number provided on an error resolution notice under Sec. 
205.8(b) given on or with the statement satisfies this requirement.
    (6) Telephone number for preauthorized transfers. A telephone number 
the consumer may call to ascertain whether preauthorized transfers to 
the consumer's account have occurred, if the financial institution uses 
the telephone-notice option under
    Sec. 205.10(a)(1)(iii).
    (c) Exceptions to the periodic statement requirement for certain 
accounts--(1) Preauthorized transfers to accounts. For accounts that may 
be accessed only by preauthorized transfers to the account the following 
rules apply:
    (i) Passbook accounts. For passbook accounts, the financial 
institution need not provide a periodic statement if the institution 
updates the passbook upon presentation or enters on a separate document 
the amount and date of each electronic fund transfer since the passbook 
was last presented.
    (ii) Other accounts. For accounts other than passbook accounts, the 
financial institution must send a periodic statement at least quarterly.
    (2) Intra-institutional transfers. For an electronic fund transfer 
initiated by the consumer between two accounts of the consumer in the 
same institution, documenting the transfer on a periodic statement for 
one of the two accounts satisfies the periodic statement requirement.
    (3) Relationship between paragraphs (c)(1) and (c)(2) of this 
section. An account that is accessed by preauthorized transfers to the 
account described in paragraph (c)(1) of this section and by intra-
institutional transfers described in paragraph (c)(2) of this section, 
but by no other type of electronic fund transfers, qualifies for the 
exceptions provided by paragraph (c)(1) of this section .

[[Page 134]]

    (d) Documentation for foreign-initiated transfers. The failure by a 
financial institution to provide a terminal receipt for an electronic 
fund transfer or to document the transfer on a periodic statement does 
not violate this part if:
    (1) The transfer is not initiated within a state; and
    (2) The financial institution treats an inquiry for clarification or 
documentation as a notice of error in accordance with Sec. 205.11.



Sec. 205.10  Preauthorized transfers.

    (a) Preauthorized transfers to consumer's account--(1) Notice by 
financial institution. When a person initiates preauthorized electronic 
fund transfers to a consumer's account at least once every 60 days, the 
account-holding financial institution shall provide notice to the 
consumer by:
    (i) Positive notice. Providing oral or written notice of the 
transfer within two business days after the transfer occurs; or
    (ii) Negative notice. Providing oral or written notice, within two 
business days after the date on which the transfer was scheduled to 
occur, that the transfer did not occur; or
    (iii) Readily-available telephone line. Providing a readily 
available telephone line that the consumer may call to determine whether 
the transfer occurred and disclosing the telephone number on the initial 
disclosure of account terms and on each periodic statement.
    (2) Notice by payor. A financial institution need not provide notice 
of a transfer if the payor gives the consumer positive notice that the 
transfer has been initiated.
    (3) Crediting. A financial institution that receives a preauthorized 
transfer of the type described in paragraph (a)(1) of this section shall 
credit the amount of the transfer as of the date the funds for the 
transfer are received.
    (b) Written authorization for preauthorized transfers from 
consumer's account. Preauthorized electronic fund transfers from a 
consumer's account may be authorized only by a writing signed or 
similarly authenticated by the consumer. The person that obtains the 
authorization shall provide a copy to the consumer.
    (c) Consumer's right to stop payment--(1) Notice. A consumer may 
stop payment of a preauthorized electronic fund transfer from the 
consumer's account by notifying the financial institution orally or in 
writing at least three business days before the scheduled date of the 
transfer.
    (2) Written confirmation. The financial institution may require the 
consumer to give written confirmation of a stop-payment order within 14 
days of an oral notification. An institution that requires written 
confirmation shall inform the consumer of the requirement and provide 
the address where confirmation must be sent when the consumer gives the 
oral notification. An oral stop-payment order ceases to be binding after 
14 days if the consumer fails to provide the required written 
confirmation.
    (d) Notice of transfers varying in amount--(1) Notice. When a 
preauthorized electronic fund transfer from the consumer's account will 
vary in amount from the previous transfer under the same authorization 
or from the preauthorized amount, the designated payee or the financial 
institution shall send the consumer written notice of the amount and 
date of the transfer at least 10 days before the scheduled date of 
transfer.
    (2) Range. The designated payee or the institution shall inform the 
consumer of the right to receive notice of all varying transfers, but 
may give the consumer the option of receiving notice only when a 
transfer falls outside a specified range of amounts or only when a 
transfer differs from the most recent transfer by more than an agreed-
upon amount.
    (e) Compulsory use--(1) Credit. No financial institution or other 
person may condition an extension of credit to a consumer on the 
consumer's repayment by preauthorized electronic fund transfers, except 
for credit extended under an overdraft credit plan or extended to 
maintain a specified minimum balance in the consumer's account.
    (2) Employment or government benefit. No financial institution or 
other person may require a consumer to establish an account for receipt 
of electronic

[[Page 135]]

fund transfers with a particular institution as a condition of 
employment or receipt of a government benefit.



Sec. 205.11  Procedures for resolving errors.

    (a) Definition of error--(1) Types of transfers or inquiries 
covered. The term error means:
    (i) An unauthorized electronic fund transfer;
    (ii) An incorrect electronic fund transfer to or from the consumer's 
account;
    (iii) The omission of an electronic fund transfer from a periodic 
statement;
    (iv) A computational or bookkeeping error made by the financial 
institution relating to an electronic fund transfer;
    (v) The consumer's receipt of an incorrect amount of money from an 
electronic terminal;
    (vi) An electronic fund transfer not identified in accordance with 
Sec. Sec. 205.9 or 205.10(a); or
    (vii) The consumer's request for documentation required by 
Sec. Sec. 205.9 or 205.10(a) or for additional information or 
clarification concerning an electronic fund transfer, including a 
request the consumer makes to determine whether an error exists under 
paragraphs (a)(1) (i) through (vi) of this section.
    (2) Types of inquiries not covered. The term error does not include:
    (i) A routine inquiry about the consumer's account balance;
    (ii) A request for information for tax or other recordkeeping 
purposes; or
    (iii) A request for duplicate copies of documentation.
    (b) Notice of error from consumer--(1) Timing; contents. A financial 
institution shall comply with the requirements of this section with 
respect to any oral or written notice of error from the consumer that:
    (i) Is received by the institution no later than 60 days after the 
institution sends the periodic statement or provides the passbook 
documentation, required by Sec. 205.9, on which the alleged error is 
first reflected;
    (ii) Enables the institution to identify the consumer's name and 
account number; and
    (iii) Indicates why the consumer believes an error exists and 
includes to the extent possible the type, date, and amount of the error, 
except for requests described in paragraph (a)(1)(vii) of this section.
    (2) Written confirmation. A financial institution may require the 
consumer to give written confirmation of an error within 10 business 
days of an oral notice. An institution that requires written 
confirmation shall inform the consumer of the requirement and provide 
the address where confirmation must be sent when the consumer gives the 
oral notification.
    (3) Request for documentation or clarifications. When a notice of 
error is based on documentation or clarification that the consumer 
requested under paragraph (a)(1)(vii) of this section, the consumer's 
notice of error is timely if received by the financial institution no 
later than 60 days after the institution sends the information 
requested.
    (c) Time limits and extent of investigation--(1) Ten-day period. A 
financial institution shall investigate promptly and, except as 
otherwise provided in this paragraph (c), shall determine whether an 
error occurred within 10 business days of receiving a notice of error. 
The institution shall report the results to the consumer within three 
business days after completing its investigation. The institution shall 
correct the error within one business day after determining that an 
error occurred.
    (2) Forty-five day period. If the financial institution is unable to 
complete its investigation within 10 business days, the institution may 
take up to 45 days from receipt of a notice of error to investigate and 
determine whether an error occurred, provided the institution does the 
following:
    (i) Provisionally credits the consumer's account in the amount of 
the alleged error (including interest where applicable) within 10 
business days of receiving the error notice. If the financial 
institution has a reasonable basis for believing that an unauthorized 
electronic fund transfer has occurred and the institution has satisfied 
the requirements of Sec. 205.6(a), the institution may withhold a 
maximum of $50 from

[[Page 136]]

the amount credited. An institution need not provisionally credit the 
consumer's account if:
    (A) The institution requires but does not receive written 
confirmation within 10 business days of an oral notice of error; or
    (B) The alleged error involves an account that is subject to 
Regulation T (Securities Credit by Brokers and Dealers, 12 CFR part 
220);
    (ii) Informs the consumer, within two business days after the 
provisional crediting, of the amount and date of the provisional 
crediting and gives the consumer full use of the funds during the 
investigation;
    (iii) Corrects the error, if any, within one business day after 
determining that an error occurred; and
    (iv) Reports the results to the consumer within three business days 
after completing its investigation (including, if applicable, notice 
that a provisional credit has been made final).
    (3) Extension of time periods. The time periods in paragraphs (c)(1) 
and (c)(2) of this section are extended as follows:
    (i) The applicable time is 20 business days in place of 10 business 
days under paragraphs (c)(1) and (c)(2) of this section if the notice of 
error involves an electronic fund transfer to or from the account within 
30 days after the first deposit to the account was made.
    (ii) The applicable time is 90 days in place of 45 days under 
paragraph (c)(2) of this section, for completing an investigation, if a 
notice of error involves an electronic fund transfer that:
    (A) Was not initiated within a state;
    (B) Resulted from a point-of-sale debit card transaction; or
    (C) Occurred within 30 days after the first deposit to the account 
was made.
    (4) Investigation. With the exception of transfers covered by Sec. 
205.14, a financial institution's review of its own records regarding an 
alleged error satisfies the requirements of this section if:
    (i) The alleged error concerns a transfer to or from a third party; 
and
    (ii) There is no agreement between the institution and the third 
party for the type of electronic fund transfer involved.
    (d) Procedures if financial institution determines no error or 
different error occurred. In addition to following the procedures 
specified in paragraph (c) of this section, the financial institution 
shall follow the procedures set forth in this paragraph (d) if it 
determines that no error occurred or that an error occurred in a manner 
or amount different from that described by the consumer:
    (1) Written explanation. The institution's report of the results of 
its investigation shall include a written explanation of the 
institution's findings and shall note the consumer's right to request 
the documents that the institution relied on in making its 
determination. Upon request, the institution shall promptly provide 
copies of the documents.
    (2) Debiting provisional credit. Upon debiting a provisionally 
credited amount, the financial institution shall:
    (i) Notify the consumer of the date and amount of the debiting;
    (ii) Notify the consumer that the institution will honor checks, 
drafts, or similar instruments payable to third parties and 
preauthorized transfers from the consumer's account (without charge to 
the consumer as a result of an overdraft) for five business days after 
the notification. The institution shall honor items as specified in the 
notice, but need honor only items that it would have paid if the 
provisionally credited funds had not been debited.
    (e) Reassertion of error. A financial institution that has fully 
complied with the error resolution requirements has no further 
responsibilities under this section should the consumer later reassert 
the same error, except in the case of an error asserted by the consumer 
following receipt of information provided under paragraph (a)(1)(vii) of 
this section.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 52118, Sept. 29, 
1998]



Sec. 205.12  Relation to other laws.

    (a) Relation to Truth in Lending. (1) The Electronic Fund Transfer 
Act and this part govern:
    (i) The addition to an accepted credit card, as defined in 
Regulation Z (12 CFR 226.12(a)(2), footnote 21), of the capability to 
initiate electronic fund transfers;
    (ii) The issuance of an access device that permits credit extensions 
(under a

[[Page 137]]

preexisting agreement between a consumer and a financial institution) 
only when the consumer's account is overdrawn or to maintain a specified 
minimum balance in the consumer's account; and
    (iii) A consumer's liability for an unauthorized electronic fund 
transfer and the investigation of errors involving an extension of 
credit that occurs under an agreement between the consumer and a 
financial institution to extend credit when the consumer's account is 
overdrawn or to maintain a specified minimum balance in the consumer's 
account.
    (2) The Truth in Lending Act and Regulation Z (12 CFR part 226), 
which prohibit the unsolicited issuance of credit cards, govern:
    (i) The addition of a credit feature to an accepted access device; 
and
    (ii) Except as provided in paragraph (a)(1)(ii) of this section, the 
issuance of a credit card that is also an access device.
    (b) Preemption of inconsistent state laws--(1) Inconsistent 
requirements. The Board shall determine, upon its own motion or upon the 
request of a state, financial institution, or other interested party, 
whether the act and this part preempt state law relating to electronic 
fund transfers. Only state laws that are inconsistent with the act and 
this part are preempted and then only to the extent of the 
inconsistency. A state law is not inconsistent with the act and this 
part if it is more protective of consumers.
    (2) Standards for determination. State law is inconsistent with the 
requirements of the act and this part if it:
    (i) Requires or permits a practice or act prohibited by the federal 
law;
    (ii) Provides for consumer liability for unauthorized electronic 
fund transfers that exceeds the limits imposed by the federal law;
    (iii) Allows longer time periods than the federal law for 
investigating and correcting alleged errors, or does not require the 
financial institution to credit the consumer's account during an error 
investigation in accordance with Sec. 205.11(c)(2)(i); or
    (iv) Requires initial disclosures, periodic statements, or receipts 
that are different in content from those required by the federal law 
except to the extent that the disclosures relate to consumer rights 
granted by the state law and not by the federal law.
    (c) State exemptions--(1) General rule. Any state may apply for an 
exemption from the requirements of the act or this part for any class of 
electronic fund transfers within the state. The Board shall grant an 
exemption if it determines that:
    (i) Under state law the class of electronic fund transfers is 
subject to requirements substantially similar to those imposed by the 
federal law; and
    (ii) There is adequate provision for state enforcement.
    (2) Exception. To assure that the federal and state courts continue 
to have concurrent jurisdiction, and to aid in implementing the act:
    (i) No exemption shall extend to the civil liability provisions of 
section 915 of the act; and
    (ii) When the Board grants an exemption, the state law requirements 
shall constitute the requirements of the federal law for purposes of 
section 915 of the act, except for state law requirements not imposed by 
the federal law.



Sec. 205.13  Administrative enforcement; record retention.

    (a) Enforcement by federal agencies. Compliance with this part is 
enforced by the agencies listed in Appendix B of this part.
    (b) Record retention. (1) Any person subject to the act and this 
part shall retain evidence of compliance with the requirements imposed 
by the act and this part for a period of not less than two years from 
the date disclosures are required to be made or action is required to be 
taken.
    (2) Any person subject to the act and this part having actual notice 
that it is the subject of an investigation or an enforcement proceeding 
by its enforcement agency, or having been served with notice of an 
action filed under sections 910, 915, or 916(a) of the act, shall retain 
the records that pertain to the investigation, action, or proceeding 
until final disposition of the matter unless an earlier time is allowed 
by court or agency order.

[[Page 138]]



Sec. 205.14  Electronic fund transfer service provider not holding 
consumer's account.

    (a) Provider of electronic fund transfer service. A person that 
provides an electronic fund transfer service to a consumer but that does 
not hold the consumer's account is subject to all requirements of this 
part if the person:
    (1) Issues a debit card (or other access device) that the consumer 
can use to access the consumer's account held by a financial 
institution; and
    (2) Has no agreement with the account-holding institution regarding 
such access.
    (b) Compliance by service provider. In addition to the requirements 
generally applicable under this part, the service provider shall comply 
with the following special rules:
    (1) Disclosures and documentation. The service provider shall give 
the disclosures and documentation required by Sec. Sec. 205.7, 205.8, 
and 205.9 that are within the purview of its relationship with the 
consumer. The service provider need not furnish the periodic statement 
required by Sec. 205.9(b) if the following conditions are met:
    (i) The debit card (or other access device) issued to the consumer 
bears the service provider's name and an address or telephone number for 
making inquiries or giving notice of error;
    (ii) The consumer receives a notice concerning use of the debit card 
that is substantially similar to the notice contained in Appendix A of 
this part;
    (iii) The consumer receives, on or with the receipts required by 
Sec. 205.9(a), the address and telephone number to be used for an 
inquiry, to give notice of an error, or to report the loss or theft of 
the debit card;
    (iv) The service provider transmits to the account-holding 
institution the information specified in Sec. 205.9(b)(1), in the 
format prescribed by the automated clearinghouse system used to clear 
the fund transfers;
    (v) The service provider extends the time period for notice of loss 
or theft of a debit card, set forth in Sec. 205.6(b) (1) and (2), from 
two business days to four business days after the consumer learns of the 
loss or theft; and extends the time periods for reporting unauthorized 
transfers or errors, set forth in Sec. Sec. 205.6(b)(3) and 
205.11(b)(1)(i), from 60 days to 90 days following the transmittal of a 
periodic statement by the account-holding institution.
    (2) Error resolution. (i) The service provider shall extend by a 
reasonable time the period in which notice of an error must be received, 
specified in Sec. 205.11(b)(1)(i), if a delay resulted from an initial 
attempt by the consumer to notify the account-holding institution.
    (ii) The service provider shall disclose to the consumer the date on 
which it initiates a transfer to effect a provisional credit in 
accordance with Sec. 205.11(c)(2)(ii).
    (iii) If the service provider determines an error occurred, it shall 
transfer funds to or from the consumer's account, in the appropriate 
amount and within the applicable time period, in accordance with Sec. 
205.11(c)(2)(i).
    (iv) If funds were provisionally credited and the service provider 
determines no error occurred, it may reverse the credit. The service 
provider shall notify the account-holding institution of the period 
during which the account-holding institution must honor debits to the 
account in accordance with Sec. 205.11(d)(2)(ii). If an overdraft 
results, the service provider shall promptly reimburse the account-
holding institution in the amount of the overdraft.
    (c) Compliance by account-holding institution. The account-holding 
institution need not comply with the requirements of the act and this 
part with respect to electronic fund transfers initiated through the 
service provider except as follows:
    (1) Documentation. The account-holding institution shall provide a 
periodic statement that describes each electronic fund transfer 
initiated by the consumer with the access device issued by the service 
provider. The account-holding institution has no liability for the 
failure to comply with this requirement if the service provider did not 
provide the necessary information; and
    (2) Error resolution. Upon request, the account-holding institution 
shall provide information or copies of documents needed by the service 
provider to investigate errors or to furnish copies of documents to the 
consumer. The account-holding institution shall also

[[Page 139]]

honor debits to the account in accordance with Sec. 205.11(d)(2)(ii).



Sec. 205.15  Electronic fund transfer of government benefits.

    (a) Government agency subject to regulation. (1) A government agency 
is deemed to be a financial institution for purposes of the act and this 
part if directly or indirectly it issues an access device to a consumer 
for use in initiating an electronic fund transfer of government benefits 
from an account, other than needs-tested benefits in a program 
established under state or local law or administered by a state or local 
agency. The agency shall comply with all applicable requirements of the 
act and this part, except as provided in this section.
    (2) For purposes of this section, the term account means an account 
established by a government agency for distributing government benefits 
to a consumer electronically, such as through automated teller machines 
or point-of-sale terminals, but does not include an account for 
distributing needs-tested benefits in a program established under state 
or local law or administered by a state or local agency.
    (b) Issuance of access devices. For purposes of this section, a 
consumer is deemed to request an access device when the consumer applies 
for government benefits that the agency disburses or will disburse by 
means of an electronic fund transfer. The agency shall verify the 
identity of the consumer receiving the device by reasonable means before 
the device is activated.
    (c) Alternative to periodic statement. A government agency need not 
furnish the periodic statement required by Sec. 205.9(b) if the agency 
makes available to the consumer:
    (1) The consumer's account balance, through a readily available 
telephone line and at a terminal (such as by providing balance 
information at a balance-inquiry terminal or providing it, routinely or 
upon request, on a terminal receipt at the time of an electronic fund 
transfer); and
    (2) A written history of the consumer's account transactions that is 
provided promptly in response to an oral or written request and that 
covers at least 60 days preceding the date of a request by the consumer.
    (d) Modified requirements. A government agency that does not furnish 
periodic statements, in accordance with paragraph (c) of this section, 
shall comply with the following special rules:
    (1) Initial disclosures. The agency shall modify the disclosures 
under Sec. 205.7(b) by disclosing:
    (i) Account balance. The means by which the consumer may obtain 
information concerning the account balance, including a telephone 
number. The agency provides a notice substantially similar to the notice 
contained in paragraph A-5 in Appendix A of this part.
    (ii) Written account history. A summary of the consumer's right to 
receive a written account history upon request, in place of the periodic 
statement required by Sec. 205.7(b)(6), and the telephone number to 
call to request an account history. This disclosure may be made by 
providing a notice substantially similar to the notice contained in 
paragraph A-5 in Appendix A of this part.
    (iii) Error resolution. A notice concerning error resolution that is 
substantially similar to the notice contained in paragraph A-5 in 
Appendix A of this part, in place of the notice required by Sec. 
205.7(b)(10).
    (2) Annual error resolution notice. The agency shall provide an 
annual notice concerning error resolution that is substantially similar 
to the notice contained in paragraph A-5 in appendix A, in place of the 
notice required by Sec. 205.8(b).
    (3) Limitations on liability. For purposes of Sec. 205.6(b)(3), 
regarding a 60-day period for reporting any unauthorized transfer that 
appears on a periodic statement, the 60-day period shall begin with 
transmittal of a written account history or other account information 
provided to the consumer under paragraph (c) of this section.
    (4) Error resolution. The agency shall comply with the requirements 
of Sec. 205.11 in response to an oral or written notice of an error 
from the consumer that is received no later than 60 days after the 
consumer obtains the written

[[Page 140]]

account history or other account information, under paragraph (c) of 
this section, in which the error is first reflected.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 62 FR 43469, Aug. 14, 
1997]



Sec. 205.16  Disclosures at automated teller machines.

    (a) Definition. Automated teller machine operator means any person 
that operates an automated teller machine at which a consumer initiates 
an electronic fund transfer or a balance inquiry and that does not hold 
the account to or from which the transfer is made, or about which an 
inquiry is made.
    (b) General. An automated teller machine operator that imposes a fee 
on a consumer for initiating an electronic fund transfer or a balance 
inquiry shall:
    (1) Provide notice that a fee will be imposed for providing 
electronic fund transfer services or a balance inquiry; and
    (2) Disclose the amount of the fee.
    (c) Notice requirement. An automated teller machine operator must 
comply with the following:
    (1) On the machine. Post the notice required by paragraph (b)(l) of 
this section in a prominent and conspicuous location on or at the 
automated teller machine; and
    (2) Screen or paper notice. Provide the notice required by 
paragraphs (b)(1) and (b)(2) of this section either by showing it on the 
screen of the automated teller machine or by providing it on paper, 
before the consumer is committed to paying a fee.
    (d) Temporary exemption. Through December 31, 2004, the notice 
requirement in paragraph (c)(2) of this section does not apply to any 
automated teller machine that lacks the technical capability to provide 
such information.
    (e) Imposition of fee. An automated teller machine operator may 
impose a fee on a consumer for initiating an electronic fund transfer or 
a balance inquiry only if
    (1) The consumer is provided the notices required under paragraph 
(c) of this section, and
    (2) The consumer elects to continue the transaction or inquiry after 
receiving such notices.

[Reg. E, 66 FR 13412, Mar. 6, 2001]



Sec. 205.17  Requirements for electronic communication.

    (a) Definition. Electronic communication means a message transmitted 
electronically between a financial institution and a consumer in a 
format that allows visual text to be displayed on equipment, for 
example, a personal computer monitor.
    (b) General rule. In accordance with the Electronic Signatures in 
Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et 
seq., and the rules of this part, a financial institution may provide by 
electronic communication any disclosure required by this part to be in 
writing.
    (c) Address or location to receive electronic communication. A 
financial institution that uses electronic communication to provide 
disclosures required by this part shall:
    (1) Send the disclosure to the consumer's electronic address; or
    (2) Make the disclosure available at another location such as an 
Internet web site; and
    (i) Alert the consumer of the disclosure's availability by sending a 
notice to the consumer's electronic address (or to a postal address, at 
the financial institution's option). The notice shall identify the 
account involved and the address of the Internet web site or other 
location where the disclosure is available; and
    (ii) Make the disclosure available for at least 90 days from the 
date the disclosure first becomes available or from the date of the 
notice alerting the consumer of the disclosure, whichever comes later.
    (d) Redelivery. When a disclosure provided by electronic 
communication is returned to a financial institution undelivered, the 
financial institution shall take reasonable steps to attempt redelivery 
using information in its files.
    (e) Persons other than financial institutions. Persons other than a 
financial institution that are required to comply

[[Page 141]]

with this part may use electronic communication in accordance with the 
requirements of Sec. 205.17, as applicable.

[Reg. E, 66 FR 17793, Apr. 4, 2001]

       Appendix A to Part 205--Model Disclosure Clauses and Forms

                            Table of Contents

A---Model Clauses for unsolicited issuance (Sec. 205.5(b)(2))
A-2--Model clauses for initial disclosures (Sec. 205.7(b))
A-3--Model forms for error resolution notice (Sec. Sec. 205.7(b)(10) 
          and 205.8(b))
A-4--Model form for service-providing institutions (Sec. 
          205.14(b)(1)(ii))
A-5--Model forms for government agencies (Sec. 205.15(d)(1) and (2))

     A-1--Model Clauses For Unsolicited Issuance (Sec. 205.5(b)(2))

    (a) Accounts using cards. You cannot use the enclosed card to 
transfer money into or out of your account until we have validated it. 
If you do not want to use the card, please (destroy it at once by 
cutting it in half).
    [Financial institution may add validation instructions here.]
    (b) Accounts using codes. You cannot use the enclosed code to 
transfer money into or out of your account until we have validated it. 
If you do not want to use the code, please (destroy this notice at 
once).
    [Financial institution may add validation instructions here.]

       A-2--Model Clauses For Initial Disclosures (Sec. 205.7(b))

    (a) Consumer Liability (Sec. 205.7(b)(1)). (Tell us AT ONCE if you 
believe your [card] [code] has been lost or stolen. Telephoning is the 
best way of keeping your possible losses down. You could lose all the 
money in your account (plus your maximum overdraft line of credit). If 
you tell us within 2 business days, you can lose no more than $50 if 
someone used your [card][code] without your permission. (If you believe 
your [card] [code] has been lost or stolen, and you tell us within 2 
business days after you learn of the loss or theft, you can lose no more 
than $50 if someone used your [card] [code] without your permission.)
    If you do NOT tell us within 2 business days after you learn of the 
loss or theft of your [card] [code], and we can prove we could have 
stopped someone from using your [card] [code] without your permission if 
you had told us, you could lose as much as $500.
    Also, if your statement shows transfers that you did not make, tell 
us at once. If you do not tell us within 60 days after the statement was 
mailed to you, you may not get back any money you lost after the 60 days 
if we can prove that we could have stopped someone from taking the money 
if you had told us in time.
    If a good reason (such as a long trip or a hospital stay) kept you 
from telling us, we will extend the time periods.
    (b) Contact in event of unauthorized transfer (Sec. 205.7(b)(2)). 
If you believe your [card] [code] has been lost or stolen or that 
someone has transferred or may transfer money from your account without 
your permission, call:

[Telephone number]
or write:
[Name of person or office to be notified]
[Address]

    (c) Business days (Sec. 205.7(b)(3)). For purposes of these 
disclosures, our business days are (Monday through Friday) (Monday 
through Saturday) (any day including Saturdays and Sundays). Holidays 
are (not) included.
    (d) Transfer types and limitations (Sec. 205.7(b)(4))--(1) Account 
access. You may use your [card][code] to:
    (i) Withdraw cash from your [checking] [or] [savings] account.
    (ii) Make deposits to your [checking] [or] [savings] account.
    (iii) Transfer funds between your checking and savings accounts 
whenever you request.
    (iv) Pay for purchases at places that have agreed to accept the 
[card] [code].
    (v) Pay bills directly [by telephone] from your [checking] [or] 
[savings] account in the amounts and on the days you request.
    Some of these services may not be available at all terminals.
    (2) Limitations on frequency of transfers.--(i) You may make only 
[insert number, e.g., 3] cash withdrawals from our terminals each 
[insert time period, e.g., week].
    (ii) You can use your telephone bill-payment service to pay [insert 
number] bills each [insert time period] [telephone call].
    (iii) You can use our point-of-sale transfer service for [insert 
number] transactions each [insert time period].
    (iv) For security reasons, there are limits on the number of 
transfers you can make using our [terminals] [telephone bill-payment 
service] [point-of-sale transfer service].
    (3) Limitations on dollar amounts of transfers--(i) You may withdraw 
up to [insert dollar amount] from our terminals each [insert time 
period] time you use the [card] [code].
    (ii) You may buy up to [insert dollar amount] worth of goods or 
services each [insert time period] time you use the [card] [code] in our 
point-of-sale transfer service.
    (e) Fees (Sec. 205.7(b)(5))--(1) Per transfer charge. We will 
charge you [insert dollar amount] for each transfer you make using our 
[automated teller machines] [telephone bill-payment service] [point-of-
sale transfer service].
    (2) Fixed charge. We will charge you [insert dollar amount] each 
[insert time period] for

[[Page 142]]

our [automated teller machine service] [telephone bill-payment service] 
[point-of-sale transfer service].
    (3) Average or minimum balance charge. We will only charge you for 
using our [automated teller machines] [telephone bill-payment service] 
[point-of-sale transfer service] if the [average] [minimum] balance in 
your [checking account] [savings account] [accounts] falls below [insert 
dollar amount]. If it does, we will charge you [insert dollar amount] 
each [transfer] [insert time period].
    (f) Confidentiality (Sec. 205.7(b)(9)). We will disclose 
information to third parties about your account or the transfers you 
make:
    (i) Where it is necessary for completing transfers, or
    (ii) In order to verify the existence and condition of your account 
for a third party, such as a credit bureau or merchant, or
    (iii) In order to comply with government agency or court orders, or
    (iv) If you give us your written permission.
    (g) Documentation (Sec. 205.7(b)(6))--(1) Terminal transfers. You 
can get a receipt at the time you make any transfer to or from your 
account using one of our [automated teller machines] [or] [point-of-sale 
terminals].
    (2) Preauthorized credits. If you have arranged to have direct 
deposits made to your account at least once every 60 days from the same 
person or company, (we will let you know if the deposit is [not] made.) 
[the person or company making the deposit will tell you every time they 
send us the money] [you can call us at (insert telephone number) to find 
out whether or not the deposit has been made].
    (3) Periodic statements. You will get a [monthly] [quarterly] 
account statement (unless there are no transfers in a particular month. 
In any case you will get the statement at least quarterly).
    (4) Passbook account where the only possible electronic fund 
transfers are preauthorized credits. If you bring your passbook to us, 
we will record any electronic deposits that were made to your account 
since the last time you brought in your passbook.
    (h) Preauthorized payments (Sec. 205.7(b) (6), (7) and (8); Sec. 
205.10(d))--(1) Right to stop payment and procedure for doing so. If you 
have told us in advance to make regular payments out of your account, 
you can stop any of these payments. Here's how:
    Call us at [insert telephone number], or write us at [insert 
address], in time for us to receive your request 3 business days or more 
before the payment is scheduled to be made. If you call, we may also 
require you to put your request in writing and get it to us within 14 
days after you call. (We will charge you [insert amount] for each stop-
payment order you give.)
    (2) Notice of varying amounts. If these regular payments may vary in 
amount, [we] [the person you are going to pay] will tell you, 10 days 
before each payment, when it will be made and how much it will be. (You 
may choose instead to get this notice only when the payment would differ 
by more than a certain amount from the previous payment, or when the 
amount would fall outside certain limits that you set.)
    (3) Liability for failure to stop payment of preauthorized transfer. 
If you order us to stop one of these payments 3 business days or more 
before the transfer is scheduled, and we do not do so, we will be liable 
for your losses or damages.
    (i) Financial institution's liability (Sec. 205.7(b)(8)). If we do 
not complete a transfer to or from your account on time or in the 
correct amount according to our agreement with you, we will be liable 
for your losses or damages. However, there are some exceptions. We will 
not be liable, for instance:
    (1) If, through no fault of ours, you do not have enough money in 
your account to make the transfer.
    (2) If the transfer would go over the credit limit on your overdraft 
line.
    (3) If the automated teller machine where you are making the 
transfer does not have enough cash.
    (4) If the [terminal] [system] was not working properly and you knew 
about the breakdown when you started the transfer.
    (5) If circumstances beyond our control (such as fire or flood) 
prevent the transfer, despite reasonable precautions that we have taken.
    (6) There may be other exceptions stated in our agreement with you.
    (j) ATM fees (Sec. 205.7(b)(11)). When you use an ATM not owned by 
us, you may be charged a fee by the ATM operator [or any network used] 
(and you may be charged a fee for a balance inquiry even if you do not 
complete a fund transfer).

 A-3--Model Forms For Error Resolution Notice (Sec. Sec. 205.7(b)(10) 
                              and 205.8(b))

    (a) Initial and annual error resolution notice (Sec. Sec. 
205.7(b)(10) and 205.8(b)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [insert telephone number] Write us at [insert address] 
[or E-mail us at [insert electronic mail address]] as soon as you can, 
if you think your statement or receipt is wrong or if you need more 
information about a transfer listed on the statement or receipt. We must 
hear from you no later than 60 days after we sent the FIRST statement on 
which the problem or error appeared.
    (1) Tell us your name and account number (if any).
    (2) Describe the error or the transfer you are unsure about, and 
explain as clearly as you can why you believe it is an error or why you 
need more information.
    (3) Tell us the dollar amount of the suspected error.

[[Page 143]]

    If you tell us orally, we may require that you send us your 
complaint or question in writing within 10 business days.
    We will determine whether an error occurred within 10 business days 
after we hear from you and will correct any error promptly. If we need 
more time, however, we may take up to 45 days to investigate your 
complaint or question. If we decide to do this, we will credit your 
account within 10 business days for the amount you think is in error, so 
that you will have the use of the money during the time it takes us to 
complete our investigation. If we ask you to put your complaint or 
question in writing and we do not receive it within 10 business days, we 
may not credit your account.
    For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your 
complaint or question. For new accounts, we may take up to 20 business 
days to credit your account for the amount you think is in error.
    We will tell you the results within three business days after 
completing our investigation. If we decide that there was no error, we 
will send you a written explanation. You may ask for copies of the 
documents that we used in our investigation.
    (b) Error resolution notice on periodic statements (Sec. 205.8(b)).

       A-4--Model Form For Service-providing Institutions (Sec. 
                            205.14(b)(1)(ii))

    ALL QUESTIONS ABOUT TRANSACTIONS MADE WITH YOUR (NAME OF CARD) CARD 
MUST BE DIRECTED TO US (NAME OF SERVICE PROVIDER), AND NOT TO THE BANK 
OR OTHER FINANCIAL INSTITUTION WHERE YOU HAVE YOUR ACCOUNT. We are 
responsible for the [name of service] service and for resolving any 
errors in transactions made with your [name of card] card.
    We will not send you a periodic statement listing transactions that 
you make using your [name of card] card. The transactions will appear 
only on the statement issued by your bank or other financial 
institution. SAVE THE RECEIPTS YOU ARE GIVEN WHEN YOU USE YOUR [NAME OF 
CARD] CARD, AND CHECK THEM AGAINST THE ACCOUNT STATEMENT YOU RECEIVE 
FROM YOUR BANK OR OTHER FINANCIAL INSTITUTION. If you have any questions 
about one of these transactions, call or write us at [telephone number 
and address] [the telephone number and address indicated below].
    IF YOUR [NAME OF CARD] CARD IS LOST OR STOLEN, NOTIFY US AT ONCE by 
calling or writing to us at [telephone number and address].

  A-5--Model Forms For Government Agencies(Sec. 205.15(d)(1) and (2))

    (a) Disclosure by government agencies of information about obtaining 
account balances and account histories (Sec. 205.15(d)(1)(i) and (ii)).
    You may obtain information about the amount of benefits you have 
remaining by calling [telephone number]. That information is also 
available [on the receipt you get when you make a transfer with your 
card at (an ATM)(a POS terminal)][when you make a balance inquiry at an 
ATM][when you make a balance inquiry at specified locations].
    You also have the right to receive a written summary of transactions 
for the 60 days preceding your request by calling [telephone number]. 
[Optional: Or you may request the summary by contacting your 
caseworker.]
    (b) Disclosure of error resolution procedures for government 
agencies that do not provide periodic statements (Sec. 
205.15(d)(1)(iii) and (d)(2)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [telephone number] Write us at [insert address] [or E-
mail us at [insert electronic mail address]] as soon as you can, if you 
think an error has occurred in your [EBT][agency's name for program] 
account. We must hear from you no later than 60 days after you learn of 
the error. You will need to tell us:
     Your name and [case] [file] number.
     Why you believe there is an error, and the dollar 
amount involved.
     Approximately when the error took place.

If you tell us orally, we may require that you send us your complaint or 
question in writing within 10 business days.
    We will determine whether an error occurred within 10 business days 
after we hear from you and will correct any error promptly. If we need 
more time, however, we may take up to 45 days to investigate your 
complaint or question. If we decide to do this, we will credit your 
account within 10 business days for the amount you think is in error, so 
that you will have the use of the money during the time it takes us to 
complete our investigation. If we ask you to put your complaint or 
question in writing and we do not receive it within 10 business days, we 
may not credit your account.
    For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your 
complaint or question. For new accounts, we may take up to 20 business 
days to credit your account for the amount you think is in error.
    We will tell you the results within three business days after 
completing our investigation. If we decide that there was no error, we 
will send you a written explanation. You

[[Page 144]]

may ask for copies of the documents that we used in our investigation.
    If you need more information about our error resolution procedures, 
call us at [telephone number][the telephone number shown above].

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 52118, Sept. 29, 
1998; 66 FR 13412, Mar. 6, 2001; 66 FR 17793, Apr. 4, 2001]

          Appendix B to Part 205--Federal Enforcement Agencies

    The following list indicates which Federal agency enforces 
Regulation E (12 CFR part 205) for particular classes of institutions. 
Any questions concerning compliance by a particular institution should 
be directed to the appropriate enforcing agency. Terms that are not 
defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall 
have the meaning given to them in the International Banking Act of 1978 
(12 U.S.C. 3101).

  National banks, and Federal branches and Federal agencies of foreign 
                                  banks

    District office of the Office of the Comptroller of the Currency 
where the institution is located.

 State member banks, branches and agencies of foreign banks (other than 
   Federal branches, Federal agencies, and insured state branches of 
  foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25(a) of 
                         the Federal Reserve Act

    Federal Reserve Bank serving the District in which the institution 
is located.

   Nonmember insured banks and insured state branches of foreign banks

    Federal Deposit Insurance Corporation regional director for the 
region in which the institution is located.

  Savings institutions insured under the Savings Association Insurance 
Fund of the FDIC and federally-chartered savings banks insured under the 
   Bank Insurance Fund of the FDIC (but not including state-chartered 
          savings banks insured under the Bank Insurance Fund)

    Office of Thrift Supervision Regional Director for the region in 
which the institution is located.

                          Federal Credit Unions

    Division of Consumer Affairs, National Credit Union Administration, 
1775 Duke Street, Alexandria, Virginia 22314-3428

                              Air Carriers

    Assistant General Counsel for Aviation Enforcement and Proceedings, 
Department of Transportation, 400 Seventh Street, S.W., Washington, D.C. 
20590.

                           Brokers and Dealers

    Division of Market Regulation, Securities and Exchange Commission, 
Washington, D.C. 20549.

     Retailers, Consumer Finance Companies, Certain Other Financial 
             Institutions, and all others not covered above

    Federal Trade Commission, Electronic Fund Transfers, Washington, 
D.C. 20580.

        Appendix C to Part 205--Issuance of Staff Interpretations

                     Official Staff Interpretations

    Pursuant to section 915(d) of the act, the Board has designated the 
director and other officials of the Division of Consumer and Community 
Affairs as officials ``duly authorized'' to issue, at their discretion, 
official staff interpretations of this part. Except in unusual 
circumstances, such interpretations will not be issued separately but 
will be incorporated in an official commentary to this part, which will 
be amended periodically.

         Requests for Issuance of Official Staff Interpretations

    A request for an official staff interpretation shall be in writing 
and addressed to the Director, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, Washington, 
D.C. 20551. The request shall contain a complete statement of all 
relevant facts concerning the issue, including copies of all pertinent 
documents.

                        Scope of Interpretations

    No staff interpretations will be issued approving financial 
institutions' forms or statements. This restriction does not apply to 
forms or statements whose use is required or sanctioned by a government 
agency.

        Supplement I to Part 205--Official Staff Interpretations

                       Section 205.2--Definitions

                           2(a) Access Device

    1. Examples. The term access device includes debit cards, personal 
identification numbers (PINs), telephone transfer and telephone bill 
payment codes, and other means that may be used by a consumer to 
initiate an electronic fund transfer (EFT) to or from a consumer 
account. The term does not include magnetic tape or other devices used 
internally by a financial institution to initiate electronic transfers.

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    2. Checks used to capture information. The term ``access device'' 
does not include a check or draft used to capture the MICR (Magnetic Ink 
Character Recognition) encoding to initiate a one-time ACH debit. For 
example, if a consumer authorizes a one-time ACH debit from the 
consumer's account using a blank, partially completed, or fully 
completed and signed check for the merchant to capture the routing, 
account, and serial numbers to initiate the debit, the check is not an 
access device. (Although the check is not an access device under 
Regulation E, the transaction is nonetheless covered by the regulation. 
See comment 3(b)-1(v).)

                              2(b) Account

    1. Consumer asset account. The term consumer asset account includes:
    i. Club accounts, such as vacation clubs. In many cases, however, 
these accounts are exempt from the regulation under Sec. 205.3(c)(5) 
because all electronic transfers to or from the account have been 
preauthorized by the consumer and involve another account of the 
consumer at the same institution.
    ii. A retail repurchase agreement (repo), which is a loan made to a 
financial institution by a consumer that is collateralized by government 
or government-insured securities.
    2. Examples of accounts not covered by Regulation E (12 CFR part 
205) include:
    i. Profit-sharing and pension accounts established under a trust 
agreement, which are exempt under Sec. 205.2(b)(2).
    ii. Escrow accounts, such as those established to ensure payment of 
items such as real estate taxes, insurance premiums, or completion of 
repairs or improvements.
    iii. Accounts for accumulating funds to purchase U.S. savings bonds.

                            Paragraph 2(b)(2)

    1. Bona fide trust agreements. The term bona fide trust agreement is 
not defined by the act or regulation; therefore, financial institutions 
must look to state or other applicable law for interpretation.
    2. Custodial agreements. An account held under a custodial agreement 
that qualifies as a trust under the Internal Revenue Code, such as an 
individual retirement account, is considered to be held under a trust 
agreement for purposes of Regulation E.

                            2(d) Business Day

    1. Duration. A business day includes the entire 24-hour period 
ending at midnight, and a notice required by the regulation is effective 
even if given outside normal business hours. The regulation does not 
require, however, that a financial institution make telephone lines 
available on a 24-hour basis.
    2. Substantially all business functions. ``Substantially all 
business functions'' include both the public and the back-office 
operations of the institution. For example, if the offices of an 
institution are open on Saturdays for handling some consumer 
transactions (such as deposits, withdrawals, and other teller 
transactions), but not for performing internal functions (such as 
investigating account errors), then Saturday is not a business day for 
that institution. In this case, Saturday does not count toward the 
business-day standard set by the regulation for reporting lost or stolen 
access devices, resolving errors, etc.
    3. Short hours. A financial institution may determine, at its 
election, whether an abbreviated day is a business day. For example, if 
an institution engages in substantially all business functions until 
noon on Saturdays instead of its usual 3:00 p.m. closing, it may 
consider Saturday a business day.
    4. Telephone line. If a financial institution makes a telephone line 
available on Sundays for reporting the loss or theft of an access 
device, but performs no other business functions, Sunday is not a 
business day under the ``substantially all business functions'' 
standard.

                        2(h) Electronic Terminal

    1. Point-of-sale (POS) payments initiated by telephone. Because the 
term electronic terminal excludes a telephone operated by a consumer, a 
financial institution need not provide a terminal receipt when:
    i. A consumer uses a debit card at a public telephone to pay for the 
call.
    ii. A consumer initiates a transfer by a means analogous in function 
to a telephone, such as by home banking equipment or a facsimile 
machine.
    2. POS terminals. A POS terminal that captures data electronically, 
for debiting or crediting to a consumer's asset account, is an 
electronic terminal for purposes of Regulation E even if no access 
device is used to initiate the transaction. (See Sec. 205.9 for receipt 
requirements.)
    3. Teller-operated terminals. A terminal or other computer equipment 
operated by an employee of a financial institution is not an electronic 
terminal for purposes of the regulation. However, transfers initiated at 
such terminals by means of a consumer's access device (using the 
consumer's PIN, for example) are EFTs and are subject to other 
requirements of the regulation. If an access device is used only for 
identification purposes or for determining the account balance, the 
transfers are not EFTs for purposes of the regulation.

               2(k) Preauthorized Electronic Fund Transfer

    1. Advance authorization. A ``preauthorized electronic fund 
transfer'' under Regulation E

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is one authorized by the consumer in advance of a transfer that will 
take place on a recurring basis, at substantially regular intervals, and 
will require no further action by the consumer to initiate the transfer. 
In a bill-payment system, for example, if the consumer authorizes a 
financial institution to make monthly payments to a payee by means of 
EFTs, and the payments take place without further action by the 
consumer, the payments are preauthorized EFTs. In contrast, if the 
consumer must take action each month to initiate a payment (such as by 
entering instructions on a touch-tone telephone or home computer), the 
payments are not preauthorized EFTs.

               2(m) Unauthorized Electronic Fund Transfer

    1. Transfer by institution's employee. A consumer has no liability 
for erroneous or fraudulent transfers initiated by an employee of a 
financial institution.
    2. Authority. If a consumer furnishes an access device and grants 
authority to make transfers to a person (such as a family member or co-
worker) who exceeds the authority given, the consumer is fully liable 
for the transfers unless the consumer has notified the financial 
institution that transfers by that person are no longer authorized.
    3. Access device obtained through robbery or fraud. An unauthorized 
EFT includes a transfer initiated by a person who obtained the access 
device from the consumer through fraud or robbery.
    4. Forced initiation. An EFT at an automated teller machine (ATM) is 
an unauthorized transfer if the consumer has been induced by force to 
initiate the transfer.
    5. Reversal of direct deposits. The reversal of a direct deposit 
made in error is not an unauthorized EFT when it involves:
    i. A credit made to the wrong consumer's account;
    ii. A duplicate credit made to a consumer's account; or
    iii. A credit in the wrong amount (for example, when the amount 
credited to the consumer's account differs from the amount in the 
transmittal instructions).

                         Section 205.3--Coverage

                              3(a) General

    1. Accounts covered. The requirements of the regulation apply only 
to an account for which an agreement for EFT services to or from the 
account has been entered into between:
    i. The consumer and the financial institution (including an account 
for which an access device has been issued to the consumer, for 
example);
    ii. The consumer and a third party (for preauthorized debits or 
credits, for example), when the account-holding institution has received 
notice of the agreement and the fund transfers have begun.
    2. Automated clearing house (ACH) membership. The fact that 
membership in an ACH requires a financial institution to accept EFTs to 
accounts at the institution does not make every account of that 
institution subject to the regulation.
    3. Foreign applicability. Regulation E applies to all persons 
(including branches and other offices of foreign banks located in the 
United States) that offer EFT services to residents of any state, 
including resident aliens. It covers any account located in the United 
States through which EFTs are offered to a resident of a state. This is 
the case whether or not a particular transfer takes place in the United 
States and whether or not the financial institution is chartered in the 
United States or a foreign country. The regulation does not apply to a 
foreign branch of a U.S. bank unless the EFT services are offered in 
connection with an account in a state as defined in Sec. 205.2(l).

                      3(b) Electronic Fund Transfer

    1. Fund transfers covered. The term electronic fund transfer 
includes:
    i. A deposit made at an ATM or other electronic terminal (including 
a deposit in cash or by check) provided a specific agreement exists 
between the financial institution and the consumer for EFTs to or from 
the account to which the deposit is made.
    ii. A transfer sent via ACH. For example, social security benefits 
under the U.S. Treasury's direct-deposit program are covered, even if 
the listing of payees and payment amounts reaches the account-holding 
institution by means of a computer printout from a correspondent bank.
    iii. A preauthorized transfer credited or debited to an account in 
accordance with instructions contained on magnetic tape, even if the 
financial institution holding the account sends or receives a composite 
check.
    iv. A transfer from the consumer's account resulting from a debit-
card transaction at a merchant location, even if no electronic terminal 
is involved at the time of the transaction, if the consumer's asset 
account is subsequently debited for the amount of the transfer.
    v. A transfer via ACH where a consumer has provided a check to 
enable the merchant or other payee to capture the routing, account, and 
serial numbers to initiate the transfer, whether the check is blank, 
partially completed, or fully completed and signed; whether the check is 
presented at POS or is mailed to a merchant or other payee or lockbox 
and later converted to an EFT; or whether the check is retained by the 
consumer, the merchant or other payee, or the payee's financial 
institution.

[[Page 147]]

    vi. A payment made by a bill payer under a bill-payment service 
available to a consumer via computer or other electronic means, unless 
the terms of the bill-payment service explicitly state that all 
payments, or all payments to a particular payee or payees, will be 
solely by check, draft, or similar paper instrument drawn on the 
consumer's account, and the payee or payees that will be paid in this 
manner are identified to the consumer.
    2. Fund transfers not covered. The term electronic fund transfer 
does not include:
    i. A payment that does not debit or credit a consumer asset account, 
such as a payroll allotment to a creditor to repay a credit extension 
(which is deducted from salary).
    ii. A payment made in currency by a consumer to another person at an 
electronic terminal.
    iii. A preauthorized check drawn by the financial institution on the 
consumer's account (such as an interest or other recurring payment to 
the consumer or another party), even if the check is computer-generated.
    3. Authorization of one-time EFT initiated using MICR encoding on a 
check. A consumer authorizes a one-time EFT (in providing a check to a 
merchant or other payee for the MICR encoding), where the consumer 
receives notice that the transaction will be processed as an EFT and 
completes the transaction. Examples of notice include, but are not 
limited to, signage at POS and written statements.

                      3(c) Exclusions From Coverage

                        Paragraph 3(c)(1)--Checks

    1. Re-presented checks. The electronic re-presentment of a returned 
check is not covered by Regulation E because the transaction originated 
by check. Regulation E does apply, however, to any fee authorized by the 
consumer to be debited electronically from the consumer's account 
because the check was returned for insufficient funds. Authorization 
occurs where the consumer has received notice that a fee imposed for 
returned checks will be debited electronically from the consumer's 
account.
    2. Check used to capture information for a one-time EFT. See comment 
3(b)-1(v).

           Paragraph 3(c)(2)--Check Guarantee or Authorization

    1. Memo posting. Under a check guarantee or check authorization 
service, debiting of the consumer's account occurs when the check or 
draft is presented for payment. These services are exempt from coverage, 
even when a temporary hold on the account is memo-posted electronically 
at the time of authorization.

           Paragraph 3(c)(3)--Wire or Other Similar Transfers

    1. Fedwire and ACH. If a financial institution makes a fund transfer 
to a consumer's account after receiving funds through Fedwire or a 
similar network, the transfer by ACH is covered by the regulation even 
though the Fedwire or network transfer is exempt.
    2. Article 4A. Financial institutions that offer telephone-initiated 
Fedwire payments are subject to the requirements of UCC section 4A-202, 
which encourages verification of Fedwire payment orders pursuant to a 
security procedure established by agreement between the consumer and the 
receiving bank. These transfers are not subject to Regulation E and the 
agreement is not considered a telephone plan if the service is offered 
separately from a telephone bill-payment or other prearranged plan 
subject to Regulation E. The Board's Regulation J (12 CFR part 210) 
specifies the rules applicable to funds handled by Federal Reserve 
Banks. To ensure that the rules for all fund transfers through Fedwire 
are consistent, the Board used its preemptive authority under UCC 
section 4A-107 to determine that subpart B of Regulation J (12 CFR part 
210), including the provisions of Article 4A, applies to all fund 
transfers through Fedwire, even if a portion of the fund transfer is 
governed by the EFTA. The portion of the fund transfer that is governed 
by the EFTA is not governed by subpart B of Regulation J (12 CFR part 
210).
    3. Similar fund transfer systems. Fund transfer systems that are 
similar to Fedwire include the Clearing House Interbank Payments System 
(CHIPS), Society for Worldwide Interbank Financial Telecommunication 
(SWIFT), Telex, and transfers made on the books of correspondent banks.

         Paragraph 3(c)(4)--Securities and Commodities Transfers

    1. Coverage. The securities exemption applies to securities and 
commodities that may be sold by a registered broker-dealer or futures 
commission merchant, even when the security or commodity itself is not 
regulated by the Securities and Exchange Commission or the Commodity 
Futures Trading Commission.
    2. Example of exempt transfer. The exemption applies to a transfer 
involving a transfer initiated by a telephone order to a stockbroker to 
buy or sell securities or to exercise a margin call.
    3. Examples of nonexempt transfers. The exemption does not apply to 
a transfer involving:
    i. A debit card or other access device that accesses a securities or 
commodities account such as a money market mutual fund and

[[Page 148]]

that the consumer uses for purchasing goods or services or for obtaining 
cash.
    ii. A payment of interest or dividends into the consumer's account 
(for example, from a brokerage firm or from a Federal Reserve Bank for 
government securities).

  Paragraph 3(c)(5)--Automatic Transfers by Account-Holding Institution

    1. Automatic transfers exempted. The exemption applies to:
    i. Electronic debits or credits to consumer accounts for check 
charges, stop-payment charges, NSF charges, overdraft charges, 
provisional credits, error adjustments, and similar items that are 
initiated automatically on the occurrence of certain events.
    ii. Debits to consumer accounts for group insurance available only 
through the financial institution and payable only by means of an 
aggregate payment from the institution to the insurer.
    iii. EFTs between a thrift institution and its paired commercial 
bank in the state of Rhode Island, which are deemed under state law to 
be intra-institutional.
    iv. Automatic transfers between a consumer's accounts within the 
same financial institution, even if the account holders on the two 
accounts are not identical.
    2. Automatic transfers not exempted. Transfers between accounts of 
the consumer at affiliated institutions (such as between a bank and its 
subsidiary or within a holding company) are not intra-institutional 
transfers, and thus do not qualify for the exemption.

            Paragraph 3(c)(6)--Telephone-Initiated Transfers

    1. Written plan or agreement. A transfer that the consumer initiates 
by telephone is covered by Regulation E if the transfer is made under a 
written plan or agreement between the consumer and the financial 
institution making the transfer. A written statement available to the 
public or to account holders that describes a service allowing a 
consumer to initiate transfers by telephone constitutes a plan--for 
example, a brochure, or material included with periodic statements. The 
following, however, do not by themselves constitute a written plan or 
agreement:
    i. A hold-harmless agreement on a signature card that protects the 
institution if the consumer requests a transfer.
    ii. A legend on a signature card, periodic statement, or passbook 
that limits the number of telephone-initiated transfers the consumer can 
make from a savings account because of reserve requirements under 
Regulation D (12 CFR part 204).
    iii. An agreement permitting the consumer to approve by telephone 
the rollover of funds at the maturity of an instrument.
    2. Examples of covered transfers. When a written plan or agreement 
has been entered into, a transfer initiated by a telephone call from a 
consumer is covered even though:
    i. An employee of the financial institution completes the transfer 
manually (for example, by means of a debit memo or deposit slip).
    ii. The consumer is required to make a separate request for each 
transfer.
    iii. The consumer uses the plan infrequently.
    iv. The consumer initiates the transfer via a facsimile machine.
    v. The consumer initiates the transfer using a financial 
institution's audio-response or voice-response telephone system.

                  Paragraph 3(c)(7)--Small Institutions

    1. Coverage. This exemption is limited to preauthorized transfers; 
institutions that offer other EFTs must comply with the applicable 
sections of the regulation as to such services. The preauthorized 
transfers remain subject to sections 913, 915, and 916 of the act and 
Sec. 205.10(e), and are therefore exempt from UCC Article 4A.

Section 205.4--General Disclosure Requirements; Jointly Offered Services

                        4(a) Form of Disclosures

    1. General. Although no particular rules govern type size, number of 
pages, or the relative conspicuousness of various terms, the disclosures 
must be in a clear and readily understandable written form that the 
consumer may retain. Numbers or codes are considered readily 
understandable if explained elsewhere on the disclosure form.
    2. Foreign language disclosures. Disclosures may be made in 
languages other than English, provided they are available in English 
upon request.

                Section 205.5--Issuance of Access Devices

    1. Coverage. The provisions of this section limit the circumstances 
under which a financial institution may issue an access device to a 
consumer. Making an additional account accessible through an existing 
access device is equivalent to issuing an access device and is subject 
to the limitations of this section.

                         5(a) Solicited Issuance

                            Paragraph 5(a)(1)

    1. Joint account. For a joint account, a financial institution may 
issue an access device to each account holder if the requesting holder 
specifically authorizes the issuance.
    2. Permissible forms of request. The request for an access device 
may be written or oral (for example, in response to a telephone 
solicitation by a card issuer).

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                            Paragraph 5(a)(2)

    1. One-for-one rule. In issuing a renewal or substitute access 
device, a financial institution may not provide additional devices. For 
example, only one new card and PIN may replace a card and PIN previously 
issued. If the replacement device permits either additional or fewer 
types of electronic fund transfer services, a change-in-terms notice or 
new disclosures are required.
    2. Renewal or substitution by a successor institution. A successor 
institution is an entity that replaces the original financial 
institution (for example, following a corporate merger or acquisition) 
or that acquires accounts or assumes the operation of an EFT system.

                        5(b) Unsolicited Issuance

    1. Compliance. A financial institution may issue an unsolicited 
access device (such as the combination of a debit card and PIN) if the 
institution's ATM system has been programmed not to accept the access 
device until after the consumer requests and the institution validates 
the device. Merely instructing a consumer not to use an unsolicited 
debit card and PIN until after the institution verifies the consumer's 
identity does not comply with the regulation.
    2. PINS. A financial institution may impose no liability on a 
consumer for unauthorized transfers involving an unsolicited access 
device until the device becomes an ``accepted access device'' under the 
regulation. A card and PIN combination may be treated as an accepted 
access device once the consumer has used it to make a transfer.
    3. Functions of PIN. If an institution issues a PIN at the 
consumer's request, the issuance may constitute both a way of validating 
the debit card and the means to identify the consumer (required as a 
condition of imposing liability for unauthorized transfers).
    4. Verification of identity. To verify the consumer's identity, a 
financial institution may use any reasonable means, such as a 
photograph, fingerprint, personal visit, signature comparison, or 
personal information about the consumer. However, even if reasonable 
means were used, if an institution fails to verify correctly the 
consumer's identity and an imposter succeeds in having the device 
validated, the consumer is not liable for any unauthorized transfers 
from the account.

     Section 205.6--Liability of Consumer for Unauthorized Transfers

                      6(a) Conditions for Liability

    1. Means of identification. A financial institution may use various 
means for identifying the consumer to whom the access device is issued, 
including but not limited to:
    i. Electronic or mechanical confirmation (such as a PIN).
    ii. Comparison of the consumer's signature, fingerprint, or 
photograph.
    2. Multiple users. When more than one access device is issued for an 
account, the financial institution may, but need not, provide a separate 
means to identify each user of the account.

                 6(b) Limitations on Amount of Liability

    1. Application of liability provisions. There are three possible 
tiers of consumer liability for unauthorized EFTs depending on the 
situation. A consumer may be liable for (1) up to $50; (2) up to $500; 
or (3) an unlimited amount depending on when the unauthorized EFT 
occurs. More than one tier may apply to a given situation because each 
corresponds to a different (sometimes overlapping) time period or set of 
conditions.
    2. Consumer negligence. Negligence by the consumer cannot be used as 
the basis for imposing greater liability than is permissible under 
Regulation E. Thus, consumer behavior that may constitute negligence 
under state law, such as writing the PIN on a debit card or on a piece 
of paper kept with the card, does not affect the consumer's liability 
for unauthorized transfers. (However, refer to comment 2(m)-2 regarding 
termination of the authority of given by the consumer to another 
person.)
    3. Limits on liability. The extent of the consumer's liability is 
determined solely by the consumer's promptness in reporting the loss or 
theft of an access device. Similarly, no agreement between the consumer 
and an institution may impose greater liability on the consumer for an 
unauthorized transfer than the limits provided in Regulation E.

                 Paragraph 6(b)(1)--Timely Notice Given

    1. $50 limit applies. The basic liability limit is $50. For example, 
the consumer's card is lost or stolen on Monday and the consumer learns 
of the loss or theft on Wednesday. If the consumer notifies the 
financial institution within two business days of learning of the loss 
or theft (by midnight Friday), the consumer's liability is limited to 
$50 or the amount of the unauthorized transfers that occurred before 
notification, whichever is less.
    2. Knowledge of loss or theft of access device. The fact that a 
consumer has received a periodic statement that reflects unauthorized 
transfers may be a factor in determining whether the consumer had 
knowledge of the loss or theft, but cannot be deemed to represent 
conclusive evidence that the consumer had such knowledge.
    3. Two-business-day rule. The two-business-day period does not 
include the day the consumer learns of the loss or theft or any day

[[Page 150]]

that is not a business day. The rule is calculated based on two 24-hour 
periods, without regard to the financial institution's business hours or 
the time of day that the consumer learns of the loss or theft. For 
example, a consumer learns of the loss or theft at 6 p.m. on Friday. 
Assuming that Saturday is a business day and Sunday is not, the two-
business-day period begins on Saturday and expires at 11:59 p.m. on 
Monday, not at the end of the financial institution's business day on 
Monday.

               Paragraph 6(b)(2)--Timely Notice Not Given

    1. $500 limit applies. The second tier of liability is $500. For 
example, the consumer's card is stolen on Monday and the consumer learns 
of the theft that same day. The consumer reports the theft on Friday. 
The $500 limit applies because the consumer failed to notify the 
financial institution within two business days of learning of the theft 
(which would have been by midnight Wednesday). How much the consumer is 
actually liable for, however, depends on when the unauthorized transfers 
take place. In this example, assume a $100 unauthorized transfer was 
made on Tuesday and a $600 unauthorized transfer on Thursday. Because 
the consumer is liable for the amount of the loss that occurs within the 
first two business days (but no more than $50), plus the amount of the 
unauthorized transfers that occurs after the first two business days and 
before the consumer gives notice, the consumer's total liability is $500 
($50 of the $100 transfer plus $450 of the $600 transfer, in this 
example). But if $600 was taken on Tuesday and $100 on Thursday, the 
consumer's maximum liability would be $150 ($50 of the $600 plus $100).

     Paragraph 6(b)(3)--Periodic Statement; Timely Notice Not Given

    1. Unlimited liability applies. The standard of unlimited liability 
applies if unauthorized transfers appear on a periodic statement, and 
may apply in conjunction with the first two tiers of liability. If a 
periodic statement shows an unauthorized transfer made with a lost or 
stolen debit card, the consumer must notify the financial institution 
within 60 calendar days after the periodic statement was sent; 
otherwise, the consumer faces unlimited liability for all unauthorized 
transfers made after the 60-day period. The consumer's liability for 
unauthorized transfers before the statement is sent, and up to 60 days 
following, is determined based on the first two tiers of liability: up 
to $50 if the consumer notifies the financial institution within two 
business days of learning of the loss or theft of the card and up to 
$500 if the consumer notifies the institution after two business days of 
learning of the loss or theft.
    2. Transfers not involving access device. The first two tiers of 
liability do not apply to unauthorized transfers from a consumer's 
account made without an access device. If, however, the consumer fails 
to report such unauthorized transfers within 60 calendar days of the 
financial institution's transmittal of the periodic statement, the 
consumer may be liable for any transfers occurring after the close of 
the 60 days and before notice is given to the institution. For example, 
a consumer's account is electronically debited for $200 without the 
consumer's authorization and by means other than the consumer's access 
device. If the consumer notifies the institution within 60 days of the 
transmittal of the periodic statement that shows the unauthorized 
transfer, the consumer has no liability. However, if in addition to the 
$200, the consumer's account is debited for a $400 unauthorized transfer 
on the 61st day and the consumer fails to notify the institution of the 
first unauthorized transfer until the 62nd day, the consumer may be 
liable for the full $400.

               Paragraph 6(b)(4)--Extension of Time Limits

    1. Extenuating circumstances. Examples of circumstances that require 
extension of the notification periods under this section include the 
consumer's extended travel or hospitalization.

           Paragraph 6(b)(5)--Notice to Financial Institution

    1. Receipt of notice. A financial institution is considered to have 
received notice for purposes of limiting the consumer's liability if 
notice is given in a reasonable manner, even if the consumer notifies 
the institution but uses an address or telephone number other than the 
one specified by the institution.
    2. Notice by third party. Notice to a financial institution by a 
person acting on the consumer's behalf is considered valid under this 
section. For example, if a consumer is hospitalized and unable to report 
the loss or theft of an access device, notice is considered given when 
someone acting on the consumer's behalf notifies the bank of the loss or 
theft. A financial institution may require appropriate documentation 
from the person representing the consumer to establish that the person 
is acting on the consumer's behalf.
    3. Content of notice. Notice to a financial institution is 
considered given when a consumer takes reasonable steps to provide the 
institution with the pertinent account information. Even when the 
consumer is unable to provide the account number or the card number in 
reporting a lost or stolen access device or an unauthorized transfer, 
the notice effectively limits the consumer's liability if the consumer 
otherwise identifies sufficiently the account in question. For example, 
the consumer may identify the account

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by the name on the account and the type of account in question.

                   Section 205.7--Initial Disclosures

                       7(a) Timing of Disclosures

    1. Early disclosures. Disclosures given by a financial institution 
earlier than the regulation requires (for example, when the consumer 
opens a checking account) need not be repeated when the consumer later 
enters into an agreement with a third party who will initiate 
preauthorized transfers to or from the consumer's account, unless the 
terms and conditions differ from those that the institution previously 
disclosed. On the other hand, if an agreement is directly between the 
consumer and the account-holding institution, disclosures must be given 
in close proximity to the event requiring disclosure, for example, when 
the consumer contracts for a new service.
    2. Lack of advance notice of a transfer. Where a consumer authorizes 
a third party to debit or credit the consumer's account, an account-
holding institution that has not received advance notice of the transfer 
or transfers must provide the required disclosures as soon as reasonably 
possible after the first debit or credit is made, unless the institution 
has previously given the disclosures.
    3. Addition of new accounts. If a consumer opens a new account 
permitting EFTs at a financial institution, and the consumer already has 
received Regulation E disclosures for another account at that 
institution, the institution need only disclose terms and conditions 
that differ from those previously given.
    4. Addition of EFT services. If an EFT service is added to a 
consumer's account and is subject to terms and conditions different from 
those described in the initial disclosures, disclosures for the new 
service are required. The disclosures must be provided when the consumer 
contracts for the new service or before the first EFT is made using the 
new service.
    5. Addition of service in interchange systems. If a financial 
institution joins an interchange or shared network system (which 
provides access to terminals operated by other institutions), 
disclosures are required for additional EFT services not previously 
available to consumers if the terms and conditions differ from those 
previously disclosed.
    6. Disclosures covering all EFT services offered. An institution may 
provide disclosures covering all EFT services that it offers, even if 
some consumers have not arranged to use all services.

                       7(b) Content of Disclosures

                Paragraph 7(b)(1)--Liability of Consumer

    1. No liability imposed by financial institution. If a financial 
institution chooses to impose zero liability for unauthorized EFTs, it 
need not provide the liability disclosures. If the institution later 
decides to impose liability, however, it must first provide the 
disclosures.
    2. Preauthorized transfers. If the only EFTs from an account are 
preauthorized transfers, liability could arise if the consumer fails to 
report unauthorized transfers reflected on a periodic statement. To 
impose such liability on the consumer, the institution must have 
disclosed the potential liability and the telephone number and address 
for reporting unauthorized transfers.
    3. Additional information. At the institution's option, the summary 
of the consumer's liability may include advice on promptly reporting 
unauthorized transfers or the loss or theft of the access device.

             Paragraph 7(b)(2)--Telephone Number and Address

    1. Disclosure of telephone numbers. An institution may use the same 
or different telephone numbers in the disclosures for the purpose of:
    i. Reporting the loss or theft of an access device or possible 
unauthorized transfers;
    ii. Inquiring about the receipt of a preauthorized credit;
    iii. Stopping payment of a preauthorized debit;
    iv. Giving notice of an error.
    2. Location of telephone number. The telephone number need not be 
incorporated into the text of the disclosure; for example, the 
institution may instead insert a reference to a telephone number that is 
readily available to the consumer, such as ``Call your branch office. 
The number is shown on your periodic statement.'' However, an 
institution must provide a specific telephone number and address, on or 
with the disclosure statement, for reporting a lost or stolen access 
device or a possible unauthorized transfer.

           Paragraph 7(b)(4)--Types of Transfers; Limitations

    1. Security limitations. Information about limitations on the 
frequency and dollar amount of transfers generally must be disclosed in 
detail, even if related to security aspects of the system. If the 
confidentiality of certain details is essential to the security of an 
account or system, these details may be withheld (but the fact that 
limitations exist must still be disclosed). For example, an institution 
limits cash ATM withdrawals to $100 per day. The institution may 
disclose that daily withdrawal limitations apply and need not disclose 
that the limitations may

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not always be in force (such as during periods when its ATMs are off-
line).
    2. Restrictions on certain deposit accounts. A limitation on account 
activity that restricts the consumer's ability to make EFTs must be 
disclosed even if the restriction also applies to transfers made by 
nonelectronic means. For example, Regulation D (12 CFR Part 204) 
restricts the number of payments to third parties that may be made from 
a money market deposit account; an institution that does not execute 
fund transfers in excess of those limits must disclose the restriction 
as a limitation on the frequency of EFTs.
    3. Preauthorized transfers. Financial institutions are not required 
to list preauthorized transfers among the types of transfers that a 
consumer can make.

                         Paragraph 7(b)(5)--Fees

    1. Disclosure of EFT fees. An institution is required to disclose 
all fees for EFTs or the right to make them. Others fees (for example, 
minimum-balance fees, stop-payment fees, or account overdrafts) may, but 
need not, be disclosed (but see Regulation DD, 12 CFR Part 230. An 
institution is not required to disclose fees for inquiries made at an 
ATM since no transfer of funds is involved.
    2. Fees also applicable to non-EFT. A per-item fee for EFTs must be 
disclosed even if the same fee is imposed on nonelectronic transfers. If 
a per-item fee is imposed only under certain conditions, such as when 
the transactions in the cycle exceed a certain number, those conditions 
must be disclosed. Itemization of the various fees may be provided on 
the disclosure statement or on an accompanying document that is 
referenced in the statement.
    3. Interchange system fees. Fees paid by the account-holding 
institution to the operator of a shared or interchange ATM system need 
not be disclosed, unless they are imposed on the consumer by the 
account-holding institution. Fees for use of an ATM that are debited 
directly from the consumer's account by an institution other than the 
account-holding institution (for example, fees included in the transfer 
amount) need not be disclosed. (See Sec. 205.7(b)(11) for the general 
notice requirement regarding fees that may be imposed by ATM operators 
and by a network used to complete the transfer.)

                   Paragraph 7(b)(9)--Confidentiality

    1. Information provided to third parties. An institution must 
describe the circumstances under which any information relating to an 
account to or from which EFTs are permitted will be made available to 
third parties, not just information concerning those EFTs. The term 
``third parties'' includes affiliates such as other subsidiaries of the 
same holding company.

                  Paragraph 7(b)(10)--Error Resolution

    1. Substantially similar. The error resolution notice must be 
substantially similar to the model form in appendix A of part 205. An 
institution may use different wording so long as the substance of the 
notice remains the same, may delete inapplicable provisions (for 
example, the requirement for written confirmation of an oral 
notification), and may substitute substantive state law requirements 
affording greater consumer protection than Regulation E.
    2. Extended time-period for certain transactions. To take advantage 
of the longer time periods for resolving errors under Sec. 205.11(c)(3) 
(for new accounts as defined in Regulation CC (12 CFR part 229), 
transfers initiated outside the United States, or transfers resulting 
from POS debit-card transactions), a financial institution must have 
disclosed these longer time periods. Similarly, an institution that 
relies on the exception from provisional crediting in Sec. 205.11(c)(2) 
for accounts subject to Regulation T (12 CFR part 220) must have 
disclosed accordingly.

     Section 205.8--Change-in-Terms Notice; Error Resolution Notice

                       8(a) Change-in-Terms Notice

    1. Form of notice. No specific form or wording is required for a 
change-in-terms notice. The notice may appear on a periodic statement, 
or may be given by sending a copy of a revised disclosure statement, 
provided attention is directed to the change (for example, in a cover 
letter referencing the changed term).
    2. Changes not requiring notice. The following changes do not 
require disclosure:
    i. Closing some of an institution's ATMs;
    ii. Cancellation of an access device.
    3. Limitations on transfers. When the initial disclosures omit 
details about limitations because secrecy is essential to the security 
of the account or system, a subsequent increase in those limitations 
need not be disclosed if secrecy is still essential. If, however, an 
institution had no limits in place when the initial disclosures were 
given and now wishes to impose limits for the first time, it must 
disclose at least the fact that limits have been adopted. (See also 
Sec. 205.7(b)(4) and the related commentary.)
    4. Change in telephone number or address. When a financial 
institution changes the telephone number or address used for reporting 
possible unauthorized transfers, a change-in-terms notice is required 
only if the institution will impose liability on the consumer for 
unauthorized transfers under Sec. 205.6. (See also Sec. 205.6(a) and 
the related commentary.)

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                      8(b) Error Resolution Notice

    1. Change between annual and periodic notice. If an institution 
switches from an annual to a periodic notice, or vice versa, the first 
notice under the new method must be sent no later than 12 months after 
the last notice sent under the old method.
    2. Exception for new accounts. For new accounts, disclosure of the 
longer error resolution time periods under Sec. 205.11(c)(3) is not 
required in the annual error resolution notice or in the notice that may 
be provided with each periodic statement as an alternative to the annual 
notice.

  Section 205.9--Receipts at Electronic Terminals; Periodic Statements

                  9(a) Receipts at Electronic Terminals

    1. Receipts furnished only on request. The regulation requires that 
a receipt be ``made available.'' A financial institution may program its 
electronic terminals to provide a receipt only to consumers who elect to 
receive one.
    2. Third party providing receipt. An account-holding institution may 
make terminal receipts available through third parties such as merchants 
or other financial institutions.
    3. Inclusion of promotional material. A financial institution may 
include promotional material on receipts if the required information is 
set forth clearly (for example, by separating it from the promotional 
material). In addition, a consumer may not be required to surrender the 
receipt or that portion containing the required disclosures in order to 
take advantage of a promotion.
    4. Transfer not completed. The receipt requirement does not apply to 
a transfer that is initiated but not completed (for example, if the ATM 
is out of currency or the consumer decides not to complete the 
transfer).
    5. Receipts not furnished due to inadvertent error. If a receipt is 
not provided to the consumer because of a bona fide unintentional error, 
such as when a terminal runs out of paper or the mechanism jams, no 
violation results if the financial institution maintains procedures 
reasonably adapted to avoid such occurrences.
    6. Multiple transfers. If the consumer makes multiple transfers at 
the same time, the financial institution may document them on a single 
or on separate receipts.

                        Paragraph 9(a)(1)--Amount

    1. Disclosure of transaction fee. The required display of a fee 
amount on or at the terminal may be accomplished by displaying the fee 
on a sign at the terminal or on the terminal screen for a reasonable 
duration. Displaying the fee on a screen provides adequate notice, as 
long as a consumer is given the option to cancel the transaction after 
receiving notice of a fee. (See Sec. 205.16 for the notice requirements 
applicable to ATM operators that impose a fee for providing EFT 
services.)
    2. Relationship between Sec. 205.9(a)(1) and Sec. 205.16. The 
requirements of Sec. Sec. 205.9(a)(1) and 205.16 are similar but not 
identical.
    i. Section 205.9(a)(1) requires that if the amount of the transfer 
as shown on the receipt will include the fee, then the fee must be 
disclosed either on a sign on or at the terminal, or on the terminal 
screen. Section 205.16 requires disclosure both on a sign on or at the 
terminal (in a prominent and conspicuous location) and on the terminal 
screen. Section 205.16 permits disclosure on a paper notice as an 
alternative to the on-screen disclosure.
    ii. The disclosure of the fee on the receipt under Sec. 205.9(a)(1) 
cannot be used to comply with the alternative paper disclosure procedure 
under Sec. 205.16, if the receipt is provided at the completion of the 
transaction because, pursuant to the statute, the paper notice must be 
provided before the consumer is committed to paying the fee.
    iii. Section 205.9(a)(1) applies to any type of electronic terminal 
as defined in Regulation E (for example, to POS terminals as well as to 
ATMs), while Sec. 205.16 applies only to ATMs.

                         Paragraph 9(a)(2)--Date

    1. Calendar date. The receipt must disclose the calendar date on 
which the consumer uses the electronic terminal. An accounting or 
business date may be disclosed in addition if the dates are clearly 
distinguished.

                         Paragraph 9(a)(3)--Type

    1. Identifying transfer and account. Examples identifying the type 
of transfer and the type of the consumer's account include ``withdrawal 
from checking,'' ``transfer from savings to checking,'' or ``payment 
from savings.''
    2. Exception. Identification of an account is not required when the 
consumer can access only one asset account at a particular time or 
terminal, even if the access device can normally be used to access more 
than one account. For example, the consumer may be able to access only 
one particular account at terminals not operated by the account-holding 
institution, or may be able to access only one particular account when 
the terminal is off-line. The exception is available even if, in 
addition to accessing one asset account, the consumer also can access a 
credit line.
    3. Access to multiple accounts. If the consumer can use an access 
device to make transfers to or from different accounts of the same type, 
the terminal receipt must specify which account was accessed, such as 
``withdrawal from checking I'' or ``withdrawal from checking II.'' If 
only one account besides the primary checking account can be

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debited, the receipt can identify the account as ``withdrawal from other 
account.''
    4. Generic descriptions. Generic descriptions may be used for 
accounts that are similar in function, such as share draft or NOW 
accounts and checking accounts. In a shared system, for example, when a 
credit union member initiates transfers to or from a share draft account 
at a terminal owned or operated by a bank, the receipt may identify a 
withdrawal from the account as a ``withdrawal from checking.''
    5. Point-of-sale transactions. There is no prescribed terminology 
for identifying a transfer at a merchant's POS terminal. A transfer may 
be identified, for example, as a purchase, a sale of goods or services, 
or a payment to a third party. When a consumer obtains cash from a POS 
terminal in addition to purchasing goods, or obtains cash only, the 
documentation need not differentiate the transaction from one involving 
the purchase of goods.

                  Paragraph 9(a)(5)--Terminal Location

    1. Options for identifying terminal. The institution may provide 
either:
    i. The city, state or foreign country, and the information in 
Sec. Sec. 205.9(a)(5) (i), (ii), or (iii), or
    ii. A number or a code identifying the terminal. If the institution 
chooses the second option, the code or terminal number identifying the 
terminal where the transfer is initiated may be given as part of a 
transaction code.
    2. Omission of city name. The city may be omitted if the generally 
accepted name (such as a branch name) contains the city name.
    3. Omission of a state. A state may be omitted from the location 
information on the receipt if:
    i. All the terminals owned or operated by the financial institution 
providing the statement (or by the system in which it participates) are 
located in that state, or
    ii. All transfers occur at terminals located within 50 miles of the 
financial institutions's main office.
    4. Omission of a city and state. A city and state may be omitted if 
all the terminals owned or operated by the financial institution 
providing the statement (or by the system in which it participates) are 
located in the same city.

                          Paragraph 9(a)(5)(i)

    1. Street address. The address should include number and street (or 
intersection); the number (or intersecting street) may be omitted if the 
street alone uniquely identifies the terminal location.

                          Paragraph 9(a)(5)(ii)

    1. Generally accepted name. Examples of a generally accepted name 
for a specific location include a branch of the financial institution, a 
shopping center, or an airport.

                         Paragraph 9(a)(5)(iii)

    1. Name of owner or operator of terminal. Examples of an owner or 
operator of a terminal are a financial institution or a retail merchant.

                 Paragraph 9(a)(6)--Third Party Transfer

    1. Omission of third-party name. The receipt need not disclose the 
third-party name if the name is provided by the consumer in a form that 
is not machine readable (for example, if the consumer indicates the 
payee by depositing a payment stub into the ATM). If, on the other hand, 
the consumer keys in the identity of the payee, the receipt must 
identify the payee by name or by using a code that is explained 
elsewhere on the receipt.
    2. Receipt as proof of payment. Documentation required under the 
regulation constitutes prima facie proof of a payment to another person, 
except in the case of a terminal receipt documenting a deposit.

                        9(b) Periodic Statements

    1. Periodic cycles. Periodic statements may be sent on a cycle that 
is shorter than monthly. The statements must correspond to periodic 
cycles that are reasonably equal, that is, do not vary by more than four 
days from the regular cycle. The requirement of reasonably equal cycles 
does not apply when an institution changes cycles for operational or 
other reasons, such as to establish a new statement day or date.
    2. Interim statements. Generally, a financial institution must 
provide periodic statements for each monthly cycle in which an EFT 
occurs, and at least quarterly if a transfer has not occurred. Where 
EFTs occur between regularly-scheduled cycles, interim statements must 
be provided. For example, if an institution issues quarterly statements 
at the end of March, June, September and December, and the consumer 
initiates an EFT in February, an interim statement for February must be 
provided. If an interim statement contains interest or rate information, 
the institution must comply with Regulation DD, 12 CFR 230.6.
    3. Inactive accounts. A financial institution need not send 
statements to consumers whose accounts are inactive as defined by the 
institution.
    4. Statement pickup. A financial institution may permit, but may not 
require, consumers to pick up their periodic statements at the financial 
institution.
    5. Periodic statements limited to EFT activity. A financial 
institution that uses a passbook as the primary means for displaying 
account activity, but also allows the account to be debited 
electronically, may provide a periodic statement requirement that 
reflects

[[Page 155]]

only the EFTs and other required disclosures (such as charges, account 
balances, and address and telephone number for inquiries). (See Sec. 
205.9(c)(1)(i) for the exception applicable to preauthorized transfers 
for passbook accounts.)
    6. Codes and accompanying documents. To meet the documentation 
requirements for periodic statements, a financial institution may:
    i. Include copies of terminal receipts to reflect transfers 
initiated by the consumer at electronic terminals;
    ii. Enclose posting memos, deposit slips, and other documents that, 
together with the statement, disclose all the required information;
    iii. Use codes for names of third parties or terminal locations and 
explain the information to which the codes relate on an accompanying 
document.

               Paragraph 9(b)(1)--Transaction Information

    1. Information obtained from others. While financial institutions 
must maintain reasonable procedures to ensure the integrity of data 
obtained from another institution, a merchant, or other third parties, 
verification of each transfer that appears on the periodic statement is 
not required.

                          Paragraph 9(b)(1)(i)

    1. Incorrect deposit amount. If a financial institution determines 
that the amount actually deposited at an ATM is different from the 
amount entered by the consumer, the institution need not immediately 
notify the consumer of the discrepancy. The periodic statement 
reflecting the deposit may show either the correct amount of the deposit 
or the amount entered by the consumer along with the institution's 
adjustment.

                         Paragraph 9(b)(1)(iii)

    1. Type of transfer. There is no prescribed terminology for 
describing a type of transfer. Placement of the amount of the transfer 
in the debit or the credit column is sufficient if other information on 
the statement, such as a terminal location or third-party name, enables 
the consumer to identify the type of transfer.

                          Paragraph 9(b)(1)(iv)

    1. Nonproprietary terminal in network. An institution need not 
reflect on the periodic statement the street addresses, identification 
codes, or terminal numbers for transfers initiated in a shared or 
interchange system at a terminal operated by an institution other than 
the account-holding institution. The statement must, however, specify 
the entity that owns or operates the terminal, plus the city and state.

                          Paragraph 9(b)(1)(v)

    1. Recurring payments by government agency. The third-party name for 
recurring payments from federal, state, or local governments need not 
list the particular agency. For example, ``U.S. gov't'' or ``N.Y. sal'' 
will suffice.
    2. Consumer as third-party payee. If a consumer makes an electronic 
fund transfer to another consumer, the financial institution must 
identify the recipient by name (not just by an account number, for 
example).
    3. Terminal location/third party. A single entry may be used to 
identify both the terminal location and the name of the third party to 
or from whom funds are transferred. For example, if a consumer purchases 
goods from a merchant, the name of the party to whom funds are 
transferred (the merchant) and the location of the terminal where the 
transfer is initiated will be satisfied by a disclosure such as ``XYZ 
Store, Anytown, Ohio.''
    4. Account-holding institution as third party. Transfers to the 
account-holding institution (by ATM, for example) must show the 
institution as the recipient, unless other information on the statement 
(such as, ``loan payment from checking'') clearly indicates that the 
payment was to the account-holding institution.
    5. Consistency in third-party identity. The periodic statement must 
disclose a third-party name as it appeared on the receipt, whether it 
was, for example, the ``dba'' (doing business as) name of the third 
party or the parent corporation's name.
    6. Third-party identity on deposits at electronic terminal. A 
financial institution need not identify third parties whose names appear 
on checks, drafts, or similar paper instruments deposited to the 
consumer's account at an electronic terminal.

                         Paragraph 9(b)(3)--Fees

    1. Disclosure of fees. The fees disclosed may include fees for EFTs 
and for other nonelectronic services, and both fixed fees and per-item 
fees; they may be given as a total or may be itemized in part or in 
full.
    2. Fees in interchange system. An account-holding institution must 
disclose any fees it imposes on the consumer for EFTs, including fees 
for ATM transactions in an interchange or shared ATM system. Fees for 
use of an ATM imposed on the consumer by an institution other than the 
account-holding institution and included in the amount of the transfer 
by the terminal-operating institution need not be separately disclosed 
on the periodic statement.
    3. Finance charges. The requirement to disclose any fees assessed 
against the account does not include a finance charge imposed on the 
account during the statement period.

[[Page 156]]

                   Paragraph 9(b)(4)--Account Balances

    1. Opening and closing balances. The opening and closing balances 
must reflect both EFTs and other account activity.

      Paragraph 9(b)(5)--Address and Telephone Number for Inquiries

    1. Telephone number. A single telephone number, preceded by the 
``direct inquiries to'' language, will satisfy the requirements of Sec. 
205.9(b)(5) and (6).

     Paragraph 9(b)(6)--Telephone Number for Preauthorized Transfers

    1. Telephone number. See comment 9(b)(5)-1.

   9(c) Exceptions to the Periodic Statement Requirements for Certain 
                                Accounts

    1. Transfers between accounts. The regulation provides an exception 
from the periodic statement requirement for certain intra-institutional 
transfers between a consumer's accounts. The financial institution must 
still comply with the applicable periodic statement requirements for any 
other EFTs to or from the account. For example, a Regulation E statement 
must be provided quarterly for an account that also receives payroll 
deposits electronically, or for any month in which an account is also 
accessed by a withdrawal at an ATM.

         Paragraph 9(c)(1)--Preauthorized Transfers to Accounts

    1. Accounts that may be accessed only by preauthorized transfers to 
the account. The exception for ``accounts that may be accessed only by 
preauthorized transfers to the account'' includes accounts that can be 
accessed by means other than EFTs, such as checks. If, however, an 
account may be accessed by any EFT other than preauthorized credits to 
the account, such as preauthorized debits or ATM transactions, the 
account does not qualify for the exception.
    2. Reversal of direct deposits. For direct-deposit-only accounts, a 
financial institution must send a periodic statement at least quarterly. 
A reversal of a direct deposit to correct an error does not trigger the 
monthly statement requirement when the error represented a credit to the 
wrong consumer's account, a duplicate credit, or a credit in the wrong 
amount. (See also comment 2(m)-5.)

           9(d) Documentation for Foreign-Initiated Transfers

    1. Foreign-initiated transfers. An institution must make a good 
faith effort to provide all required information for foreign-initiated 
transfers. For example, even if the institution is not able to provide a 
specific terminal location, it should identify the country and city in 
which the transfer was initiated.

                 Section 205.10--Preauthorized Transfers

           10(a) Preauthorized Transfers to Consumer's Account

           Paragraph 10(a)(1)--Notice by Financial Institution

    1. Content. No specific language is required for notice regarding 
receipt of a preauthorized transfer. Identifying the deposit is 
sufficient; however, simply providing the current account balance is 
not.
    2. Notice of credit. A financial institution may use different 
methods of notice for various types or series of preauthorized 
transfers, and the institution need not offer consumers a choice of 
notice methods.
    3. Positive notice. A periodic statement sent within two business 
days of the scheduled transfer, showing the transfer, can serve as 
notice of receipt.
    4. Negative notice. The absence of a deposit entry (on a periodic 
statement sent within two business days of the scheduled transfer date) 
will serve as negative notice.
    5. Telephone notice. If a financial institution uses the telephone 
notice option, it should be able in most instances to verify during a 
consumer's initial call whether a transfer was received. The institution 
must respond within two business days to any inquiry not answered 
immediately.
    6. Phone number for passbook accounts. The financial institution may 
use any reasonable means necessary to provide the telephone number to 
consumers with passbook accounts that can only be accessed by 
preauthorized credits and that do not receive periodic statements. For 
example, it may print the telephone number in the passbook, or include 
the number with the annual error resolution notice.
    7. Telephone line availability. To satisfy the readily-available 
standard, the financial institution must provide enough telephone lines 
so that consumers get a reasonably prompt response. The institution need 
only provide telephone service during normal business hours. Within its 
primary service area, an institution must provide a local or toll-free 
telephone number. It need not provide a toll-free number or accept 
collect long-distance calls from outside the area where it normally 
conducts business.

10(b) Written Authorization for Preauthorized Transfers From Consumer's 
                                 Account

    1. Preexisting authorizations. The financial institution need not 
require a new authorization before changing from paper-based to 
electronic debiting when the existing authorization does not specify 
that debiting is to occur electronically or specifies that the debiting 
will occur by paper means. A new authorization also is not required when 
a successor institution begins collecting payments.

[[Page 157]]

    2. Authorization obtained by third party. The account-holding 
financial institution does not violate the regulation when a third-party 
payee fails to obtain the authorization in writing or fails to give a 
copy to the consumer; rather, it is the third-party payee that is in 
violation of the regulation.
    3. Written authorization for preauthorized transfers. The 
requirement that preauthorized EFTs be authorized by the consumer ``only 
by a writing'' cannot be met by a payee's signing a written 
authorization on the consumer's behalf with only an oral authorization 
from the consumer. A tape recording of a telephone conversation with a 
consumer who agrees to preauthorized debits also does not constitute 
written authorization for purposes of this provision.
    4. Use of a confirmation form. A financial institution or designated 
payee may comply with the requirements of this section in various ways. 
For example, a payee may provide the consumer with two copies of a 
preauthorization form, and ask the consumer to sign and return one and 
to retain the second copy.
    5. Similarly authenticated. The similarly authenticated standard 
permits signed, written authorizations to be provided electronically. 
The writing and signature requirements of this section are satisfied by 
complying with the Electronic Signatures in Global and National Commerce 
Act, 15 U.S.C. 7001 et seq., which defines electronic records and 
electronic signatures. Examples of electronic signatures include, but 
are not limited to, digital signatures and security codes. A security 
code need not originate with the account-holding institution. The 
authorization process should evidence the consumer's identity and assent 
to the authorization. The person that obtains the authorization must 
provide a copy of the terms of the authorization to the consumer either 
electronically or in paper form. Only the consumer may authorize the 
transfer and not, for example, a third-party merchant on behalf of the 
consumer.
    6. Requirements of an authorization. An authorization is valid if it 
is readily identifiable as such and the terms of the preauthorized 
transfer are clear and readily understandable.
    7. Bona fide error. Consumers sometimes authorize third-party 
payees, by telephone or on-line, to submit recurring charges against a 
credit card account. If the consumer indicates use of a credit card 
account when in fact a debit card is being used, the payee does not 
violate the requirement to obtain a written authorization if the failure 
to obtain written authorization was not intentional and resulted from a 
bona fide error, and if the payee maintains procedures reasonably 
adapted to avoid any such error. If the payee is unable to determine, at 
the time of the authorization, whether a credit or debit card number is 
involved, and later finds that the card used is a debit card, the payee 
must obtain a written and signed or (where appropriate) a similarly 
authenticated authorization as soon as reasonably possible, or cease 
debiting the consumer's account.

                 10(c) Consumer's Right To Stop Payment

    1. Stop-payment order. The financial institution must honor an oral 
stop-payment order made at least three business days before a scheduled 
debit. If the debit item is resubmitted, the institution must continue 
to honor the stop-payment order (for example, by suspending all 
subsequent payments to the payee-originator until the consumer notifies 
the institution that payments should resume).
    2. Revocation of authorization. Once a financial institution has 
been notified that the consumer's authorization is no longer valid, it 
must block all future payments for the particular debit transmitted by 
the designated payee-originator. The institution may not wait for the 
payee-originator to terminate the automatic debits. The institution may 
confirm that the consumer has informed the payee-originator of the 
revocation (for example, by requiring a copy of the consumer's 
revocation as written confirmation to be provided within fourteen days 
of an oral notification). If the institution does not receive the 
required written confirmation within the fourteen-day period, it may 
honor subsequent debits to the account.

               10(d) Notice of Transfers Varying in Amount

                       Paragraph 10(d)(1)--Notice

    1. Preexisting authorizations. A financial institution holding the 
consumer's account does not violate the regulation if the designated 
payee fails to provide notice of varying amounts.

                        Paragraph 10(d)(2)--Range

    1. Range. A financial institution or designated payee that elects to 
offer the consumer a specified range of amounts for debiting (in lieu of 
providing the notice of transfers varying in amount) must provide an 
acceptable range that could be anticipated by the consumer. For example, 
if the transfer is for payment of a gas bill, an appropriate range might 
be based on the highest bill in winter and the lowest bill in summer.

                          10(e) Compulsory Use

                       Paragraph 10(e)(1)--Credit

    1. Loan payments. Creditors may not require repayment of loans by 
electronic means on a preauthorized, recurring basis. A creditor may 
offer a program with a reduced annual percentage rate or other cost-
related

[[Page 158]]

incentive for an automatic repayment feature, provided the program with 
the automatic payment feature is not the only loan program offered by 
the creditor for the type of credit involved. Examples include:
    i. Mortgages with graduated payments in which a pledged savings 
account is automatically debited during an initial period to supplement 
the monthly payments made by the borrower.
    ii. Mortgage plans calling for preauthorized biweekly payments that 
are debited electronically to the consumer's account and produce a lower 
total finance charge.
    2. Overdraft. A financial institution may require the automatic 
repayment of an overdraft credit plan even if the overdraft extension is 
charged to an open-end account that may be accessed by the consumer in 
ways other than by overdrafts.

          Paragraph 10(e)(2)--Employment or Government Benefit

    1. Payroll. An employer (including a financial institution) may not 
require its employees to receive their salary by direct deposit to any 
particular institution. An employer may require direct deposit of salary 
by electronic means if employees are allowed to choose the institution 
that will receive the direct deposit. Alternatively, an employer may 
give employees the choice of having their salary deposited at a 
particular institution (designated by the employer) or receiving their 
salary by another means, such as by check or cash.

             Section 205.11--Procedures for Resolving Errors

                        11(a) Definition of Error

    1. Terminal location. With regard to deposits at an ATM, a 
consumer's request for the terminal location or other information 
triggers the error resolution procedures, but the financial institution 
need only provide the ATM location if it has captured that information.
    2. Verifying an account debit or credit. If the consumer contacts 
the financial institution to ascertain whether a payment (for example, 
in a home-banking or bill-payment program) or any other type of EFT was 
debited to the account, or whether a deposit made via ATM, preauthorized 
transfer, or any other type of EFT was credited to the account, without 
asserting an error, the error resolution procedures do not apply.
    3. Loss or theft of access device. A financial institution is 
required to comply with the error resolution procedures when a consumer 
reports the loss or theft of an access device if the consumer also 
alleges possible unauthorized use as a consequence of the loss or theft.
    4. Error asserted after account closed. The financial institution 
must comply with the error resolution procedures when a consumer 
properly asserts an error, even if the account has been closed.
    5. Request for documentation or information. A request for 
documentation or other information must be treated as an error unless it 
is clear that the consumer is requesting a duplicate copy for tax or 
other record-keeping purposes.

                   11(b) Notice of Error From Consumer

                  Paragraph 11(b)(1)--Timing; Contents

    1. Content of error notice. The notice of error is effective even if 
it does not contain the consumer's account number, so long as the 
financial institution is able to identify the account in question. For 
example, the consumer could provide a Social Security number or other 
unique means of identification.
    2. Investigation pending receipt of information. While a financial 
institution may request a written, signed statement from the consumer 
relating to a notice of error, it may not delay initiating or completing 
an investigation pending receipt of the statement.
    3. Statement held for consumer. When a consumer has arranged for 
periodic statements to be held until picked up, the statement for a 
particular cycle is deemed to have been transmitted on the date the 
financial institution first makes the statement available to the 
consumer.
    4. Failure to provide statement. When a financial institution fails 
to provide the consumer with a periodic statement, a request for a copy 
is governed by this section if the consumer gives notice within 60 days 
from the date on which the statement should have been transmitted.
    5. Discovery of error by institution. The error resolution 
procedures of this section apply when a notice of error is received from 
the consumer, and not when the financial institution itself discovers 
and corrects an error.
    6. Notice at particular phone number or address. A financial 
institution may require the consumer to give notice only at the 
telephone number or address disclosed by the institution, provided the 
institution maintains reasonable procedures to refer the consumer to the 
specified telephone number or address if the consumer attempts to give 
notice to the institution in a different manner.

                Paragraph 11(b)(2)--Written Confirmation

    1. Written confirmation-of-error notice. If the consumer sends a 
written confirmation of error to the wrong address, the financial 
institution must process the confirmation through normal procedures. But 
the institution need not provisionally credit the consumer's account if 
the written confirmation

[[Page 159]]

is delayed beyond 10 business days in getting to the right place because 
it was sent to the wrong address.

              11(c) Time Limits and Extent of Investigation

    1. Notice to consumer. Unless otherwise indicated in this section, 
the financial institution may provide the required notices to the 
consumer either orally or in writing.
    2. Written confirmation of oral notice. A financial institution must 
begin its investigation promptly upon receipt of an oral notice. It may 
not delay until it has received a written confirmation.
    3. Charges for error resolution. If a billing error occurred, 
whether as alleged or in a different amount or manner, the financial 
institution may not impose a charge related to any aspect of the error-
resolution process (including charges for documentation or 
investigation). Since the act grants the consumer error-resolution 
rights, the institution should avoid any chilling effect on the good-
faith assertion of errors that might result if charges are assessed when 
no billing error has occurred.
    4. Correction without investigation. A financial institution may 
make, without investigation, a final correction to a consumer's account 
in the amount or manner alleged by the consumer to be in error, but must 
comply with all other applicable requirements of Sec. 205.11.
    5. Correction notice. A financial institution may include the notice 
of correction on a periodic statement that is mailed or delivered within 
the 10-business-day or 45-calendar-day time limits and that clearly 
identifies the correction to the consumer's account. The institution 
must determine whether such a mailing will be prompt enough to satisfy 
the requirements of this section, taking into account the specific facts 
involved.
    6. Correction of an error. If the financial institution determines 
an error occurred, within either the 10-day or 45-day period, it must 
correct the error (subject to the liability provisions of Sec. Sec. 
205.6 (a) and (b)) including, where applicable, the crediting of 
interest and the refunding of any fees imposed by the institution. In a 
combined credit/EFT transaction, for example, the institution must 
refund any finance charges incurred as a result of the error. The 
institution need not refund fees that would have been imposed whether or 
not the error occurred.
    7. Extent of required investigation. A financial institution 
complies with its duty to investigate, correct, and report its 
determination regarding an error described in Sec. 205.11(a)(1)(vii) by 
transmitting the requested information, clarification, or documentation 
within the time limits set forth in Sec. 205.11(c). If the institution 
has provisionally credited the consumer's account in accordance with 
Sec. 205.11(c)(2), it may debit the amount upon transmitting the 
requested information, clarification, or documentation.

                          Paragraph 11(c)(2)(i)

    1. Compliance with all requirements. Financial institutions exempted 
from provisionally crediting a consumer's account under Sec. 
205.11(c)(2)(i) (A) and (B) must still comply with all other 
requirements of Sec. 205.11.

              Paragraph 11(c)(3)--Extension of Time Periods

    1. POS debit card transactions. The extended deadlines for 
investigating errors resulting from POS debit card transactions apply to 
all debit card transactions, including those for cash only, at 
merchants' POS terminals, and also including mail and telephone orders. 
The deadlines do not apply to transactions at an ATM, however, even 
though the ATM may be in a merchant location.

                    Paragraph 11(c)(4)--Investigation

    1. Third parties. When information or documentation requested by the 
consumer is in the possession of a third party with whom the financial 
institution does not have an agreement, the institution satisfies the 
error resolution requirement by so advising the consumer within the 
specified time period.
    2. Scope of investigation. When an alleged error involves a payment 
to a third party under the financial institution's telephone bill-
payment plan, a review of the institution's own records is sufficient, 
assuming no agreement exists between the institution and the third party 
concerning the bill-payment service.
    3. POS transfers. When a consumer alleges an error involving a 
transfer to a merchant via a POS terminal, the institution must verify 
the information previously transmitted when executing the transfer. For 
example, the financial institution may request a copy of the sales 
receipt to verify that the amount of the transfer correctly corresponds 
to the amount of the consumer's purchase.
    4. Agreement. An agreement that a third party will honor an access 
device is an agreement for purposes of this paragraph. A financial 
institution does not have an agreement for purposes of Sec. 
205.11(c)(4)(ii) solely because it participates in transactions that 
occur under the federal recurring payments programs, or that are cleared 
through an ACH or similar arrangement for the clearing and settlement of 
fund transfers generally, or because it agrees to be bound by the rules 
of such an arrangement.

    11(d) Procedures if Financial Institution Determines No Error or 
                        Different Error Occurred

    1. Error different from that alleged. When a financial institution 
determines that an error occurred in a manner or amount different from 
that described by the consumer,

[[Page 160]]

it must comply with the requirements of both Sec. 205.11 (c) and (d), 
as relevant. The institution may give the notice of correction and the 
explanation separately or in a combined form.

                 Paragraph 11(d)(1)--Written Explanation

    1. Request for documentation. When a consumer requests copies of 
documents, the financial institution must provide the copies in an 
understandable form. If an institution relied on magnetic tape it must 
convert the applicable data into readable form, for example, by printing 
it and explaining any codes.

             Paragraph 11(d)(2)--Debiting Provisional Credit

    1. Alternative procedure for debiting of credited funds. The 
financial institution may comply with the requirements of this section 
by notifying the consumer that the consumer's account will be debited 
five business days from the transmittal of the notification, specifying 
the calendar date on which the debiting will occur.
    2. Fees for overdrafts. The financial institution may not impose 
fees for items it is required to honor under Sec. 205.11. It may, 
however, impose any normal transaction or item fee that is unrelated to 
an overdraft resulting from the debiting. If the account is still 
overdrawn after five business days, the institution may impose the fees 
or finance charges to which it is entitled, if any, under an overdraft 
credit plan.

                       11(e) Reassertion of Error

    1. Withdrawal of error; right to reassert. The financial institution 
has no further error resolution responsibilities if the consumer 
voluntarily withdraws the notice alleging an error. A consumer who has 
withdrawn an allegation of error has the right to reassert the 
allegation unless the financial institution had already complied with 
all of the error resolution requirements before the allegation was 
withdrawn. The consumer must do so, however, within the original 60-day 
period.

                 Section 205.12--Relation to Other Laws

                   12(a) Relation to Truth in Lending

    1. Determining applicable regulation. i. For transactions involving 
access devices that also function as credit cards, whether Regulation E 
or Regulation Z (12 CFR part 226) applies depends on the nature of the 
transaction. For example, if the transaction solely involves an 
extension of credit, and does not include a debit to a checking account 
(or other consumer asset account), the liability limitations and error 
resolution requirements of Regulation Z apply. If the transaction debits 
a checking account only (with no credit extended), the provisions of 
Regulation E apply. If the transaction debits a checking account but 
also draws on an overdraft line of credit attached to the account, 
Regulation E's liability limitations apply, in addition to Sec. Sec. 
226.13 (d) and (g) of Regulation Z (which apply because of the extension 
of credit associated with the overdraft feature on the checking 
account). If a consumer's access device is also a credit card and the 
device is used to make unauthorized withdrawals from a checking account, 
but also is used to obtain unauthorized cash advances directly from a 
line of credit that is separate from the checking account, both 
Regulation E and Regulation Z apply.
    ii. The following examples illustrate these principles:
    A. A consumer has a card that can be used either as a credit card or 
a debit card. When used as a debit card, the card draws on the 
consumer's checking account. When used as a credit card, the card draws 
only on a separate line of credit. If the card is stolen and used as a 
credit card to make purchases or to get cash advances at an ATM from the 
line of credit, the liability limits and error resolution provisions of 
Regulation Z apply; Regulation E does not apply.
    B. In the same situation, if the card is stolen and is used as a 
debit card to make purchases or to get cash withdrawals at an ATM from 
the checking account, the liability limits and error resolution 
provisions of Regulation E apply; Regulation Z does not apply.
    C. In the same situation, assume the card is stolen and used both as 
a debit card and as a credit card; for example, the thief makes some 
purchases using the card as a debit card, and other purchases using the 
card as a credit card. Here, the liability limits and error resolution 
provisions of Regulation E apply to the unauthorized transactions in 
which the card was used as a debit card, and the corresponding 
provisions of Regulation Z apply to the unauthorized transactions in 
which the card was used as a credit card.
    D. Assume a somewhat different type of card, one that draws on the 
consumer's checking account and can also draw on an overdraft line of 
credit attached to the checking account. There is no separate line of 
credit, only the overdraft line, associated with the card. In this 
situation, if the card is stolen and used, the liability limits and the 
error resolution provisions of Regulation E apply. In addition, if the 
use of the card has resulted in accessing the overdraft line of credit, 
the error resolution provisions of Sec. 226.13(d) and (g) of Regulation 
Z also apply, but not the other error resolution provisions of 
Regulation Z.
    2. Issuance rules. For access devices that also constitute credit 
cards, the issuance rules of Regulation E apply if the only credit 
feature is a preexisting credit line attached to the asset account to 
cover overdrafts (or to maintain a specified minimum balance).

[[Page 161]]

Regulation Z (12 CFR part 226) rules apply if there is another type of 
credit feature, for example, one permitting direct extensions of credit 
that do not involve the asset account.

               12(b) Preemption of Inconsistent State Laws

    1. Specific determinations. The regulation prescribes standards for 
determining whether state laws that govern EFTs are preempted by the act 
and the regulation. A state law that is inconsistent may be preempted 
even if the Board has not issued a determination. However, nothing in 
Sec. 205.12(b) provides a financial institution with immunity for 
violations of state law if the institution chooses not to make state 
disclosures and the Board later determines that the state law is not 
preempted.
    2. Preemption determination. The Board determined that certain 
provisions in the state law of Michigan are preempted by the federal 
law, effective March 30, 1981:
    i. Definition of unauthorized use. Section 5(4) is preempted to the 
extent that it relates to the section of state law governing consumer 
liability for unauthorized use of an access device.
    ii. Consumer liability for unauthorized use of an account. Section 
14 is inconsistent with Sec. 205.6 and is less protective of the 
consumer than the federal law. The state law places liability on the 
consumer for the unauthorized use of an account in cases involving the 
consumer's negligence. Under the federal law, a consumer's liability for 
unauthorized use is not related to the consumer's negligence and depends 
instead on the consumer's promptness in reporting the loss or theft of 
the access device.
    iii. Error resolution. Section 15 is preempted because it is 
inconsistent with Sec. 205.11 and is less protective of the consumer 
than the federal law. The state law allows financial institutions up to 
70 days to resolve errors, whereas the federal law generally requires 
errors to be resolved within 45 days.
    iv. Receipts and periodic statements. Sections 17 and 18 are 
preempted because they are inconsistent with Sec. 205.9. The state 
provisions require a different disclosure of information than does the 
federal law. The receipt provision is also preempted because it allows 
the consumer to be charged for receiving a receipt if a machine cannot 
furnish one at the time of a transfer.

      Section 205.13--Administrative Enforcement; Record Retention

                         13(b) Record Retention

    1. Requirements. A financial institution need not retain records 
that it has given disclosures and documentation to each consumer; it 
need only retain evidence demonstrating that its procedures reasonably 
ensure the consumers' receipt of required disclosures and documentation.

 Section 205.14--Electronic Fund Transfer Service Provider Not Holding 
                           Consumer's Account

 14(a) Electronic Fund Transfer Service Providers Subject to Regulation

    1. Applicability. This section applies only when a service provider 
issues an access device to a consumer for initiating transfers to or 
from the consumer's account at a financial institution and the two 
entities have no agreement regarding this EFT service. If the service 
provider does not issue an access device to the consumer for accessing 
an account held by another institution, it does not qualify for the 
treatment accorded by Sec. 205.14. For example, this section does not 
apply to an institution that initiates preauthorized payroll deposits to 
consumer accounts on behalf of an employer. By contrast, Sec. 205.14 
can apply to an institution that issues a code for initiating telephone 
transfers to be carried out through the ACH from a consumer's account at 
another institution. This is the case even if the consumer has accounts 
at both institutions.
    2. ACH agreements. The ACH rules generally do not constitute an 
agreement for purposes of this section. However, an ACH agreement under 
which members specifically agree to honor each other's debit cards is an 
``agreement,'' and thus this section does not apply.

      14(b) Compliance by Electronic Fund Transfer Service Provider

    1. Liability. The service provider is liable for unauthorized EFTs 
that exceed limits on the consumer's liability under Sec. 205.6.
    Paragraph 14(b)(1)--Disclosures and Documentation
    1. Periodic statements from electronic fund transfer service 
provider. A service provider that meets the conditions set forth in this 
paragraph does not have to issue periodic statements. A service provider 
that does not meet the conditions need only include on periodic 
statements information about transfers initiated with the access device 
it has issued.

                  Paragraph 14(b)(2)--Error Resolution

    1. Error resolution. When a consumer notifies the service provider 
of an error, the EFT service provider must investigate and resolve the 
error in compliance with Sec. 205.11 as modified by Sec. 205.14(b)(2). 
If an error occurred, any fees or charges imposed as a result of the 
error, either by the service provider or by the account-holding 
institution (for example, overdraft or dishonor fees) must be reimbursed 
to the consumer by the service provider.

[[Page 162]]

             14(c) Compliance by Account-Holding Institution

                           Paragraph 14(c)(1)

    1. Periodic statements from account-holding institution. The 
periodic statement provided by the account-holding institution need only 
contain the information required by Sec. 205.9(b)(1).

        Section 205.16--Disclosures at Automated Teller Machines

                              16(b) General

                           Paragraph 16(b)(1)

    1. Specific notices. An ATM operator that imposes a fee for a 
specific type of transaction such as a cash withdrawal, but not a 
balance inquiry, may provide a general statement that a fee will be 
imposed for providing EFT services or may specify the type of EFT for 
which a fee is imposed.

        Section 205.17--Requirements for Electronic Communication

                           17(b) General Rule

    1. Relationship to the E-Sign Act. The E-Sign Act authorizes the use 
of electronic disclosures. It does not affect any requirement imposed 
under this part other than a provision that requires disclosures to be 
in paper form, and it does not affect the content or timing of 
disclosures. Electronic disclosures are subject to the regulation's 
format, timing, and retainability rules and the clear and readily 
understandable standard. For example, to satisfy the clear and readily 
understandable standard for disclosures, electronic disclosures must use 
visual text.
    2. Clear and readily understandable standard. A financial 
institution must provide electronic disclosures using a clear and 
readily understandable format. Also, in accordance with the E-Sign Act:
    i. The institution must disclose the requirements for accessing and 
retaining disclosures in that format;
    ii. The consumer must demonstrate the ability to access the 
information electronically and affirmatively consent to electronic 
delivery; and
    iii. The institution must provide the disclosures in accordance with 
the specified requirements.
    3. Timing and effective delivery when a consumer signs up for an EFT 
service on-line. When a consumer contracts for an EFT service on the 
Internet and will be able immediately to initiate a fund transfer, a 
financial institution satisfies the timing requirements under this part 
if, at the time the consumer contracts for the service or before the 
first transfer is made, the disclosures automatically appear on the 
screen, even if multiple screens are required to view the entire 
disclosure. Or a financial institution may provide a link to electronic 
disclosures, as long as consumers cannot bypass the link and they are 
required to access the disclosures before initiating the first transfer. 
The institution is not required to confirm that the consumer has read 
the disclosures.
    4. Timing and effective delivery for disclosures provided 
periodically. Disclosures provided by e-mail are timely based on when 
the disclosures are sent. Disclosures posted at an Internet web site, 
such as periodic statements or change-in-terms and other notices, are 
timely when the financial institution has both made the disclosures 
available and sent a notice alerting the consumer that the disclosures 
have been posted. For example, under Sec. 205.8(a), institution 
offering accounts with EFT services must provide a change-in-terms 
notice to consumers at least 21 days in advance of certain changes. For 
a change-in-terms notice posted on the Internet, an institution must 
both post the notice and notify consumers of its availability at least 
21 days in advance of the change.
    5. Retainability of disclosures. Financial institutions satisfy the 
requirement that disclosures be in a form that the consumer may keep if 
electronic disclosures are delivered in a format that is capable of 
being retained (such as by printing or storing electronically). The 
format must also be consistent with the information required to be 
provided under section 101(c)(1)(C)(i) of the E-Sign Act (15 U.S.C. 
7001(c)(1)(C)(i)) about the hardware and software requirements for 
accessing and retaining electronic disclosures.
    6. Disclosures provided on financial institution's equipment. A 
financial institution that controls the equipment providing electronic 
disclosures to consumers (for example, an ATM or computer terminal in a 
financial institution's lobby) must ensure that the equipment satisfies 
the regulation's requirements to provide timely disclosures in a clear 
and readily understandable format and in a form that the consumer may 
keep. For example, if disclosures are required at the time of an on-line 
transaction, the disclosures must be sent to the consumer's e-mail 
address or must be made available at another location such as the 
financial institution's Internet web site, unless the financial 
institution provides a printer that automatically prints the 
disclosures.

      17(c) Address or Location To Receive Electronic Communication

                           Paragraph 17(c)(1)

    1. Electronic address. A consumer's electronic address is an e-mail 
address that is not limited to receiving communications transmitted 
solely by the financial institution.

[[Page 163]]

                           Paragraph 17(c)(2)

    1. Identifying account involved. A financial institution may 
identify a specific account in a variety of ways and is not required to 
identify an account by reference to the account number. For example, 
where the consumer has only one checking account, and no confusion would 
result, the institution may refer to ``your checking account.'' If the 
consumer has two checking accounts, the institution may, for example, 
differentiate accounts based on names for different checking account 
programs or by using a truncated account number.
    2. 90-day rule. The actual disclosures provided to the consumer must 
be available for at least 90 days, but the financial institution has 
discretion to determine whether they should be available at the same 
location for the entire period.

                            17(d) Redelivery

    1. E-mail returned as undeliverable. If an e-mail to the consumer 
(containing an alert notice or other disclosure) is returned as 
undeliverable, the redelivery requirement is satisfied if, for example, 
the institution sends the disclosure to a different e-mail address or 
postal address that the institution has on file for the consumer. 
Sending the disclosure a second time to the same electronic address is 
not sufficient if the institution has a different address for the 
consumer on file.

             17(e) Persons Other Than Financial Institutions

    1. Electronic disclosures. Entities other than financial 
institutions, such as merchants, are subject to certain provisions of 
Regulation E, including Sec. Sec. 205.10(b) and (d). These entities too 
may use electronic communication to provide disclosures required to be 
in writing.

             Appendix A--Model Disclosure Clauses and Forms

    1. Review of forms. The Board will not review or approve disclosure 
forms or statements for financial institutions. However, the Board has 
issued model clauses for institutions to use in designing their 
disclosures. If an institution uses these clauses accurately to reflect 
its service, the institution is protected from liability for failure to 
make disclosures in proper form.
    2. Use of the forms. The appendix contains model disclosure clauses 
for optional use by financial institutions to facilitate compliance with 
the disclosure requirements of Sec. Sec. 205.5(b)(2) and (b)(3), 
205.6(a), 205.7, 205.8(b), 205.14(b)(1)(ii) and 205.15(d)(7) and (d)(2). 
The use of appropriate clauses in making disclosures will protect a 
financial institution from liability under sections 915 and 916 of the 
act provided the clauses accurately reflect the institution's EFT 
services.
    3. Altering the clauses. Financial institutions may use clauses of 
their own design in conjunction with the Board's model clauses. The 
inapplicable words or portions of phrases in parentheses should be 
deleted. The catchlines are not part of the clauses and need not be 
used. Financial institutions may make alterations, substitutions, or 
additions in the clauses to reflect the services offered, such as 
technical changes (including the substitution of a trade name for the 
word ``card,'' deletion of inapplicable services, or substitution of 
lesser liability limits). Several of the model clauses include 
references to a telephone number and address. Where two or more of these 
clauses are used in a disclosure, the telephone number and address may 
be referenced and need not be repeated.

[Reg. E, 61 FR 19686, May 2, 1996, as amended at 66 FR 13412, Mar. 6, 
2001; 66 FR 15192, Mar. 16, 2001; 66 FR 17794, Apr. 4, 2001]



PART 206_LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)--Table of 
Contents




Sec.
206.1 Authority, purpose, and scope.
206.2 Definitions.
206.3 Prudential standards.
206.4 Credit exposure.
206.5 Capital levels of correspondents.
206.6 Waiver.

    Authority: 12 U.S.C. 371b-2

    Source: Reg. F, 57 FR 60106, Dec. 18, 1992, unless otherwise noted.



Sec. 206.1  Authority, purpose, and scope.

    (a) Authority and purpose. This part (Regulation F, 12 CFR part 206) 
is issued by the Board of Governors of the Federal Reserve System 
(Board) under authority of section 23 of the Federal Reserve Act (12 
U.S.C. 371b-2). The purpose of this part is to limit the risks that the 
failure of a depository institution would pose to insured depository 
institutions.
    (b) Scope. This part applies to all depository institutions insured 
by the Federal Deposit Insurance Corporation.

[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283, 
Sept. 10, 2003]



Sec. 206.2  Definitions.

    As used in this part, unless the context requires otherwise:
    (a) Bank means an insured depository institution, as defined in 
section 3 of the Federal Deposit Insurance Act (12

[[Page 164]]

U.S.C. 1813), and includes an insured national bank, state bank, 
District bank, or savings association, and an insured branch of a 
foreign bank.
    (b) Commonly-controlled correspondent means a correspondent that is 
commonly controlled with the bank and for which the bank is subject to 
liability under section 5(e) of the Federal Deposit Insurance Act. A 
correspondent is considered to be commonly controlled with the bank if:
    (1) 25 percent or more of any class of voting securities of the bank 
and the correspondent are owned, directly or indirectly, by the same 
depository institution or company; or
    (2) Either the bank or the correspondent owns 25 percent or more of 
any class of voting securities of the other.
    (c) Correspondent means a U.S. depository institution or a foreign 
bank, as defined in this part, to which a bank has exposure, but does 
not include a commonly controlled correspondent.
    (d) Exposure means the potential that an obligation will not be paid 
in a timely manner or in full. ``Exposure'' includes credit and 
liquidity risks, including operational risks, related to intraday and 
interday transactions.
    (e) Foreign bank means an institution that: (1) Is organized under 
the laws of a country other than the United States;
    (2) Engages in the business of banking;
    (3) Is recognized as a bank by the bank supervisory or monetary 
authorities of the country of the bank's organization;
    (4) Receives deposits to a substantial extent in the regular course 
of business; and
    (5) Has the power to accept demand deposits.
    (f) Primary federal supervisor has the same meaning as the term 
``appropriate Federal banking agency'' in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813).
    (g) Total capital means the total of a bank's Tier 1 and Tier 2 
capital under the risk-based capital guidelines provided by the bank's 
primary federal supervisor. For an insured branch of a foreign bank 
organized under the laws of a country that subscribes to the principles 
of the Basel Capital Accord, ``total capital'' means total Tier 1 and 
Tier 2 capital as calculated under the standards of that country. For an 
insured branch of a foreign bank organized under the laws of a country 
that does not subscribe to the principles of the Basel Capital Accord, 
``total capital'' means total Tier 1 and Tier 2 capital as calculated 
under the provisions of the Accord.
    (h) U.S. depository institution means a bank, as defined in Sec. 
206.2(a) of this part, other than an insured branch of a foreign bank.

[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283, 
Sept. 10, 2003]



Sec. 206.3  Prudential standards.

    (a) General. A bank shall establish and maintain written policies 
and procedures to prevent excessive exposure to any individual 
correspondent in relation to the condition of the correspondent.
    (b) Standards for selecting correspondents. (1) A bank shall 
establish policies and procedures that take into account credit and 
liquidity risks, including operational risks, in selecting 
correspondents and terminating those relationships.
    (2) Where exposure to a correspondent is significant, the policies 
and procedures shall require periodic reviews of the financial condition 
of the correspondent and shall take into account any deterioration in 
the correspondent's financial condition. Factors bearing on the 
financial condition of the correspondent include the capital level of 
the correspondent, level of nonaccrual and past due loans and leases, 
level of earnings, and other factors affecting the financial condition 
of the correspondent. Where public information on the financial 
condition of the correspondent is available, a bank may base its review 
of the financial condition of a correspondent on such information, and 
is not required to obtain non-public information for its review. 
However, for those foreign banks for which there is no public source of 
financial information, a bank will be required to obtain information for 
its review.
    (3) A bank may rely on another party, such as a bank rating agency 
or

[[Page 165]]

the bank's holding company, to assess the financial condition of or 
select a correspondent, provided that the bank's board of directors has 
reviewed and approved the general assessment or selection criteria used 
by that party.
    (c) Internal limits on exposure. (1) Where the financial condition 
of the correspondent and the form or maturity of the exposure create a 
significant risk that payments will not be made in full or in a timely 
manner, a bank's policies and procedures shall limit the bank's exposure 
to the correspondent, either by the establishment of internal limits or 
by other means. Limits shall be consistent with the risk undertaken, 
considering the financial condition and the form and maturity of 
exposure to the correspondent. Limits may be fixed as to amount or 
flexible, based on such factors as the monitoring of exposure and the 
financial condition of the correspondent. Different limits may be set 
for different forms of exposure, different products, and different 
maturities.
    (2) A bank shall structure transactions with a correspondent or 
monitor exposure to a correspondent, directly or through another party, 
to ensure that its exposure ordinarily does not exceed the bank's 
internal limits, including limits established for credit exposure, 
except for occasional excesses resulting from unusual market 
disturbances, market movements favorable to the bank, increases in 
activity, operational problems, or other unusual circumstances. 
Generally, monitoring may be done on a retrospective basis. The level of 
monitoring required depends on:
    (i) The extent to which exposure approaches the bank's internal 
limits;
    (ii) The volatility of the exposure; and
    (iii) The financial condition of the correspondent.
    (3) A bank shall establish appropriate procedures to address 
excesses over its internal limits.
    (d) Review by board of directors. The policies and procedures 
established under this section shall be reviewed and approved by the 
bank's board of directors at least annually.

[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283, 
Sept. 10, 2003]



Sec. 206.4  Credit exposure.

    (a) Limits on credit exposure. (1) The policies and procedures on 
exposure established by a bank under Sec. 206.3(c) of this part shall 
limit a bank's interday credit exposure to an individual correspondent 
to not more than 25 percent of the bank's total capital, unless the bank 
can demonstrate that its correspondent is at least adequately 
capitalized, as defined in Sec. 206.5(a) of this part.
    (2) Where a bank is no longer able to demonstrate that a 
correspondent is at least adequately capitalized for the purposes of 
Sec. 206.4(a) of this part, including where the bank cannot obtain 
adequate information concerning the capital ratios of the correspondent, 
the bank shall reduce its credit exposure to comply with the 
requirements of Sec. 206.4(a)(1) of this part within 120 days after the 
date when the current Report of Condition and Income or other relevant 
report normally would be available.
    (b) Calculation of credit exposure. Except as provided in Sec. Sec. 
206.4 (c) and (d) of this part, the credit exposure of a bank to a 
correspondent shall consist of the bank's assets and off-balance sheet 
items that are subject to capital requirements under the capital 
adequacy guidelines of the bank's primary federal supervisor, and that 
involve claims on the correspondent or capital instruments issued by the 
correspondent. For this purpose, off-balance sheet items shall be valued 
on the basis of current exposure. The term ``credit exposure'' does not 
include exposure related to the settlement of transactions, intraday 
exposure, transactions in an agency or similar capacity where losses 
will be passed back to the principal or other party, or other sources of 
exposure that are not covered by the capital adequacy guidelines.
    (c) Netting. Transactions covered by netting agreements that are 
valid and enforceable under all applicable laws may be netted in 
calculating credit exposure.

[[Page 166]]

    (d) Exclusions. A bank may exclude the following from the 
calculation of credit exposure to a correspondent:
    (1) Transactions, including reverse repurchase agreements, to the 
extent that the transactions are secured by government securities or 
readily marketable collateral, as defined in paragraph (f) of this 
section, based on the current market value of the collateral;
    (2) The proceeds of checks and other cash items deposited in an 
account at a correspondent that are not yet available for withdrawal;
    (3) Quality assets, as defined in paragraph (f) of this section, on 
which the correspondent is secondarily liable, or obligations of the 
correspondent on which a creditworthy obligor in addition to the 
correspondent is available, including but not limited to:
    (i) Loans to third parties secured by stock or debt obligations of 
the correspondent;
    (ii) Loans to third parties purchased from the correspondent with 
recourse;
    (iii) Loans or obligations of third parties backed by stand-by 
letters of credit issued by the correspondent; or
    (iv) Obligations of the correspondent backed by stand-by letters of 
credit issued by a creditworthy third party;
    (4) exposure that results from the merger with or acquisition of 
another bank for one year after that merger or acquisition is 
consummated; and
    (5) The portion of the bank's exposure to the correspondent that is 
covered by federal deposit insurance.
    (e) Credit exposure of subsidiaries. In calculating credit exposure 
to a correspondent under this part, a bank shall include credit exposure 
to the correspondent of any entity that the bank is required to 
consolidate on its Report of Condition and Income or Thrift Financial 
Report.
    (f) Definitions. As used in this section:
    (1) Government securities means obligations of, or obligations fully 
guaranteed as to principal and interest by, the United States government 
or any department, agency, bureau, board, commission, or establishment 
of the United States, or any corporation wholly owned, directly or 
indirectly, by the United States.
    (2) Readily marketable collateral means financial instruments or 
bullion that may be sold in ordinary circumstances with reasonable 
promptness at a fair market value determined by quotations based on 
actual transactions on an auction or a similarly available daily bid- 
ask-price market.
    (3)(i) Quality asset means an asset:
    (A) That is not in a nonaccrual status;
    (B) On which principal or interest is not more than thirty days past 
due; and
    (C) Whose terms have not been renegotiated or compromised due to the 
deteriorating financial conditions of the additional obligor.
    (ii) An asset is not considered a ``quality asset'' if any other 
loans to the primary obligor on the asset have been classified as 
``substandard,'' ``doubtful,'' or ``loss,'' or treated as ``other loans 
specially mentioned'' in the most recent report of examination or 
inspection of the bank or an affiliate prepared by either a federal or a 
state supervisory agency.

[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283, 
Sept. 10, 2003]



Sec. 206.5  Capital levels of correspondents.

    (a) Adequately capitalized correspondents.\1\ For the purpose of 
this part, a correspondent is considered adequately capitalized if the 
correspondent has:
---------------------------------------------------------------------------

    \1\ As used in this part, the term ``adequately capitalized'' is 
similar but not identical to the definition of that term as used for the 
purposes of the prompt corrective action standards. See, e.g. 12 CFR 
part 208, subpart D.
---------------------------------------------------------------------------

    (1) A total risk-based capital ratio, as defined in paragraph (e)(1) 
of this section, of 8.0 percent or greater;
    (2) A Tier 1 risk-based capital ratio, as defined in paragraph 
(e)(2) of this section, of 4.0 percent or greater; and
    (3) A leverage ratio, as defined in paragraph (e)(3) of this 
section, of 4.0 percent or greater.
    (b) Frequency of monitoring capital levels. A bank shall obtain 
information to demonstrate that a correspondent is at least adequately 
capitalized on a quarterly basis, either from the most recently 
available Report of Condition and Income, Thrift Financial Report,

[[Page 167]]

financial statement, or bank rating report for the correspondent. For a 
foreign bank correspondent for which quarterly financial statements or 
reports are not available, a bank shall obtain such information on as 
frequent a basis as such information is available. Information obtained 
directly from a correspondent for the purpose of this section should be 
based on the most recently available Report of Condition and Income, 
Thrift Financial Report, or financial statement of the correspondent.
    (c) Foreign banks. A correspondent that is a foreign bank may be 
considered adequately capitalized under this section without regard to 
the minimum leverage ratio required under paragraph (a)(3) of this 
section.
    (d) Reliance on information. A bank may rely on information as to 
the capital levels of a correspondent obtained from the correspondent, a 
bank rating agency, or other party that it reasonably believes to be 
accurate.
    (e) Definitions. For the purposes of this section:
    (1) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets.
    (2) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets.
    (3) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the capital 
adequacy guidelines of the correspondent's primary federal supervisor.
    (f) Calculation of capital ratios. (1) For a correspondent that is a 
U.S. depository institution, the ratios shall be calculated in 
accordance with the capital adequacy guidelines of the correspondent's 
primary federal supervisor.
    (2) For a correspondent that is a foreign bank organized in a 
country that has adopted the risk-based framework of the Basel Capital 
Accord, the ratios shall be calculated in accordance with the capital 
adequacy guidelines of the appropriate supervisory authority of the 
country in which the correspondent is chartered.
    (3) For a correspondent that is a foreign bank organized in a 
country that has not adopted the risk-based framework of the Basel 
Capital Accord, the ratios shall be calculated in accordance with the 
provisions of the Basel Capital Accord.

[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283, 
Sept. 10, 2003]



Sec. 206.6  Waiver.

    The Board may waive the application of Sec. 206.4(a) of this part 
to a bank if the primary Federal supervisor of the bank advises the 
Board that the bank is not reasonably able to obtain necessary services, 
including payment-related services and placement of funds, without 
incurring exposure to a correspondent in excess of the otherwise 
applicable limit.



PART 207_DISCLOSURE AND REPORTING OF CRA-RELATED AGREEMENTS (REGULATION G)
--Table of Contents




Sec.
207.1 Purpose and scope of this part.
207.2 Definition of covered agreement.
207.3 CRA communications.
207.4 Fulfillment of the CRA.
207.5 Related agreements considered a single agreement.
207.6 Disclosure of covered agreements.
207.7 Annual reports.
207.8 Release of information under FOIA.
207.9 Compliance provisions.
207.10 Transition provisions.
207.11 Other definitions and rules of construction used in this part.

    Authority: 12 U.S.C. 1831y.

    Source: Reg. G, 66 FR 2092, Jan. 10, 2001, unless otherwise noted.



Sec. 207.1  Purpose and scope of this part.

    (a) General. This part implements section 711 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1831y). That section requires any nongovernmental 
entity or person, insured depository institution, or affiliate of an 
insured depository institution that enters into a covered agreement to--
    (1) Make the covered agreement available to the public and the 
appropriate Federal banking agency; and
    (2) File an annual report with the appropriate Federal banking 
agency concerning the covered agreement.
    (b) Scope of this part. The provisions of this part apply to--
    (1) State member banks and their subsidiaries;

[[Page 168]]

    (2) Bank holding companies;
    (3) Affiliates of bank holding companies, other than banks, savings 
associations and subsidiaries of banks and savings associations; and
    (4) Nongovernmental entities or persons that enter into covered 
agreements with any company listed in paragraph (b)(1) through (3) of 
this section.
    (c) Relation to Community Reinvestment Act. This part does not 
affect in any way the Community Reinvestment Act of 1977 (12 U.S.C. 2901 
et seq.), the Board's Regulation BB (12 CFR part 228), or the Board's 
interpretations or administration of that Act or regulation.
    (d) Examples.--(1) The examples in this part are not exclusive. 
Compliance with an example, to the extent applicable, constitutes 
compliance with this part.
    (2) Examples in a paragraph illustrate only the issue described in 
the paragraph and do not illustrate any other issues that may arise in 
this part.



Sec. 207.2  Definition of covered agreement.

    (a) General definition of covered agreement. A covered agreement is 
any contract, arrangement, or understanding that meets all of the 
following criteria--
    (1) The agreement is in writing.
    (2) The parties to the agreement include--
    (i) One or more insured depository institutions or affiliates of an 
insured depository institution; and
    (ii) One or more nongovernmental entities or persons (referred to 
hereafter as NGEPs).
    (3) The agreement provides for the insured depository institution or 
any affiliate to--
    (i) Provide to one or more individuals or entities (whether or not 
parties to the agreement) cash payments, grants, or other consideration 
(except loans) that have an aggregate value of more than $10,000 in any 
calendar year; or
    (ii) Make to one or more individuals or entities (whether or not 
parties to the agreement) loans that have an aggregate principal amount 
of more than $50,000 in any calendar year.
    (4) The agreement is made pursuant to, or in connection with, the 
fulfillment of the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et 
seq.) (CRA), as defined in Sec. 207.4.
    (5) The agreement is with a NGEP that has had a CRA communication as 
described in Sec. 207.3 prior to entering into the agreement.
    (b) Examples concerning written arrangements or understandings--(1) 
Example 1. A NGEP meets with an insured depository institution and 
states that the institution needs to make more community development 
investments in the NGEP's community. The NGEP and insured depository 
institution do not reach an agreement concerning the community 
development investments the institution should make in the community, 
and the parties do not reach any mutual arrangement or understanding. 
Two weeks later, the institution unilaterally issues a press release 
announcing that it has established a general goal of making $100 million 
of community development grants in low- and moderate-income 
neighborhoods served by the insured depository institution over the next 
5 years. The NGEP is not identified in the press release. The press 
release is not a written arrangement or understanding.
    (2) Example 2. A NGEP meets with an insured depository institution 
and states that the institution needs to offer new loan programs in the 
NGEP's community. The NGEP and the insured depository institution reach 
a mutual arrangement or understanding that the institution will provide 
additional loans in the NGEP's community. The institution tells the NGEP 
that it will issue a press release announcing the program. Later, the 
insured depository institution issues a press release announcing the 
loan program. The press release incorporates the key terms of the 
understanding reached between the NGEP and the insured depository 
institution. The written press release reflects the mutual arrangement 
or understanding of the NGEP and the insured depository institution and 
is, therefore, a written arrangement or understanding.

[[Page 169]]

    (3) Example 3. An NGEP sends a letter to an insured depository 
institution requesting that the institution provide a $15,000 grant to 
the NGEP. The insured depository institution responds in writing and 
agrees to provide the grant in connection with its annual grant program. 
The exchange of letters constitutes a written arrangement or 
understanding.
    (c) Loan agreements that are not covered agreements. A covered 
agreement does not include--
    (1) Any individual loan that is secured by real estate; or
    (2) Any specific contract or commitment for a loan or extension of 
credit to an individual, business, farm, or other entity, or group of 
such individuals or entities, if--
    (i) The funds are loaned at rates that are not substantially below 
market rates; and
    (ii) The loan application or other loan documentation does not 
indicate that the borrower intends or is authorized to use the borrowed 
funds to make a loan or extension of credit to one or more third 
parties.
    (d) Examples concerning loan agreements--(1) Example 1. An insured 
depository institution provides an organization with a $1 million loan 
that is documented in writing and is secured by real estate owned or to-
be-acquired by the organization. The agreement is an individual mortgage 
loan and is exempt from coverage under paragraph (c)(1) of this section, 
regardless of the interest rate on the loan or whether the organization 
intends or is authorized to re-loan the funds to a third party.
    (2) Example 2. An insured depository institution commits to provide 
a $500,000 line of credit to a small business that is documented by a 
written agreement. The loan is made at rates that are within the range 
of rates offered by the institution to similarly situated small 
businesses in the market and the loan documentation does not indicate 
that the small business intends or is authorized to re-lend the borrowed 
funds. The agreement is exempt from coverage under paragraph (c)(2) of 
this section.
    (3) Example 3. An insured depository institution offers small 
business loans that are guaranteed by the Small Business Administration 
(SBA). A small business obtains a $75,000 loan, documented in writing, 
from the institution under the institution's SBA loan program. The loan 
documentation does not indicate that the borrower intends or is 
authorized to re-lend the funds. Although the rate charged on the loan 
is well below that charged by the institution on commercial loans, the 
rate is within the range of rates that the institution would charge a 
similarly situated small business for a similar loan under the SBA loan 
program. Accordingly, the loan is not made at substantially below market 
rates and is exempt from coverage under paragraph (c)(2) of this 
section.
    (4) Example 4. A bank holding company enters into a written 
agreement with a community development organization that provides that 
insured depository institutions owned by the bank holding company will 
make $250 million in small business loans in the community over the next 
5 years. The written agreement is not a specific contract or commitment 
for a loan or an extension of credit and, thus, is not exempt from 
coverage under paragraph (c)(2) of this section. Each small business 
loan made by the insured depository institution pursuant to this general 
commitment would, however, be exempt from coverage if the loan is made 
at rates that are not substantially below market rates and the loan 
documentation does not indicate that the borrower intended or was 
authorized to re-lend the funds.
    (e) Agreements that include exempt loan agreements. If an agreement 
includes a loan, extension of credit or loan commitment that, if 
documented separately, would be exempt under paragraph (c) of this 
section, the exempt loan, extension of credit or loan commitment may be 
excluded for purposes of determining whether the agreement is a covered 
agreement.
    (f) Determining annual value of agreements that lack schedule of 
disbursements. For purposes of paragraph (a)(3) of this section, a 
multi-year agreement that does not include a schedule for the 
disbursement of payments, grants,

[[Page 170]]

loans or other consideration by the insured depository institution or 
affiliate, is considered to have a value in the first year of the 
agreement equal to all payments, grants, loans and other consideration 
to be provided at any time under the agreement.



Sec. 207.3  CRA communications.

    (a) Definition of CRA communication. A CRA communication is any of 
the following--
    (1) Any written or oral comment or testimony provided to a Federal 
banking agency concerning the adequacy of the performance under the CRA 
of the insured depository institution, any affiliated insured depository 
institution, or any CRA affiliate.
    (2) Any written comment submitted to the insured depository 
institution that discusses the adequacy of the performance under the CRA 
of the institution and must be included in the institution's CRA public 
file.
    (3) Any discussion or other contact with the insured depository 
institution or any affiliate about--
    (i) Providing (or refraining from providing) written or oral 
comments or testimony to any Federal banking agency concerning the 
adequacy of the performance under the CRA of the insured depository 
institution, any affiliated insured depository institution, or any CRA 
affiliate;
    (ii) Providing (or refraining from providing) written comments to 
the insured depository institution that concern the adequacy of the 
institution's performance under the CRA and must be included in the 
institution's CRA public file; or
    (iii) The adequacy of the performance under the CRA of the insured 
depository institution, any affiliated insured depository institution, 
or any CRA affiliate.
    (b) Discussions or contacts that are not CRA communications--(1) 
Timing of contacts with a Federal banking agency. An oral or written 
communication with a Federal banking agency is not a CRA communication 
if it occurred more than 3 years before the parties entered into the 
agreement.
    (2) Timing of contacts with insured depository institutions and 
affiliates. A communication with an insured depository institution or 
affiliate is not a CRA communication if the communication occurred--
    (i) More than 3 years before the parties entered into the agreement, 
in the case of any written communication;
    (ii) More than 3 years before the parties entered into the 
agreement, in the case of any oral communication in which the NGEP 
discusses providing (or refraining from providing) comments or testimony 
to a Federal banking agency or written comments that must be included in 
the institution's CRA public file in connection with a request to, or 
agreement by, the institution or affiliate to take (or refrain from 
taking) any action that is in fulfillment of the CRA; or
    (iii) More than 1 year before the parties entered into the 
agreement, in the case of any other oral communication not described in 
paragraph (b)(2)(ii) of this section.
    (3) Knowledge of communication by insured depository institution or 
affiliate. (i) A communication is only a CRA communication under 
paragraph (a) of this section if the insured depository institution or 
its affiliate has knowledge of the communication under this paragraph 
(b)(3)(ii) or (b)(3)(iii) of this section.
    (ii) Communication with insured depository institution or affiliate. 
An insured depository institution or affiliate has knowledge of a 
communication by the NGEP to the institution or its affiliate under this 
paragraph only if one of the following representatives of the insured 
depository institution or any affiliate has knowledge of the 
communication.
    (A) An employee who approves, directs, authorizes, or negotiates the 
agreement with the NGEP; or
    (B) An employee designated with responsibility for compliance with 
the CRA or executive officer if the employee or executive officer knows 
that the institution or affiliate is negotiating, intends to negotiate, 
or has been informed by the NGEP that it expects to request that the 
institution or affiliate negotiate an agreement with the NGEP.
    (iii) Other communications. An insured depository institution or 
affiliate is deemed to have knowledge of--

[[Page 171]]

    (A) Any testimony provided to a Federal banking agency at a public 
meeting or hearing;
    (B) Any comment submitted to a Federal banking agency that is 
conveyed in writing by the agency to the insured depository institution 
or affiliate; and
    (C) Any written comment submitted to the insured depository 
institution that must be and is included in the institution's CRA public 
file.
    (4) Communication where NGEP has knowledge. A NGEP has a CRA 
communication with an insured depository institution or affiliate only 
if any of the following individuals has knowledge of the communication--
    (i) A director, employee, or member of the NGEP who approves, 
directs, authorizes, or negotiates the agreement with the insured 
depository institution or affiliate;
    (ii) A person who functions as an executive officer of the NGEP and 
who knows that the NGEP is negotiating or intends to negotiate an 
agreement with the insured depository institution or affiliate; or
    (iii) Where the NGEP is an individual, the NGEP.
    (c) Examples of CRA communications--(1) Examples of actions that are 
CRA communications. The following are examples of CRA communications. 
These examples are not exclusive and assume that the communication 
occurs within the relevant time period as described in paragraph (b)(1) 
or (b)(2) of this section and the appropriate representatives have 
knowledge of the communication as specified in paragraphs (b)(3) and 
(b)(4) of this section.
    (i) Example 1. A NGEP files a written comment with a Federal banking 
agency that states than an insured depository institution successfully 
addresses the credit needs of its community. The written comment is in 
response to a general request from the agency for comments on an 
application of the insured depository institution to open a new branch 
and a copy of the comment is provided to the institution.
    (ii) Example 2. A NGEP meets with an executive officer of an insured 
depository institution and states that the institution must improve its 
CRA performance.
    (iii) Example 3. A NGEP meets with an executive officer of an 
insured depository institution and states that the institution needs to 
make more mortgage loans in low- and moderate-income neighborhoods in 
its community.
    (iv) Example 4. A bank holding company files an application with a 
Federal banking agency to acquire an insured depository institution. Two 
weeks later, the NGEP meets with an executive officer of the bank 
holding company to discuss the adequacy of the performance under the CRA 
of the target insured depository institution. The insured depository 
institution was an affiliate of the bank holding company at the time the 
NGEP met with the target institution. (See Sec. 207.11(a).) 
Accordingly, the NGEP had a CRA communication with an affiliate of the 
bank holding company.
    (2) Examples of actions that are not CRA communications. The 
following are examples of actions that are not by themselves CRA 
communications. These examples are not exclusive.
    (i) Example 1. A NGEP provides to a Federal banking agency comments 
or testimony concerning an insured depository institution or affiliate 
in response to a direct request by the agency for comments or testimony 
from that NGEP. Direct requests for comments or testimony do not include 
a general invitation by a Federal banking agency for comments or 
testimony from the public in connection with a CRA performance 
evaluation of, or application for a deposit facility (as defined in 
section 803 of the CRA (12 U.S.C. 2902(3)) by, an insured depository 
institution or an application by a company to acquire an insured 
depository institution.
    (ii) Example 2. A NGEP makes a statement concerning an insured 
depository institution or affiliate at a widely attended conference or 
seminar regarding a general topic. A public or private meeting, public 
hearing, or other meeting regarding one or more specific institutions, 
affiliates or transactions involving an application for a deposit 
facility is not considered a widely attended conference or seminar.
    (iii) Example 3. A NGEP, such as a civil rights group, community 
group

[[Page 172]]

providing housing and other services in low- and moderate-income 
neighborhoods, veterans organization, community theater group, or youth 
organization, sends a fundraising letter to insured depository 
institutions and to other businesses in its community. The letter 
encourages all businesses in the community to meet their obligation to 
assist in making the local community a better place to live and work by 
supporting the fundraising efforts of the NGEP.
    (iv) Example 4. A NGEP discusses with an insured depository 
institution or affiliate whether particular loans, services, 
investments, community development activities, or other activities are 
generally eligible for consideration by a Federal banking agency under 
the CRA. The NGEP and insured depository institution or affiliate do not 
discuss the adequacy of the CRA performance of the insured depository 
institution or affiliate.
    (v) Example 5. A NGEP engaged in the sale or purchase of loans in 
the secondary market sends a general offering circular to financial 
institutions offering to sell or purchase a portfolio of loans. An 
insured depository institution that receives the offering circular 
discusses with the NGEP the types of loans included in the loan pool, 
whether such loans are generally eligible for consideration under the 
CRA, and which loans are made to borrowers in the institution's local 
community. The NGEP and insured depository institution do not discuss 
the adequacy of the institution's CRA performance.
    (d) Multiparty covered agreements. (1) A NGEP that is a party to a 
covered agreement that involves multiple NGEPs is not required to comply 
with the requirements of this part if--
    (i) The NGEP has not had a CRA communication; and
    (ii) No representative of the NGEP identified in paragraph (b)(4) of 
this section has knowledge at the time of the agreement that another 
NGEP that is a party to the agreement has had a CRA communication.
    (2) An insured depository institution or affiliate that is a party 
to a covered agreement that involves multiple insured depository 
institutions or affiliates is not required to comply with the disclosure 
and annual reporting requirements in Sec. Sec. 207.6 and 207.7 if--
    (i) No NGEP that is a party to the agreement has had a CRA 
communication concerning the insured depository institution or any 
affiliate; and
    (ii) No representative of the insured depository institution or any 
affiliate identified in paragraph (b)(3) of this section has knowledge 
at the time of the agreement that an NGEP that is a party to the 
agreement has had a CRA communication concerning any other insured 
depository institution or affiliate that is a party to the agreement.



Sec. 207.4  Fulfillment of the CRA.

    (a) List of factors that are in fulfillment of the CRA. Fulfillment 
of the CRA, for purposes of this part, means the following list of 
factors--
    (1) Comments to a Federal banking agency or included in CRA public 
file. Providing or refraining from providing written or oral comments or 
testimony to any Federal banking agency concerning the performance under 
the CRA of an insured depository institution or CRA affiliate that is a 
party to the agreement or an affiliate of a party to the agreement or 
written comments that are required to be included in the CRA public file 
of any such insured depository institution; or
    (2) Activities given favorable CRA consideration. Performing any of 
the following activities if the activity is of the type that is likely 
to receive favorable consideration by a Federal banking agency in 
evaluating the performance under the CRA of the insured depository 
institution that is a party to the agreement or an affiliate of a party 
to the agreement--
    (i) Home-purchase, home-improvement, small business, small farm, 
community development, and consumer lending, as described in Sec. 
228.22 of Regulation BB (12 CFR 228.22), including loan purchases, loan 
commitments, and letters of credit;
    (ii) Making investments, deposits, or grants, or acquiring 
membership shares, that have as their primary purpose community 
development, as described in Sec. 228.23 of Regulation BB (12 CFR 
228.23);

[[Page 173]]

    (iii) Delivering retail banking services, as described in Sec. 
228.24(d) of Regulation BB (12 CFR 228.24(d));
    (iv) Providing community development services, as described in Sec. 
228.24(e) of Regulation BB (12 CFR 228.24(e));
    (v) In the case of a wholesale or limited-purpose insured depository 
institution, community development lending, including originating and 
purchasing loans and making loan commitments and letters of credit, 
making qualified investments, or providing community development 
services, as described in Sec. 228.25(c) of Regulation BB (12 CFR 
228.25(c));
    (vi) In the case of a small insured depository institution, any 
lending or other activity described in Sec. 228.26(a) of Regulation BB 
(12 CFR 228.26(a)); or
    (vii) In the case of an insured depository institution that is 
evaluated on the basis of a strategic plan, any element of the strategic 
plan, as described in Sec. 228.27(f) of Regulation BB (12 CFR 
228.27(f)).
    (b) Agreements relating to activities of CRA affiliates. An insured 
depository institution or affiliate that is a party to a covered 
agreement that concerns any activity described in paragraph (a) of this 
section of a CRA affiliate must, prior to the time the agreement is 
entered into, notify each NGEP that is a party to the agreement that the 
agreement concerns a CRA affiliate.



Sec. 207.5  Related agreements considered a single agreement.

    The following rules must be applied in determining whether an 
agreement is a covered agreement under Sec. 207.2.
    (a) Agreements entered into by same parties. All written agreements 
to which an insured depository institution or an affiliate of the 
insured depository institution is a party shall be considered to be a 
single agreement if the agreements--
    (1) Are entered into with the same NGEP;
    (2) Were entered into within the same 12-month period; and
    (3) Are each in fulfillment of the CRA.
    (b) Substantively related contracts. All written contracts to which 
an insured depository institution or an affiliate of the insured 
depository institution is a party shall be considered to be a single 
agreement, without regard to whether the other parties to the contracts 
are the same or whether each such contract is in fulfillment of the CRA, 
if the contracts were negotiated in a coordinated fashion and a NGEP is 
a party to each contract.



Sec. 207.6  Disclosure of covered agreements.

    (a) Applicability date. This section applies only to covered 
agreements entered into after November 12, 1999.
    (b) Disclosure of covered agreements to the public--(1) Disclosure 
required. Each NGEP and each insured depository institution or affiliate 
that enters into a covered agreement must promptly make a copy of the 
covered agreement available to any individual or entity upon request.
    (2) Nondisclosure of confidential and proprietary information 
permitted. In responding to a request for a covered agreement from any 
individual or entity under paragraph (b)(1) of this section, a NGEP, 
insured depository institution, or affiliate may withhold from public 
disclosure confidential or proprietary information that the party 
believes the relevant supervisory agency could withhold from disclosure 
under the Freedom of Information Act (5 U.S.C. 552 et seq.) (FOIA).
    (3) Information that must be disclosed. Notwithstanding paragraph 
(b)(2) of this section, a party must disclose any of the following 
information that is contained in a covered agreement--
    (i) The names and addresses of the parties to the agreement;
    (ii) The amount of any payments, fees, loans, or other consideration 
to be made or provided by any party to the agreement;
    (iii) Any description of how the funds or other resources provided 
under the agreement are to be used;
    (iv) The term of the agreement (if the agreement establishes a 
term); and
    (v) Any other information that the relevant supervisory agency 
determines is not properly exempt from public disclosure.
    (4) Request for review of withheld information. Any individual or 
entity may request that the relevant supervisory

[[Page 174]]

agency review whether any information in a covered agreement withheld by 
a party must be disclosed. Any requests for agency review of withheld 
information must be filed, and will be processed in accordance with, the 
relevant supervisory agency's rules concerning the availability of 
information (see Sec. 261.12 of the Board's Rules Regarding the 
Availability of Information (12 CFR 261.12)).
    (5) Duration of obligation. The obligation to disclose a covered 
agreement to the public terminates 12 months after the end of the term 
of the agreement.
    (6) Reasonable copy and mailing fees. Each NGEP and each insured 
depository institution or affiliate may charge an individual or entity 
that requests a copy of a covered agreement a reasonable fee not to 
exceed the cost of copying and mailing the agreement.
    (7) Use of CRA public file by insured depository institution or 
affiliate. An insured depository institution and any affiliate of an 
insured depository institution may fulfill its obligation under this 
paragraph (b) by placing a copy of the covered agreement in the insured 
depository institution's CRA public file if the institution makes the 
agreement available in accordance with the procedures set forth in Sec. 
228.43 of Regulation BB (12 CFR 228.43).
    (c) Disclosure by NGEPs of covered agreements to the relevant 
supervisory agency. (1) Each NGEP that is a party to a covered agreement 
must provide the following within 30 days of receiving a request from 
the relevant supervisory agency--
    (i) A complete copy of the agreement; and
    (ii) In the event the NGEP proposes the withholding of any 
information contained in the agreement in accordance with paragraph 
(b)(2) of this section, a public version of the agreement that excludes 
such information and an explanation justifying the exclusions. Any 
public version must include the information described in paragraph 
(b)(3) of this section.
    (2) The obligation of a NGEP to provide a covered agreement to the 
relevant supervisory agency terminates 12 months after the end of the 
term of the covered agreement.
    (d) Disclosure by insured depository institution or affiliate of 
covered agreements to the relevant supervisory agency--(1) In general. 
Within 60 days of the end of each calendar quarter, each insured 
depository institution and affiliate must provide each relevant 
supervisory agency with--
    (i)(A) A complete copy of each covered agreement entered into by the 
insured depository institution or affiliate during the calendar quarter; 
and
    (B) In the event the institution or affiliate proposes the 
withholding of any information contained in the agreement in accordance 
with paragraph (b)(2) of this section, a public version of the agreement 
that excludes such information (other than any information described in 
paragraph (b)(3) of this section) and an explanation justifying the 
exclusions; or
    (ii) A list of all covered agreements entered into by the insured 
depository institution or affiliate during the calendar quarter that 
contains--
    (A) The name and address of each insured depository institution or 
affiliate that is a party to the agreement;
    (B) The name and address of each NGEP that is a party to the 
agreement;
    (C) The date the agreement was entered into;
    (D) The estimated total value of all payments, fees, loans and other 
consideration to be provided by the institution or any affiliate of the 
institution under the agreement; and
    (E) The date the agreement terminates.
    (2) Prompt filing of covered agreements contained in list required. 
(i) If an insured depository institution or affiliate files a list of 
the covered agreements entered into by the institution or affiliate 
pursuant to paragraph (d)(1)(ii) of this section, the institution or 
affiliate must provide any relevant supervisory agency a complete copy 
and public version of any covered agreement referenced in the list 
within 7 calendar days of receiving a request from the agency for a copy 
of the agreement.
    (ii) The obligation of an insured depository institution or 
affiliate to provide a covered agreement to the relevant supervisory 
agency under this paragraph (d)(2) terminates 36 months

[[Page 175]]

after the end of the term of the agreement.
    (3) Joint filings. In the event that 2 or more insured depository 
institutions or affiliates are parties to a covered agreement, the 
insured depository institution(s) and affiliate(s) may jointly file the 
documents required by this paragraph (d). Any joint filing must identify 
the insured depository institution(s) and affiliate(s) for whom the 
filings are being made.



Sec. 207.7  Annual reports.

    (a) Applicability date. This section applies only to covered 
agreements entered into on or after May 12, 2000.
    (b) Annual report required. Each NGEP and each insured depository 
institution or affiliate that is a party to a covered agreement must 
file an annual report with each relevant supervisory agency concerning 
the disbursement, receipt, and uses of funds or other resources under 
the covered agreement.
    (c) Duration of reporting requirement--(1) NGEPs. A NGEP must file 
an annual report for a covered agreement for any fiscal year in which 
the NGEP receives or uses funds or other resources under the agreement.
    (2) Insured depository institutions and affiliates. An insured 
depository institution or affiliate must file an annual report for a 
covered agreement for any fiscal year in which the institution or 
affiliate--
    (i) provides or receives any payments, fees, or loans under the 
covered agreement that must be reported under paragraphs (e)(1)(iii) and 
(iv) of this section; or
    (ii) has data to report on loans, investments, and services provided 
by a party to the covered agreement under the covered agreement under 
paragraph (e)(1)(vi) of this section.
    (d) Annual reports filed by NGEP--(1) Contents of report. The annual 
report filed by a NGEP under this section must include the following--
    (i) The name and mailing address of the NGEP filing the report;
    (ii) Information sufficient to identify the covered agreement for 
which the annual report is being filed, such as by providing the names 
of the parties to the agreement and the date the agreement was entered 
into or by providing a copy of the agreement;
    (iii) The amount of funds or resources received under the covered 
agreement during the fiscal year; and
    (iv) A detailed, itemized list of how any funds or resources 
received by the NGEP under the covered agreement were used during the 
fiscal year, including the total amount used for--
    (A) Compensation of officers, directors, and employees;
    (B) Administrative expenses;
    (C) Travel expenses;
    (D) Entertainment expenses;
    (E) Payment of consulting and professional fees; and
    (F) Other expenses and uses (specify expense or use).
    (2) More detailed reporting of uses of funds or resources 
permitted--(i) In general. If a NGEP allocated and used funds received 
under a covered agreement for a specific purpose, the NGEP may fulfill 
the requirements of paragraph (d)(1)(iv) of this section with respect to 
such funds by providing--
    (A) A brief description of each specific purpose for which the funds 
or other resources were used; and
    (B) The amount of funds or resources used during the fiscal year for 
each specific purpose.
    (ii) Specific purpose defined. A NGEP allocates and uses funds for a 
specific purpose if the NGEP receives and uses the funds for a purpose 
that is more specific and limited than the categories listed in 
paragraph (d)(1)(iv) of this section.
    (3) Use of other reports. The annual report filed by a NGEP may 
consist of or incorporate a report prepared for any other purpose, such 
as the Internal Revenue Service Return of Organization Exempt From 
Income Tax on Form 990, or any other Internal Revenue Service form, 
state tax form, report to members or shareholders, audited or unaudited 
financial statements, audit report, or other report, so long as the 
annual report filed by the NGEP contains all of the information required 
by this paragraph (d).
    (4) Consolidated reports permitted. A NGEP that is a party to 2 or 
more covered agreements may file with each relevant supervisory agency a 
single consolidated annual report covering all

[[Page 176]]

the covered agreements. Any consolidated report must contain all the 
information required by this paragraph (d). The information reported 
under paragraphs (d)(1)(iv) and (d)(2) of this section may be reported 
on an aggregate basis for all covered agreements.
    (5) Examples of annual report requirements for NGEPs--(i) Example 1. 
A NGEP receives an unrestricted grant of $15,000 under a covered 
agreement, includes the funds in its general operating budget and uses 
the funds during its fiscal year. The NGEP's annual report for the 
fiscal year must provide the name and mailing address of the NGEP, 
information sufficient to identify the covered agreement, and state that 
the NGEP received $15,000 during the fiscal year. The report must also 
indicate the total expenditures made by the NGEP during the fiscal year 
for compensation, administrative expenses, travel expenses, 
entertainment expenses, consulting and professional fees, and other 
expenses and uses. The NGEP's annual report may provide this information 
by submitting an Internal Revenue Service Form 990 that includes the 
required information. If the Internal Revenue Service Form does not 
include information for all of the required categories listed in this 
part, the NGEP must report the total expenditures in the remaining 
categories either by providing that information directly or by providing 
another form or report that includes the required information.
    (ii) Example 2. An organization receives $15,000 from an insured 
depository institution under a covered agreement and allocates and uses 
the $15,000 during the fiscal year to purchase computer equipment to 
support its functions. The organization's annual report must include the 
name and address of the organization, information sufficient to identify 
the agreement, and a statement that the organization received $15,000 
during the year. In addition, since the organization allocated and used 
the funds for a specific purpose that is more narrow and limited than 
the categories of expenses included in the detailed, itemized list of 
expenses, the organization would have the option of providing either the 
total amount it used during the year for each category of expenses 
included in paragraph (d)(1)(iv) of this section, or a statement that it 
used the $15,000 to purchase computer equipment and a brief description 
of the equipment purchased.
    (iii) Example 3. A community group receives $50,000 from an insured 
depository institution under a covered agreement. During its fiscal 
year, the community group specifically allocates and uses $5,000 of the 
funds to pay for a particular business trip and uses the remaining 
$45,000 for general operating expenses. The group's annual report for 
the fiscal year must include the name and address of the group, 
information sufficient to identify the agreement, and a statement that 
the group received $50,000. Because the group did not allocate and use 
all of the funds for a specific purpose, the group's annual report must 
provide the total amount of funds it used during the year for each 
category of expenses included in paragraph (d)(1)(iv) of this section. 
The group's annual report also could state that it used $5,000 for a 
particular business trip and include a brief description of the trip.
    (iv) Example 4. A community development organization is a party to 
two separate covered agreements with two unaffiliated insured depository 
institutions. Under each agreement, the organization receives $15,000 
during its fiscal year and uses the funds to support its activities 
during that year. If the organization elects to file a consolidated 
annual report, the consolidated report must identify the organization 
and the two covered agreements, state that the organization received 
$15,000 during the fiscal year under each agreement, and provide the 
total amount that the organization used during the year for each 
category of expenses included in paragraph (d)(1)(iv) of this section.
    (e) Annual report filed by insured depository institution or 
affiliate--(1) General. The annual report filed by an insured depository 
institution or affiliate must include the following--
    (i) The name and principal place of business of the insured 
depository institution or affiliate filing the report;
    (ii) Information sufficient to identify the covered agreement for 
which the annual report is being filed, such as by

[[Page 177]]

providing the names of the parties to the agreement and the date the 
agreement was entered into or by providing a copy of the agreement;
    (iii) The aggregate amount of payments, aggregate amount of fees, 
and aggregate amount of loans provided by the insured depository 
institution or affiliate under the covered agreement to any other party 
to the agreement during the fiscal year;
    (iv) The aggregate amount of payments, aggregate amount of fees, and 
aggregate amount of loans received by the insured depository institution 
or affiliate under the covered agreement from any other party to the 
agreement during the fiscal year;
    (v) A general description of the terms and conditions of any 
payments, fees, or loans reported under paragraphs (e)(1)(iii) and (iv) 
of this section, or, in the event such terms and conditions are set 
forth--
    (A) In the covered agreement, a statement identifying the covered 
agreement and the date the agreement (or a list identifying the 
agreement) was filed with the relevant supervisory agency; or
    (B) In a previous annual report filed by the insured depository 
institution or affiliate, a statement identifying the date the report 
was filed with the relevant supervisory agency; and
    (vi) The aggregate amount and number of loans, aggregate amount and 
number of investments, and aggregate amount of services provided under 
the covered agreement to any individual or entity not a party to the 
agreement--
    (A) By the insured depository institution or affiliate during its 
fiscal year; and
    (B) By any other party to the agreement, unless such information is 
not known to the insured depository institution or affiliate filing the 
report or such information is or will be contained in the annual report 
filed by another party under this section.
    (2) Consolidated reports permitted--(i) Party to multiple 
agreements. An insured depository institution or affiliate that is a 
party to 2 or more covered agreements may file a single consolidated 
annual report with each relevant supervisory agency concerning all the 
covered agreements.
    (ii) Affiliated entities party to the same agreement. An insured 
depository institution and its affiliates that are parties to the same 
covered agreement may file a single consolidated annual report relating 
to the agreement with each relevant supervisory agency for the covered 
agreement.
    (iii) Content of report. Any consolidated annual report must contain 
all the information required by this paragraph (e). The amounts and data 
required to be reported under paragraphs (e)(1)(iv) and (vi) of this 
section may be reported on an aggregate basis for all covered 
agreements.
    (f) Time and place of filing--(1) General. Each party must file its 
annual report with each relevant supervisory agency for the covered 
agreement no later than six months following the end of the fiscal year 
covered by the report.
    (2) Alternative method of fulfilling annual reporting requirement 
for a NGEP--(i) A NGEP may fulfill the filing requirements of this 
section by providing the following materials to an insured depository 
institution or affiliate that is a party to the agreement no later than 
six months following the end of the NGEP's fiscal year--
    (A) A copy of the NGEP's annual report required under paragraph (d) 
of this section for the fiscal year; and
    (B) Written instructions that the insured depository institution or 
affiliate promptly forward the annual report to the relevant supervisory 
agency or agencies on behalf of the NGEP.
    (ii) An insured depository institution or affiliate that receives an 
annual report from a NGEP pursuant to paragraph (f)(2)(i) of this 
section must file the report with the relevant supervisory agency or 
agencies on behalf of the NGEP within 30 days.



Sec. 207.8  Release of information under FOIA.

    The Board will make covered agreements and annual reports available 
to the public in accordance with the Freedom of Information Act (5 
U.S.C. 552 et seq.) and the Board's Rules Regarding the Availability of 
Information (12 CFR part 261). A party to a covered agreement may 
request confidential treatment of proprietary and confidential 
information in a covered agreement or

[[Page 178]]

an annual report under those procedures.



Sec. 207.9  Compliance provisions.

    (a) Willful failure to comply with disclosure and reporting 
obligations--(1) If the Board determines that a NGEP has willfully 
failed to comply in a material way with Sec. Sec. 207.6 or 207.7, the 
Board will notify the NGEP in writing of that determination and provide 
the NGEP a period of 90 days (or such longer period as the Board finds 
to be reasonable under the circumstances) to comply.
    (2) If the NGEP does not comply within the time period established 
by the Board, the agreement shall thereafter be unenforceable by that 
NGEP by operation of section 48 of the Federal Deposit Insurance Act (12 
U.S.C. 1831y).
    (3) The Board may assist any insured depository institution or 
affiliate that is a party to a covered agreement that is unenforceable 
by a NGEP by operation of section 48 of the Federal Deposit Insurance 
Act (12 U.S.C. 1831y) in identifying a successor to assume the NGEP's 
responsibilities under the agreement.
    (b) Diversion of funds. If a court or other body of competent 
jurisdiction determines that funds or resources received under a covered 
agreement have been diverted contrary to the purposes of the covered 
agreement for an individual's personal financial gain, the Board may 
take either or both of the following actions--
    (1) Order the individual to disgorge the diverted funds or resources 
received under the agreement;
    (2) Prohibit the individual from being a party to any covered 
agreement for a period not to exceed 10 years.
    (c) Notice and opportunity to respond. Before making a determination 
under paragraph (a)(1) of this section, or taking any action under 
paragraph (b) of this section, the Board will provide written notice and 
an opportunity to present information to the Board concerning any 
relevant facts or circumstances relating to the matter.
    (d) Inadvertent or de minimis errors. Inadvertent or de minimis 
errors in annual reports or other documents filed with the Board under 
Sec. Sec. 207.6 or 207.7 will not subject the reporting party to any 
penalty.
    (e) Enforcement of provisions in covered agreements. No provision of 
this part shall be construed as authorizing the Board to enforce the 
provisions of any covered agreement.



Sec. 207.10  Transition provisions.

    (a) Disclosure of covered agreements entered into before the 
effective date of this part. The following disclosure requirements apply 
to covered agreements that were entered into after November 12, 1999, 
and that terminated before April 1, 2001.
    (1) Disclosure to the public. Each NGEP and each insured depository 
institution or affiliate that was a party to the agreement must make the 
agreement available to the public under Sec. 207.6 until at least April 
1, 2002.
    (2) Disclosure to the relevant supervisory agency--(i) Each NGEP 
that was a party to the agreement must make the agreement available to 
the relevant supervisory agency under Sec. 207.6 until at least April 
1, 2002.
    (ii) Each insured depository institution or affiliate that was a 
party to the agreement must, by June 30, 2001, provide each relevant 
supervisory agency either--
    (A) A copy of the agreement under Sec. 207.6(d)(1)(i); or
    (B) The information described in Sec. 207.6(d)(1)(ii) for each 
agreement.
    (b) Filing of annual reports that relate to fiscal years ending on 
or before December 31, 2000. In the event that a NGEP, insured 
depository institution or affiliate has any information to report under 
Sec. 207.7 for a fiscal year that ends on or before December 31, 2000, 
and that concerns a covered agreement entered into between May 12, 2000, 
and December 31, 2000, the annual report for that fiscal year must be 
provided no later than June 30, 2001, to--
    (1) Each relevant supervisory agency; or
    (2) In the case of a NGEP, to an insured depository institution or 
affiliate that is a party to the agreement in accordance with Sec. 
207.7(f)(2).



Sec. 207.11  Other definitions and rules of construction used in this part.

    (a) Affiliate. ``Affiliate'' means--

[[Page 179]]

    (1) Any company that controls, is controlled by, or is under common 
control with another company; and
    (2) For the purpose of determining whether an agreement is a covered 
agreement under Sec. 207.2, an ``affiliate'' includes any company that 
would be under common control or merged with another company on 
consummation of any transaction pending before a Federal banking agency 
at the time--
    (i) The parties enter into the agreement; and
    (ii) The NGEP that is a party to the agreement makes a CRA 
communication, as described in Sec. 207.3.
    (b) Control. ``Control'' is defined in section 2(a) of the Bank 
Holding Company Act (12 U.S.C. 1841(a)).
    (c) CRA affiliate. A ``CRA affiliate'' of an insured depository 
institution is any company that is an affiliate of an insured depository 
institution to the extent, and only to the extent, that the activities 
of the affiliate were considered by the appropriate Federal banking 
agency when evaluating the CRA performance of the institution at its 
most recent CRA examination prior to the agreement. An insured 
depository institution or affiliate also may designate any company as a 
CRA affiliate at any time prior to the time a covered agreement is 
entered into by informing the NGEP that is a party to the agreement of 
such designation.
    (d) CRA public file. ``CRA public file'' means the public file 
maintained by an insured depository institution and described in Sec. 
228.43 of Regulation BB (12 CFR 228.43).
    (e) Executive officer. The term ``executive officer'' has the same 
meaning as in Sec. 215.2(e)(1) of the Board's Regulation O (12 CFR 
215.2(e)(1)).
    (f) Federal banking agency; appropriate Federal banking agency. The 
terms ``Federal banking agency'' and ``appropriate Federal banking 
agency'' have the same meanings as in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813).
    (g) Fiscal year. (1) The fiscal year for a NGEP that does not have a 
fiscal year shall be the calendar year.
    (2) Any NGEP, insured depository institution, or affiliate that has 
a fiscal year may elect to have the calendar year be its fiscal year for 
purposes of this part.
    (h) Insured depository institution. ``Insured depository 
institution'' has the same meaning as in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813).
    (i) NGEP. ``NGEP'' means a nongovernmental entity or person.
    (j) Nongovernmental entity or person--(1) General. A 
``nongovernmental entity or person'' is any partnership, association, 
trust, joint venture, joint stock company, corporation, limited 
liability corporation, company, firm, society, other organization, or 
individual.
    (2) Exclusions. A nongovernmental entity or person does not 
include--
    (i) The United States government, a state government, a unit of 
local government (including a county, city, town, township, parish, 
village, or other general-purpose subdivision of a state) or an Indian 
tribe or tribal organization established under Federal, state or Indian 
tribal law (including the Department of Hawaiian Home Lands), or a 
department, agency, or instrumentality of any such entity;
    (ii) A federally-chartered public corporation that receives Federal 
funds appropriated specifically for that corporation;
    (iii) An insured depository institution or affiliate of an insured 
depository institution; or
    (iv) An officer, director, employee, or representative (acting in 
his or her capacity as an officer, director, employee, or 
representative) of an entity listed in paragraphs (i)(2)(i) through 
(iii) of this section.
    (k) Party. The term ``party'' with respect to a covered agreement 
means each NGEP and each insured depository institution or affiliate 
that entered into the agreement.
    (l) Relevant supervisory agency. The ``relevant supervisory agency'' 
for a covered agreement means the appropriate Federal banking agency 
for--
    (1) Each insured depository institution (or subsidiary thereof) that 
is a party to the covered agreement;
    (2) Each insured depository institution (or subsidiary thereof) or 
CRA affiliate that makes payments or loans or provides services that are 
subject to the covered agreement; and

[[Page 180]]

    (3) Any company (other than an insured depository institution or 
subsidiary thereof) that is a party to the covered agreement.
    (m) Term of agreement. An agreement that does not have a fixed 
termination date is considered to terminate on the last date on which 
any party to the agreement makes any payment or provides any loan or 
other resources under the agreement, unless the relevant supervisory 
agency for the agreement otherwise notifies each party in writing.



PART 208_MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE 
SYSTEM (REGULATION H)--Table of Contents




Sec.
208.1 Authority, purpose, and scope.
208.2 Definitions.
208.3 Application and conditions for membership in the Federal Reserve 
          System.
208.4 Capital adequacy.
208.5 Dividends and other distributions.
208.6 Establishment and maintenance of branches.
208.7 Prohibition against use of interstate branches primarily for 
          deposit production.

                     Subpart B_Investments and Loans

208.20 Authority, purpose, and scope.
208.21 Investments in premises and securities.
208.22 Community development and public welfare investments.
208.23 Agricultural loan loss amortization.
208.24 Letters of credit and acceptances.
208.25 Loans in areas having special flood hazards.

       Subpart C_Bank Securities and Securities-Related Activities

208.30 Authority, purpose, and scope.
208.31 State member banks as transfer agents.
208.32 Notice of disciplinary sanctions imposed by registered clearing 
          agency.
208.33 Application for stay or review of disciplinary sanctions imposed 
          by registered clearing agency.
208.34 Recordkeeping and confirmation of certain securities transactions 
          effected by State member banks.
208.35 Qualification requirements for transactions in certain 
          securities. [Reserved]
208.36 Reporting requirements for State member banks subject to the 
          Securities Exchange Act of 1934.
208.37 Government securities sales practices.

                   Subpart D_Prompt Corrective Action

208.40 Authority, purpose, scope, other supervisory authority, and 
          disclosure of capital categories.
208.41 Definitions for purposes of this subpart.
208.42 Notice of capital category.
208.43 Capital measures and capital category definitions.
208.44 Capital restoration plans.
208.45 Mandatory and discretionary supervisory actions under section 38.

          Subpart E_Real Estate Lending and Appraisal Standards

208.50 Authority, purpose, and scope.
208.51 Real estate lending standards.

                  Subpart F_Miscellaneous Requirements

208.60 Authority, purpose, and scope.
208.61 Bank security procedures.
208.62 Suspicious activity reports.
208.63 Procedures for monitoring Bank Secrecy Act compliance.
208.64 Frequency of examination.

         Subpart G_Financial Subsidiaries of State Member Banks

208.71 What are the requirements to invest in or control a financial 
          subsidiary?
208.72 What activities may a financial subsidiary conduct?
208.73 What additional provisions are applicable to state member banks 
          with financial subsidiaries?
208.74 What happens if the state member bank or a depository institution 
          affiliate fails to continue to meet certain requirements?
208.75 What happens if the state member bank or any of its insured 
          depository institution affiliates receives less than a 
          ``satisfactory'' CRA rating?
208.76 What Federal Reserve approvals are necessary for financial 
          subsidiaries?
208.77 Definitions.

           Subpart H_Consumer Protection in Sales of Insurance

208.81 Purpose and scope.
208.82 Definitions for purposes of this subpart.
208.83 Prohibited practices.
208.84 What you must disclose.
208.85 Where insurance activities may take place.
208.86 Qualification and licensing requirements for insurance sales 
          personnel.

Appendix A to Subpart H--Consumer Grievance Process

[[Page 181]]

                        Subpart I_Interpretations

208.100 Sale of bank's money orders off premises as establishment of 
          branch office.
208.101 Obligations concerning institutional customers.

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
          Banks: Risk-Based Measure
Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
          Banks: Tier 1 Leverage Measure
Appendix C to Part 208--Interagency Guidelines for Real Estate Lending 
          Policies
Appendix D-1 to Part 208--Interagency Guidelines Establishing Standards 
          for Safety and Soundness
Appendix D-2 to Part 208--Interagency Guidelines Establishing Standards 
          for Safeguarding Customer Information
Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
          Banks; Market Risk Measure

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882, 2901-
2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 
78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318, 42 
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

    Source: Reg. H, 17 FR 8006, Sept. 4, 1952, unless otherwise noted.



         Subpart A_General Membership and Branching Requirements

    Source: 63 FR 37637, July 13, 1998, unless otherwise noted.



Sec. 208.1  Authority, purpose, and scope.

    (a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart 
A) is issued by the Board of Governors of the Federal Reserve System 
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the 
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 
and 611); sections 1814, 1816, 1818, 1831o, 1831p-1, 1831r-1 and 1835a 
of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816, 
1818, 1831o, 1831p-1, 1831r-1, and 1835); and 12 U.S.C. 3906-3909.
    (b) Purpose and scope of Part 208. The requirements of this part 208 
govern State member banks and state banks applying for admission to 
membership in the Federal Reserve System (System) under section 9 of the 
Federal Reserve Act (Act), except for Sec. 208.7, which also applies to 
certain foreign banks licensed by a State. This part 208 does not govern 
banks eligible for membership under section 2 or 19 of the Act.\1\ Any 
bank desiring to be admitted to the System under the provisions of 
section 2 or 19 should communicate with the Federal Reserve Bank with 
which it would like to become a member.
---------------------------------------------------------------------------

    \1\ Under section 2 of the Federal Reserve Act, every national bank 
in any state shall, upon commencing business, or within 90 days after 
admission into the Union of the State in which it is located, become a 
member of the System. Under section 19 of the Federal Reserve Act, 
national banks and banks organized under local laws, located in a 
dependency or insular possession or any part of the United States 
outside of the States of the United States and the District of Columbia, 
are not required to become members of the System but may, with the 
consent of the board, become members of the System.
---------------------------------------------------------------------------

    (c) Purpose and scope of Subpart A. This Subpart A describes the 
eligibility requirements for membership of state-chartered banking 
institutions in the System, the general conditions imposed upon members, 
including capital and dividend requirements, as well as the requirements 
for establishing and maintaining branches.



Sec. 208.2  Definitions.

    For the purposes of this part:
    (a) Board of Directors means the governing board of any institution 
performing the usual functions of a board of directors.
    (b) Board means the Board of Governors of the Federal Reserve 
System.
    (c) Branch. (1) Branch means any branch bank, branch office, branch 
agency, additional office, or any branch place of business that receives 
deposits, pays checks, or lends money. A branch may include a temporary, 
seasonal, or mobile facility that meets these criteria.
    (2) Branch does not include:
    (i) A loan origination facility where the proceeds of loans are not 
disbursed;
    (ii) An office of an affiliated or unaffiliated institution that 
provides services to customers of the member bank on behalf of the 
member bank so long as the institution is not established or operated by 
the bank;

[[Page 182]]

    (iii) An automated teller machine;
    (iv) A remote service unit;
    (v) A facility to which the bank does not permit members of the 
public to have physical access for purposes of making deposits, paying 
checks, or borrowing money (such as an office established by the bank 
that receives deposits only through the mail); or
    (vi) A facility that is located at the site of, or is an extension 
of, an approved main office or branch. The Board determines whether a 
facility is an extension of an existing main or branch office on a case-
by-case basis.
    (d) Capital stock and surplus means, unless otherwise provided in 
this part, or by statute, Tier 1 and Tier 2 capital included in a member 
bank's risk-based capital (under the guidelines in appendix A of this 
part) and the balance of a member bank's allowance for loan and lease 
losses not included in its Tier 2 capital for calculation of risk-based 
capital, based on the bank's most recent consolidated Report of 
Condition and Income filed under 12 U.S.C. 324.
    (e) Eligible bank means a member bank that:
    (1) Is well capitalized as defined in subpart D of this part;
    (2) Has a composite Uniform Financial Institutions Rating System 
(CAMELS) rating of 1 or 2;
    (3) Has a Community Reinvestment Act (CRA) (12 U.S.C. 2906) rating 
of ``Outstanding'' or ``Satisfactory;''
    (4) Has a compliance rating of 1 or 2; and
    (5) Has no major unresolved supervisory issues outstanding (as 
determined by the Board or appropriate Federal Reserve Bank in its 
discretion).
    (f) State bank means any bank incorporated by special law of any 
State, or organized under the general laws of any State, or of the 
United States, including a Morris Plan bank, or other incorporated 
banking institution engaged in a similar business.
    (g) State member bank or member bank means a state bank that is a 
member of the Federal Reserve System.



Sec. 208.3  Application and conditions for membership in the Federal 
Reserve System.

    (a) Applications for membership and stock. (1) State banks applying 
for membership in the Federal Reserve System shall file with the 
appropriate Federal Reserve Bank an application for membership in the 
Federal Reserve System and for stock in the Reserve Bank,\2\ in 
accordance with this part and Sec. 262.3 of the Rules of Procedure, 
located at 12 CFR 262.3.
---------------------------------------------------------------------------

    \2\ A mutual savings bank not authorized to purchase Federal Reserve 
Bank stock may apply for membership evidenced initially by a deposit, 
but if the laws under which the bank is organized are not amended at the 
first session of the legislature after its admission to authorize the 
purchase, or if the bank fails to purchase the stock within six months 
of the amendment, its membership shall be terminated.
---------------------------------------------------------------------------

    (2) Board approval. If an applying bank conforms to all the 
requirements of the Federal Reserve Act and this section, and is 
otherwise qualified for membership, the Board may approve its 
application subject to such conditions as the Board may prescribe.
    (3) Effective date of membership. A State bank becomes a member of 
the Federal Reserve System on the date its Federal Reserve Bank stock is 
credited to its account (or its deposit is accepted, if it is a mutual 
savings bank not authorized to purchase Reserve Bank stock) in 
accordance with the Board's Regulation I (12 CFR part 209).
    (b) Factors considered in approving applications for membership. 
Factors given special consideration by the Board in passing upon an 
application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management.
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects.
    (3) Convenience and needs. The convenience and needs of the 
community.
    (4) Corporate powers. Whether the bank's corporate powers are 
consistent with the purposes of the Federal Reserve Act.
    (c) Expedited approval for eligible banks and bank holding 
companies. (1) Availability of expedited treatment. The expedited 
membership procedures described in paragraph (c)(2) of this section are 
available to:
    (i) An eligible bank; and

[[Page 183]]

    (ii) A bank that cannot be determined to be an eligible bank because 
it has not received CAMELS compliance or CRA ratings from a bank 
regulatory authority, if it is controlled by a bank holding company that 
meets the criteria for expedited processing under Sec. 225.14(c) of 
Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. A completed membership application filed 
with the appropriate Reserve Bank will be deemed approved on the 
fifteenth day after receipt of the complete application by the Board or 
appropriate Reserve Bank, unless the Board or the appropriate Reserve 
Bank notifies the bank that the application is approved prior to that 
date or the Board or the appropriate Federal Reserve Bank notifies the 
bank that the application is not eligible for expedited review for any 
reason, including, without limitation, that:
    (i) The bank will offer banking services that are materially 
different from those currently offered by the bank, or by the affiliates 
of the proposed bank;
    (ii) The bank or bank holding company does not meet the criteria 
under Sec. 208.3(c)(1);
    (iii) The application contains a material error or is otherwise 
deficient; or
    (iv) The application raises significant supervisory, compliance, 
policy or legal issues that have not been resolved, or a timely 
substantive adverse comment is submitted. A comment will be considered 
substantive unless it involves individual complaints, or raises 
frivolous, previously considered, or wholly unsubstantiated claims or 
irrelevant issues.
    (d) Conditions of membership. (1) Safety and soundness. Each member 
bank shall at all times conduct its business and exercise its powers 
with due regard to safety and soundness. Each member bank shall comply 
with the Interagency Guidelines Establishing Standards for Safety and 
Soundness prescribed pursuant to section 39 of the FDI Act (12 U.S.C. 
1831p-1), set forth in appendix D-1 to this part, and the Interagency 
Guidelines Establishing Standards for Safeguarding Customer Information 
prescribed pursuant to sections 501 and 505 of the Gramm-Leach-Bliley 
Act (15 U.S.C. 6801 and 6805), set forth in appendix D-2 to this part.
    (2) General character of bank's business. A member bank may not, 
without the permission of the Board, cause or permit any change in the 
general character of its business or in the scope of the corporate 
powers it exercises at the time of admission to membership.
    (3) Compliance with conditions of membership. Each member bank shall 
comply at all times with this Regulation H (12 CFR part 208) and any 
other conditions of membership prescribed by the Board.
    (e) Waivers. (1) Conditions of membership. A member bank may 
petition the Board to waive a condition of membership. The Board may 
grant a waiver of a condition of membership upon a showing of good cause 
and, in its discretion, may limit, among other items, the scope, 
duration, and timing of the waiver.
    (2) Reports of affiliates. Pursuant to section 21 of the Federal 
Reserve Act (12 U.S.C. 486), the Board waives the requirement for the 
submission of reports of affiliates of member banks, unless such reports 
are specifically requested by the Board.
    (f) Voluntary withdrawal from membership. Voluntary withdrawal from 
membership becomes effective upon cancellation of the Federal Reserve 
Bank stock held by the member bank, and after the bank has made due 
provision to pay any indebtedness due or to become due to the Federal 
Reserve Bank in accordance with the Board's Regulation I (12 CFR part 
209).

[Reg. H, 63 FR 37637, July 13, 1998, as amended at 63 FR 58620, Nov. 2, 
1998; 66 FR 8634, Feb. 1, 2001]

    Effective Date Note: At 69 FR 77617, Dec. 28, 2004, in Sec. 208.3, 
paragraph (d)(1) was revised, effective July 1, 2005. For the 
convenience of the user, the revised text is set forth as follows:

Sec. 208.3  Application and conditions for membership in the Federal 
          Reserve System.

                                * * * * *

    (d) Conditions of membership. (1) Safety and soundness. Each member 
bank shall at all times conduct its business and exercise its powers 
with due regard to safety and soundness. Each member bank shall comply 
with the Interagency Guidelines Establishing

[[Page 184]]

Standards for Safety and Soundness prescribed pursuant to section 39 of 
the FDI Act (12 U.S.C. 1831p-1), set forth in appendix D-1 to this part, 
and the Interagency Guidelines Establishing Information Security 
Standards prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805) and section 216 of the Fair 
and Accurate Credit Transactions Act of 2003 (15 U.S.C. 1681w), set 
forth in appendix D-2 to this part.

                                * * * * *



Sec. 208.4  Capital adequacy.

    (a) Adequacy. A member bank's capital, as defined in appendix A to 
this part, shall be at all times adequate in relation to the character 
and condition of its assets and to its existing and prospective 
liabilities and other corporate responsibilities. If at any time, in 
light of all the circumstances, the bank's capital appears inadequate in 
relation to its assets, liabilities, and responsibilities, the bank 
shall increase the amount of its capital, within such period as the 
Board deems reasonable, to an amount which, in the judgment of the 
Board, shall be adequate.
    (b) Standards for evaluating capital adequacy. Standards and 
guidelines by which the Board evaluates the capital adequacy of member 
banks include those in appendices A and E to this part for risk-based 
capital purposes and appendix B to this part for leverage measurement 
purposes.



Sec. 208.5  Dividends and other distributions.

    (a) Definitions. For the purposes of this section:
    (1) Capital surplus means the total of surplus as reportable in the 
bank's Reports of Condition and Income and surplus on perpetual 
preferred stock.
    (2) Permanent capital means the total of the bank's perpetual 
preferred stock and related surplus, common stock and surplus, and 
minority interest in consolidated subsidiaries, as reportable in the 
Reports of Condition and Income.
    (b) Limitations. The limitations in this section on the payment of 
dividends and withdrawal of capital apply to all cash and property 
dividends or distributions on common or preferred stock. The limitations 
do not apply to dividends paid in the form of common stock.
    (c) Earnings limitations on payment of dividends. (1) A member bank 
may not declare or pay a dividend if the total of all dividends declared 
during the calendar year, including the proposed dividend, exceeds the 
sum of the bank's net income (as reportable in its Reports of Condition 
and Income) during the current calendar year and the retained net income 
of the prior two calendar years, unless the dividend has been approved 
by the Board.
    (2) ``Retained net income'' in a calendar year is equal to the 
bank's net income (as reported in its Report of Condition and Income for 
such year), less any dividends declared during such year.\3\ The bank's 
net income during the current year and its retained net income from the 
prior two calendar years is reduced by any net losses incurred in the 
current or prior two years and any required transfers to surplus or to a 
fund for the retirement of preferred stock.\4\
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    \3\ In the case of dividends in excess of net income for the year, a 
bank generally is not required to carry forward negative amounts 
resulting from such excess. Instead, the bank may attribute the excess 
to the prior two years, attributing the excess first to the earlier year 
and then to the immediately preceding year. If the excess is greater 
than the bank's previously undistributed net income for the preceding 
two years, prior Board approval of the dividend is required and a 
negative amount would be carried forward in future dividend 
calculations. However, in determining any such request for approval, the 
Board could consider any request for different treatment of such 
negative amount, including advance waivers for future periods. This 
applies only to earnings deficits that result from dividends declared in 
excess of net income for the year and does not apply to other types of 
current earnings deficits.
    \4\ State member banks are required to comply with state law 
provisions concerning the maintenance of surplus funds in addition to 
common capital. Where the surplus of a State member bank is less than 
what applicable state law requires the bank to maintain relative to its 
capital stock account, the bank may be required to transfer amounts from 
its undivided profits account to surplus.
---------------------------------------------------------------------------

    (d) Limitation on withdrawal of capital by dividend or otherwise. 
(1) A member bank may not declare or pay a dividend

[[Page 185]]

if the dividend would exceed the bank's undivided profits as reportable 
on its Reports of Condition and Income, unless the bank has received the 
prior approval of the Board and of at least two-thirds of the 
shareholders of each class of stock outstanding.
    (2) A member bank may not permit any portion of its permanent 
capital to be withdrawn unless the withdrawal has been approved by the 
Board and by at least two-thirds of the shareholders of each class of 
stock outstanding.
    (3) If a member bank has capital surplus in excess of that required 
by law, the excess amount may be transferred to the bank's undivided 
profits account and be available for the payment of dividends if:
    (i) The amount transferred came from the earnings of prior periods, 
excluding earnings transferred as a result of stock dividends;
    (ii) The bank's board of directors approves the transfer of funds; 
and
    (iii) The transfer has been approved by the Board.
    (e) Payment of capital distributions. All member banks also are 
subject to the restrictions on payment of capital distributions 
contained in Sec. 208.45 of subpart D of this part implementing section 
38 of the FDI Act (12 U.S.C. 1831o).
    (f) Compliance. A member bank shall use the date a dividend is 
declared to determine compliance with this section.



Sec. 208.6  Establishment and maintenance of branches.

    (a) Branching. (1) To the extent authorized by state law, a member 
bank may establish and maintain branches (including interstate branches) 
subject to the same limitations and restrictions that apply to the 
establishment and maintenance of national bank branches (12 U.S.C. 36 
and 1831u), except that approval of such branches shall be obtained from 
the Board rather than from the Comptroller of the Currency.
    (2) Branch applications. A State member bank wishing to establish a 
branch in the United States or its territories must file an application 
in accordance with the Board's Rules of Procedure, located at 12 CFR 
262.3, and must comply with the public notice and comment rules 
contained in paragraphs (a)(3) and (a)(4) of this section. Branches of 
member banks located in foreign nations, in the overseas territories, 
dependencies, and insular possessions of those nations and of the United 
States, and in the Commonwealth of Puerto Rico, are subject to the 
Board's Regulation K (12 CFR part 211).
    (3) Public notice of branch applications. (i) Location of 
publication. A State member bank wishing to establish a branch in the 
United States or its territories must publish notice in a newspaper of 
general circulation in the form and at the locations specified in Sec. 
262.3 of the Rules of Procedure (12 CFR 262.3).
    (ii) Contents of notice. The newspaper notice referred to in 
paragraph (a)(3) of this section shall provide an opportunity for 
interested persons to comment on the application for a period of at 
least 15 days.
    (iii) Timing of publication. Each newspaper notice shall be 
published no more than 7 calendar days before and no later than the 
calendar day on which an application is filed with the appropriate 
Reserve Bank.
    (4) Public comment. (i) Timely comments. Interested persons may 
submit information and comments regarding a branch application under 
Sec. 208.6. A comment shall be considered timely for purposes of this 
subpart if the comment, together with all supplemental information, is 
submitted in writing in accordance with the Board's Rules of Procedure 
(12 CFR 262.3) and received by the Board or the appropriate Reserve Bank 
prior to the expiration of the public comment period provided in 
paragraph (a)(3)(ii) of this section.
    (ii) Extension of comment period. The Board may, in its discretion, 
extend the public comment period regarding any application under Sec. 
208.6. In the event that an interested person requests a copy of an 
application submitted under Sec. 208.6, the Board may, in its 
discretion and based on the facts and circumstances, grant such person 
an extension of the comment period for up to 15 calendar days.
    (b) Factors considered in approving domestic branch applications. 
Factors given special consideration by the

[[Page 186]]

Board in passing upon a branch application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management;
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects;
    (3) Convenience and needs. The convenience and needs of the 
community to be served by the branch;
    (4) CRA performance. In the case of branches with deposit-taking 
capability, the bank's performance under the Community Reinvestment Act 
(12 U.S.C. 2901 et seq.) and Regulation BB (12 CFR part 228); and
    (5) Investment in bank premises. Whether the bank's investment in 
bank premises in establishing the branch is consistent with Sec. 
208.21.
    (c) Expedited approval for eligible banks and bank holding 
companies. (1) Availability of expedited treatment. The expedited branch 
application procedures described in paragraph (c)(2) of this section are 
available to:
    (i) An eligible bank; and
    (ii) A bank that cannot be determined to be an eligible bank because 
it has not received CAMELS compliance or CRA ratings from a bank 
regulatory authority, if it is controlled by a bank holding company that 
meets the criteria for expedited processing under Sec. 225.14(c) of 
Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. A completed domestic branch application 
filed with the appropriate Reserve Bank will be deemed approved on the 
fifth day after the close of the comment period, unless the Board or the 
appropriate Reserve Bank notifies the bank that the application is 
approved prior to that date (but in no case will an application be 
approved before the third day after the close of the public comment 
period) or the Board or the appropriate Federal Reserve Bank notifies 
the bank that the application is not eligible for expedited review for 
any reason, including, without limitation, that:
    (i) The bank or bank holding company does not meet the criteria 
under Sec. 208.6(c)(1);
    (ii) The application contains a material error or is otherwise 
deficient; or
    (iii) The application or the notice required under paragraph (a)(3) 
of this section, raises significant supervisory, Community Reinvestment 
Act, compliance, policy or legal issues that have not been resolved, or 
a timely substantive adverse comment is submitted. A comment will be 
considered substantive unless it involves individual complaints, or 
raises frivolous, previously considered, or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Consolidated Applications. (1) Proposed branches; notice of 
branch opening. A member bank may seek approval in a single application 
or notice for any branches that it proposes to establish within one year 
after the approval date. The bank shall, unless notification is waived, 
notify the appropriate Reserve Bank not later than 30 days after opening 
any branch approved under a consolidated application. A bank is not 
required to open a branch approved under either a consolidated or single 
branch application.
    (2) Duration of branch approval. Branch approvals remain valid for 
one year unless the Board or the appropriate Reserve Bank notifies the 
bank that in its judgment, based on reports of condition, examinations, 
or other information, there has been a change in the bank's condition, 
financial or otherwise, that warrants reconsideration of the approval.
    (e) Branch closings. A member bank shall comply with section 42 of 
the FDI Act (FDI Act), 12 U.S.C. 1831r-1, with regard to branch 
closings.
    (f) Branch relocations. A relocation of an existing branch does not 
require filing a branch application. A relocation of an existing branch, 
for purposes of determining whether to file a branch application, is a 
movement that does not substantially affect the nature of the branch's 
business or customers served.

[63 FR 37639, July 13, 1998, as amended at 63 FR 58621, Nov. 2, 1998]

[[Page 187]]



Sec. 208.7  Prohibition against use of interstate branches primarily 
for deposit production.

    (a) Purpose and scope--(1) Purpose. The purpose of this section is 
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate 
Banking and Branching Efficiency Act of 1994 (Interstate Act).
    (2) Scope. (i) This section applies to any State member bank that 
has operated a covered interstate branch for a period of at least one 
year, and any foreign bank that has operated a covered interstate branch 
licensed by a State for a period of at least one year.
    (ii) This section describes the requirements imposed under 12 U.S.C. 
1835a, which requires the appropriate Federal banking agencies (the 
Board, the Office of the Comptroller of the Currency, and the Federal 
Deposit Insurance Corporation) to prescribe uniform rules that prohibit 
a bank from using any authority to engage in interstate branching 
pursuant to the Interstate Act, or any amendment made by the Interstate 
Act to any other provision of law, primarily for the purpose of deposit 
production.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Bank means, unless the context indicates otherwise:
    (i) A State member bank as that term is defined in 12 U.S.C. 
1813(d)(2); and
    (ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 
12 CFR 211.21.
    (2) Covered interstate branch means:
    (i) Any branch of a State member bank, and any uninsured branch of a 
foreign bank licensed by a State, that:
    (A) Is established or acquired outside the bank's home State 
pursuant to the interstate branching authority granted by the Interstate 
Act or by any amendment made by the Interstate Act to any other 
provision of law; or
    (B) Could not have been established or acquired outside of the 
bank's home State but for the establishment or acquisition of a branch 
described in paragraph (b)(2)(i) of this section; and
    (ii) Any bank or branch of a bank controlled by an out-of-State bank 
holding company.
    (3) Home State means:
    (i) With respect to a State bank, the State that chartered the bank;
    (ii) With respect to a national bank, the State in which the main 
office of the bank is located;
    (iii) With respect to a bank holding company, the State in which the 
total deposits of all banking subsidiaries of such company are the 
largest on the later of:
    (A) July 1, 1966; or
    (B) The date on which the company becomes a bank holding company 
under the Bank Holding Company Act.
    (iv) With respect to a foreign bank:
    (A) For purposes of determining whether a U.S. branch of a foreign 
bank is a covered interstate branch, the home State of the foreign bank 
as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 211.22; 
and
    (B) For purposes of determining whether a branch of a U.S. bank 
controlled by a foreign bank is a covered interstate branch, the State 
in which the total deposits of all banking subsidiaries of such foreign 
bank are the largest on the later of:
    (1) July 1, 1966; or
    (2) The date on which the foreign bank becomes a bank holding 
company under the Bank Holding Company Act.
    (4) Host State means a State in which a covered interstate branch is 
established or acquired.
    (5) Host state loan-to-deposit ratio generally means, with respect 
to a particular host state, the ratio of total loans in the host state 
relative to total deposits from the host state for all banks (including 
institutions covered under the definition of ``bank'' in 12 U.S.C. 
1813(a)(1)) that have that state as their home state, as determined and 
updated periodically by the appropriate Federal banking agencies and 
made available to the public.
    (6) Out-of-State bank holding company means, with respect to any 
State, a bank holding company whose home State is another State.
    (7) State means state as that term is defined in 12 U.S.C. 
1813(a)(3).
    (8) Statewide loan-to-deposit ratio means, with respect to a bank, 
the ratio of the bank's loans to its deposits in a state in which the 
bank has one or

[[Page 188]]

more covered interstate branches, as determined by the Board.
    (c)(1) Application of screen. Beginning no earlier than one year 
after a covered interstate branch is acquired or established, the Board 
will consider whether the bank's statewide loan-to-deposit ratio is less 
than 50 percent of the relevant host State loan-to-deposit ratio.
    (2) Results of screen. (i) If the Board determines that the bank's 
statewide loan-to-deposit ratio is 50 percent or more of the host state 
loan-to-deposit ratio, no further consideration under this section is 
required.
    (ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit 
ratio, or if reasonably available data are insufficient to calculate the 
bank's statewide loan-to-deposit ratio, the Board will make a credit 
needs determination for the bank as provided in paragraph (d) of this 
section.
    (d) Credit needs determination--(1) In general. The Board will 
review the loan portfolio of the bank and determine whether the bank is 
reasonably helping to meet the credit needs of the communities in the 
host state that are served by the bank.
    (2) Guidelines. The Board will use the following considerations as 
guidelines when making the determination pursuant to paragraph (d)(1) of 
this section:
    (i) Whether covered interstate branches were formerly part of a 
failed or failing depository institution;
    (ii) Whether covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of the 
nature of the acquired institution's business or loan portfolio;
    (iii) Whether covered interstate branches have a high concentration 
of commercial or credit card lending, trust services, or other 
specialized activities, including the extent to which the covered 
interstate branches accept deposits in the host state;
    (iv) The Community Reinvestment Act ratings received by the bank, if 
any, under 12 U.S.C. 2901 et seq.;
    (v) Economic conditions, including the level of loan demand, within 
the communities served by the covered interstate branches;
    (vi) The safe and sound operation and condition of the bank; and
    (vii) The Board's Regulation BB--Community Reinvestment (12 CFR part 
228) and interpretations of that regulation.
    (e) Sanctions--(1) In general. If the Board determines that a bank 
is not reasonably helping to meet the credit needs of the communities 
served by the bank in the host state, and that the bank's statewide 
loan-to-deposit ratio is less than 50 percent of the host state loan-to-
deposit ratio, the Board:
    (i) May order that a bank's covered interstate branch or branches be 
closed unless the bank provides reasonable assurances to the 
satisfaction of the Board, after an opportunity for public comment, that 
the bank has an acceptable plan under which the bank will reasonably 
help to meet the credit needs of the communities served by the bank in 
the host state; and
    (ii) Will not permit the bank to open a new branch in the host state 
that would be considered to be a covered interstate branch unless the 
bank provides reasonable assurances to the satisfaction of the Board, 
after an opportunity for public comment, that the bank will reasonably 
help to meet the credit needs of the community that the new branch will 
serve.
    (2) Notice prior to closure of a covered interstate branch. Before 
exercising the Board's authority to order the bank to close a covered 
interstate branch, the Board will issue to the bank a notice of the 
Board's intent to order the closure and will schedule a hearing within 
60 days of issuing the notice.
    (3) Hearing. The Board will conduct a hearing scheduled under 
paragraph (e)(2) of this section in accordance with the provisions of 12 
U.S.C. 1818(h) and 12 CFR part 263.

[63 FR 37637, July 13, 1998, as amended at 67 FR 38848, June 6, 2002]



                     Subpart B_Investments and Loans

    Source: 63 FR 37641, July 13, 1998, unless otherwise noted.



Sec. 208.20  Authority, purpose, and scope.

    (a) Authority. Subpart B of Regulation H (12 CFR part 208, subpart 
B) is

[[Page 189]]

issued by the Board of Governors of the Federal Reserve System under 12 
U.S.C. 24; sections 9, 11 and 21 of the Federal Reserve Act (12 U.S.C. 
321-338a, 248(a), 248(c), and 481-486); sections 1814, 1816, 1818, 
1823(j), 1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 
1816, 1818, 1823(j), 1831o, 1831p-1 and 1831r-1); and the National Flood 
Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4001-4129).
    (b) Purpose and scope. This subpart B describes certain investment 
limitations on member banks, statutory requirements for amortizing 
losses on agricultural loans and extending credit in areas having 
special flood hazards, as well as the requirements for issuing letters 
of credit and acceptances.



Sec. 208.21  Investments in premises and securities.

    (a) Investment in bank premises. No state member bank shall invest 
in bank premises, or in the stock, bonds, debentures, or other such 
obligations of any corporation holding the premises of such bank, or 
make loans to or upon the security of any such corporation unless:
    (1) The bank notifies the appropriate Reserve Bank at least fifteen 
days prior to such investment and has not received notice that the 
investment is subject to further review by the end of the fifteen day 
notice period;
    (2) The aggregate of all such investments and loans, together with 
the amount of any indebtedness incurred by any such corporation that is 
an affiliate of the bank (as defined in section 2 of the Banking Act of 
1933, as amended, 12 U.S.C. 221a), is less than or equal to the bank's 
perpetual preferred stock and related surplus plus common stock plus 
surplus, as those terms are defined in the FFIEC Consolidated Reports of 
Condition and Income; or
    (3)(i) The aggregate of all such investments and loans, together 
with the amount of any indebtedness incurred by any such corporation 
that is an affiliate of the bank, is less than or equal to 150 percent 
of the bank's perpetual preferred stock and related surplus plus common 
stock plus surplus, as those terms are defined in the FFIEC Consolidated 
Reports of Condition and Income; and
    (ii) The bank:
    (A) Has a CAMELS composite rating of 1 or 2 under the Uniform 
Interagency Bank Rating System \5\ (or an equivalent rating under a 
comparable rating system) as of the most recent examination of the bank; 
and
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    \5\ See FRRS 3-1575 for an explanation of the Uniform Interagency 
Bank Rating System. (For availability, see 12 CFR 261.10(f).)
---------------------------------------------------------------------------

    (B) Is well capitalized and will continue to be well capitalized, in 
accordance with subpart D of this part, after the investment or loan.
    (b) Investments in securities. Member banks are subject to the same 
limitations and conditions with respect to purchasing, selling, 
underwriting, and holding investment securities and stocks as are 
national banks under 12 U.S.C. 24, ] 7th. To determine whether an 
obligation qualifies as an investment security for the purposes of 12 
U.S.C. 24, ] 7th, and to calculate the limits with respect to the 
purchase of such obligations, a state member bank may look to part 1 of 
the rules of the Comptroller of the Currency (12 CFR part 1) and 
interpretations thereunder. A state member bank may consult the Board 
for a determination with respect to the application of 12 U.S.C. 24, ] 
7th, with respect to issues not addressed in 12 CFR part 1. The 
provisions of 12 CFR part 1 do not provide authority for a state member 
bank to purchase securities of a type or amount that the bank is not 
authorized to purchase under applicable state law.



Sec. 208.22  Community development and public welfare investments.

    (a) Definitions. For purposes of this section:
    (1) Low- or moderate-income area means:
    (i) One or more census tracts in a Metropolitan Statistical Area 
where the median family income adjusted for family size in each census 
tract is less than 80 percent of the median family income adjusted for 
family size of the Metropolitan Statistical Area; or
    (ii) If not in a Metropolitan Statistical Area, one or more census 
tracts

[[Page 190]]

or block-numbered areas where the median family income adjusted for 
family size in each census tract or block-numbered area is less than 80 
percent of the median family income adjusted for family size of the 
State.
    (2) Low- and moderate-income persons has the same meaning as low- 
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
    (3) Small business means a business that meets the size-eligibility 
standards of 13 CFR 121.802(a)(2).
    (b) Investments not requiring prior Board approval. Notwithstanding 
the provisions of section 5136 of the Revised Statutes (12 U.S.C. 24, ] 
7th) made applicable to member banks by paragraph 20 of section 9 of the 
Federal Reserve Act (12 U.S.C. 335), a member bank may make an 
investment, without prior Board approval, if the following conditions 
are met:
    (1) The investment is in a corporation, limited partnership, or 
other entity, and:
    (i) The Board has determined that an investment in that entity or 
class of entities is a public welfare investment under paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a), or a community 
development investment under Regulation Y (12 CFR 225.25(b)(6)); or
    (ii) The Comptroller of the Currency has determined, by order or 
regulation, that an investment in that entity by a national bank is a 
public welfare investment under section 5136 of the Revised Statutes (12 
U.S.C. 24 (Eleventh)); or
    (iii) The entity is a community development financial institution as 
defined in section 103(5) of the Community Development Banking and 
Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
    (iv) The entity, directly or indirectly, engages solely in or makes 
loans solely for the purposes of one or more of the following community 
development activities:
    (A) Investing in, developing, rehabilitating, managing, selling, or 
renting residential property if a majority of the units will be occupied 
by low- and moderate-income persons, or if the property is a ``qualified 
low-income building'' as defined in section 42(c)(2) of the Internal 
Revenue Code (26 U.S.C. 42(c)(2));
    (B) Investing in, developing, rehabilitating, managing, selling, or 
renting nonresidential real property or other assets located in a low- 
or moderate-income area and targeted towards low- and moderate-income 
persons;
    (C) Investing in one or more small businesses located in a low- or 
moderate-income area to stimulate economic development;
    (D) Investing in, developing, or otherwise assisting job training or 
placement facilities or programs that will be targeted towards low- and 
moderate-income persons;
    (E) Investing in an entity located in a low- or moderate-income area 
if the entity creates long-term employment opportunities, a majority of 
which (based on full-time equivalent positions) will be held by low- and 
moderate-income persons; and
    (F) Providing technical assistance, credit counseling, research, and 
program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development;
    (2) The investment is permitted by state law;
    (3) The investment will not expose the member bank to liability 
beyond the amount of the investment;
    (4) The aggregate of all such investments of the member bank does 
not exceed the sum of five percent of its capital stock and surplus;
    (5) The member bank is well capitalized or adequately capitalized 
under Sec. Sec. 208.43(b) (1) and (2);
    (6) The member bank received a composite CAMELS rating of ``1'' or 
``2'' under the Uniform Financial Institutions Rating System as of its 
most recent examination and an overall rating of ``1'' or ``2'' as of 
its most recent consumer compliance examination; and
    (7) The member bank is not subject to any written agreement, cease-
and-desist order, capital directive, prompt-corrective-action directive, 
or memorandum of understanding issued by the Board or a Federal Reserve 
Bank.
    (c) Notice to Federal Reserve Bank. Not more than 30 days after 
making an investment under paragraph (b) of this

[[Page 191]]

section, the member bank shall advise its Federal Reserve Bank of the 
investment, including the amount of the investment and the identity of 
the entity in which the investment is made.
    (d) Investments requiring Board approval. (1) With prior Board 
approval, a member bank may make public welfare investments under 
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a), 
other than those specified in paragraph (b) of this section.
    (2) Requests for Board approval under this paragraph (d) shall 
include, at a minimum:
    (i) The amount of the proposed investment;
    (ii) A description of the entity in which the investment is to be 
made;
    (iii) An explanation of why the investment is a public welfare 
investment under paragraph 23 of section 9 of the Federal Reserve Act 
(12 U.S.C. 338a);
    (iv) A description of the member bank's potential liability under 
the proposed investment;
    (v) The amount of the member bank's aggregate outstanding public 
welfare investments under paragraph 23 of section 9 of the Federal 
Reserve Act;
    (vi) The amount of the member bank's capital stock and surplus; and
    (vii) If the bank investment is not eligible under paragraph (b) of 
this section, explain the reason or reasons why it is ineligible.
    (3) The Board shall act on a request under this paragraph (d) within 
60 calendar days of receipt of a request that meets the requirements of 
paragraph (d)(2) of this section, unless the Board notifies the 
requesting member bank that a longer time period will be required.
    (e) Divestiture of investments. A member bank shall divest itself of 
an investment made under paragraph (b) or (d) of this section to the 
extent that the investment exceeds the scope of, or ceases to meet, the 
requirements of paragraphs (b)(1) through (b)(4) or paragraph (d) of 
this section. The divestiture shall be made in the manner specified in 
12 CFR 225.140, Regulation Y, for interests acquired by a lending 
subsidiary of a bank holding company or the bank holding company itself 
in satisfaction of a debt previously contracted.



Sec. 208.23  Agricultural loan loss amortization.

    (a) Definitions. For purposes of this section:
    (1) Accepting official means:
    (i) The Reserve Bank in whose district the bank is located; or
    (ii) The Director of the Division of Banking Supervision and 
Regulation in cases in which the Reserve Bank cannot determine that the 
bank qualifies.
    (2) Agriculturally related other property means any property, real 
or personal, that the bank owned on January 1, 1983, and any additional 
property that it acquired prior to January 1, 1992, in connection with a 
qualified agricultural loan. For the purposes of paragraph (d) of this 
section, the value of such property shall include the amount previously 
charged off as a loss.
    (3) Participating bank means an agricultural bank (as defined in 12 
U.S.C. 1823(j)(4)(A)) that, as of January 1, 1992, had a proposal for a 
capital restoration plan accepted by an accepting official and received 
permission from the accepting official, subject to paragraphs (d) and 
(e) of this section, to amortize losses in accordance with paragraphs 
(b) and (c) of this section.
    (4) Qualified agricultural loan means:
    (i) Loans that finance agricultural production or are secured by 
farm land for purposes of Schedule RC-C of the FFIEC Consolidated Report 
of Condition or such other comparable schedule;
    (ii) Loans secured by farm machinery;
    (iii) Other loans that a bank proves to be sufficiently related to 
agriculture for classification as an agricultural loan by the Board; and
    (iv) The remaining unpaid balance of any loans described in 
paragraphs (a)(4) (i), (ii) and (iii) of this section that have been 
charged off since January 1, 1984, and that qualify for deferral under 
this section.
    (b)(1) Provided there is no evidence that the loss resulted from 
fraud or criminal abuse on the part of the bank, the officers, 
directors, or principal shareholders, a participating bank may

[[Page 192]]

amortize in its Reports of Condition and Income:
    (i) Any loss on a qualified agricultural loan that the bank would be 
required to reflect in its financial statements for any period between 
and including 1984 and 1991; or
    (ii) Any loss that the bank would be required to reflect in its 
financial statements for any period between and including 1983 and 1991 
resulting from a reappraisal or sale of agriculturally-related other 
property.
    (2) Amortization under this section shall be computed over a period 
not to exceed seven years on a quarterly straight-line basis commencing 
in the first quarter after the loan was or is charged off so as to be 
fully amortized not later than December 31, 1998.
    (c) Accounting for amortization. Any bank that is permitted to 
amortize losses in accordance with paragraph (b) of this section may 
restate its capital and other relevant accounts and account for future 
authorized deferrals and authorizations in accordance with the 
instructions to the FFIEC Consolidated Reports of Condition and Income. 
Any resulting increase in the capital account shall be included in 
qualifying capital pursuant to appendix A of this part.
    (d) Conditions of participation. In order for a bank to maintain its 
status as a participating bank, it shall:
    (1) Adhere to the approved capital plan and obtain the prior 
approval of the accepting official before making any modifications to 
the plan;
    (2) Maintain accounting records for each asset subject to loss 
deferral under the program that document the amount and timing of the 
deferrals, repayments, and authorizations;
    (3) Maintain the financial condition of the bank so that it does not 
deteriorate to the point where it is no longer a viable, fundamentally 
sound institution;
    (4) Make a reasonable effort, consistent with safe and sound banking 
practices, to maintain in its loan portfolio a percentage of 
agricultural loans, including agriculturally-related other property, not 
less than the percentage of such loans in its loan portfolio on January 
1, 1986; and
    (5) Provide the accepting official, upon request, with any 
information the accepting official deems necessary to monitor the bank's 
amortization, its compliance with the conditions of participation, and 
its continued eligibility.
    (e) Revocation of eligibility for loss amortization. The failure to 
comply with any condition in an acceptance, with the capital restoration 
plan, or with the conditions stated in paragraph (d) of this section, is 
grounds for revocation of acceptance for loss amortization and for an 
administrative action against the bank under 12 U.S.C. 1818(b). In 
addition, acceptance of a bank for loss amortization shall not foreclose 
any administrative action against the bank that the Board may deem 
appropriate.
    (f) Expiration date. The terms of this section will no longer be in 
effect as of January 1, 1999.



Sec. 208.24  Letters of credit and acceptances.

    (a) Standby letters of credit. For the purpose of this section, 
standby letters of credit include every letter of credit (or similar 
arrangement however named or designated) that represents an obligation 
to the beneficiary on the part of the issuer:
    (1) To repay money borrowed by or advanced to or for the account of 
the account party; or
    (2) To make payment on account of any evidence of indebtedness 
undertaken by the account party; or
    (3) To make payment on account of any default by the party procuring 
the issuance of the letter of credit in the performance of an 
obligation.\6\
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    \6\ A standby letter of credit does not include: (1) Commercial 
letters of credit and similar instruments, where the issuing bank 
expects the beneficiary to draw upon the issuer, and which do not 
guaranty payment of a money obligation; or (2) a guaranty or similar 
obligation issued by a foreign branch in accordance with and subject to 
the limitations of 12 CFR part 211 (Regulation K).
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    (b) Ineligible acceptance. An ineligible acceptance is a time draft 
accepted by a bank, which does not meet the requirements for discount 
with a Federal Reserve Bank.

[[Page 193]]

    (c) Bank's lending limits. Standby letters of credit and ineligible 
acceptances count toward member banks' lending limits imposed by state 
law.
    (d) Exceptions. A standby letter of credit or ineligible acceptance 
is not subject to the restrictions set forth in paragraph (c) of this 
section if prior to or at the time of issuance of the credit:
    (1) The issuing bank is paid an amount equal to the bank's maximum 
liability under the standby letter of credit; or
    (2) The party procuring the issuance of a letter of credit or 
ineligible acceptance has set aside sufficient funds in a segregated, 
clearly earmarked deposit account to cover the bank's maximum liability 
under the standby letter of credit or ineligible acceptance.



Sec. 208.25  Loans in areas having special flood hazards.

    (a) Purpose and scope. (1) Purpose. The purpose of this section is 
to implement the requirements of the National Flood Insurance Act of 
1968 and the Flood Disaster Protection Act of 1973, as amended (42 
U.S.C. 4001-4129).
    (2) Scope. This section, except for paragraphs (f) and (h) of this 
section, applies to loans secured by buildings or mobile homes located 
or to be located in areas determined by the Director of the Federal 
Emergency Management Agency to have special flood hazards. Paragraphs 
(f) and (h) of this section apply to loans secured by buildings or 
mobile homes, regardless of location.
    (b) Definitions. For purposes of this section:
    (1) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (2) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (3) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (4) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (5) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (6) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use with 
or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational vehicle. 
For purposes of this section, the term mobile home means a mobile home 
on a permanent foundation. The term mobile home includes a manufactured 
home as that term is used in the National Flood Insurance Program.
    (7) NFIP means the National Flood Insurance Program authorized under 
the Act.
    (8) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (9) Servicer means the person responsible for:
    (i) Receiving any scheduled, periodic payments from a borrower under 
the terms of a loan, including amounts for taxes, insurance premiums, 
and other charges with respect to the property securing the loan; and
    (ii) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (10) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (11) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.
    (c) Requirement to purchase flood insurance where available. (1) In 
general. A member bank shall not make, increase, extend, or renew any 
designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term of 
the loan. The amount of insurance must be at least equal to the

[[Page 194]]

lesser of the outstanding principal balance of the designated loan or 
the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (2) Table funded loans. A member bank that acquires a loan from a 
mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this section.
    (d) Exemptions. The flood insurance requirement prescribed by 
paragraph (c) of this section does not apply with respect to:
    (1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (2) Property securing any loan with an original principal balance of 
$5,000 or less and a repayment term of one year or less.
    (e) Escrow requirement. If a member bank requires the escrow of 
taxes, insurance premiums, fees, or any other charges for a loan secured 
by residential improved real estate or a mobile home that is made, 
increased, extended, or renewed after October 1, 1996, the member bank 
shall also require the escrow of all premiums and fees for any flood 
insurance required under paragraph (c) of this section. The member bank, 
or a servicer acting on its behalf, shall deposit the flood insurance 
premiums on behalf of the borrower in an escrow account. This escrow 
account will be subject to escrow requirements adopted pursuant to 
section 10 of the Real Estate Settlement Procedures Act of 1974 (12 
U.S.C. 2609) (RESPA), which generally limits the amount that may be 
maintained in escrow accounts for certain types of loans and requires 
escrow account statements for those accounts, only if the loan is 
otherwise subject to RESPA. Following receipt of a notice from the 
Director of FEMA or other provider of flood insurance that premiums are 
due, the member bank, or a servicer acting on its behalf, shall pay the 
amount owed to the insurance provider from the escrow account by the 
date when such premiums are due.
    (f) Required use of standard flood hazard determination form. (1) 
Use of form. A member bank shall use the standard flood hazard 
determination form developed by the Director of FEMA when determining 
whether the building or mobile home offered as collateral security for a 
loan is or will be located in a special flood hazard area in which flood 
insurance is available under the Act. The standard flood hazard 
determination form may be used in a printed, computerized, or electronic 
manner. A member bank may obtain the standard flood hazard determination 
form by written request to FEMA, P.O. Box 2012, Jessup, MD 20794-2012.
    (2) Retention of form. A member bank shall retain a copy of the 
completed standard flood hazard determination form, in either hard copy 
or electronic form, for the period of time the bank owns the loan.
    (g) Forced placement of flood insurance. If a member bank, or a 
servicer acting on behalf of the bank, determines at any time during the 
term of a designated loan that the building or mobile home and any 
personal property securing the designated loan is not covered by flood 
insurance or is covered by flood insurance in an amount less than the 
amount required under paragraph (c) of this section, then the bank or 
its servicer shall notify the borrower that the borrower should obtain 
flood insurance, at the borrower's expense, in an amount at least equal 
to the amount required under paragraph (c) of this section, for the 
remaining term of the loan. If the borrower fails to obtain flood 
insurance within 45 days after notification, then the member bank or its 
servicer shall purchase insurance on the borrower's behalf. The member 
bank or its servicer may charge the borrower for the cost of premiums 
and fees incurred in purchasing the insurance.
    (h) Determination fees. (1) General. Notwithstanding any Federal or 
State law other than the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4001-4129), any member bank, or a servicer acting on 
behalf of the bank, may charge a reasonable fee for determining whether 
the building or mobile

[[Page 195]]

home securing the loan is located or will be located in a special flood 
hazard area. A determination fee may also include, but is not limited 
to, a fee for life-of-loan monitoring.
    (2) Borrower fee. The determination fee authorized by paragraph 
(h)(1) of this section may be charged to the borrower if the 
determination:
    (i) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (ii) Reflects the Director of FEMA's revision or updating of flood 
plain areas or flood-risk zones;
    (iii) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (A) Affects the area in which the building or mobile home securing 
the loan is located; or
    (B) By determination of the Director of FEMA, may reasonably require 
a determination whether the building or mobile home securing the loan is 
located in a special flood hazard area;
    (iv) Results in the purchase of flood insurance coverage by the 
lender or its servicer on behalf of the borrower under paragraph (g) of 
this section.
    (3) Purchaser or transferee fee. The determination fee authorized by 
paragraph (h)(1) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.
    (i) Notice of special flood hazards and availability of Federal 
disaster relief assistance. When a member bank makes, increases, 
extends, or renews a loan secured by a building or a mobile home located 
or to be located in a special flood hazard area, the bank shall mail or 
deliver a written notice to the borrower and to the servicer in all 
cases whether or not flood insurance is available under the Act for the 
collateral securing the loan.
    (1) Contents of notice. The written notice must include the 
following information:
    (i) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (ii) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4012a(b));
    (iii) A statement, where applicable, that flood insurance coverage 
is available under the NFIP and may also be available from private 
insurers; and
    (iv) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (2) Timing of notice. The member bank shall provide the notice 
required by paragraph (i)(1) of this section to the borrower within a 
reasonable time before the completion of the transaction, and to the 
servicer as promptly as practicable after the bank provides notice to 
the borrower and in any event no later than the time the bank provides 
other similar notices to the servicer concerning hazard insurance and 
taxes. Notice to the servicer may be made electronically or may take the 
form of a copy of the notice to the borrower.
    (3) Record of receipt. The member bank shall retain a record of the 
receipt of the notices by the borrower and the servicer for the period 
of time the bank owns the loan.
    (4) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (i)(1) of this section, a member bank 
may obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The member bank shall retain a record of the 
written assurance from the seller or lessor for the period of time the 
bank owns the loan.
    (5) Use of prescribed form of notice. A member bank will be 
considered to be in compliance with the requirement for notice to the 
borrower of this paragraph (i) by providing written notice to the 
borrower containing the language presented in appendix A of this section 
within a reasonable time before the completion of the transaction. The 
notice presented in appendix A of this section satisfies the borrower 
notice requirements of the Act.
    (j) Notice of servicer's identity. (1) Notice requirement. When a 
member bank makes, increases, extends, renews,

[[Page 196]]

sells, or transfers a loan secured by a building or mobile home located 
or to be located in a special flood hazard area, the bank shall notify 
the Director of FEMA (or the Director's designee) in writing of the 
identity of the servicer of the loan. The Director of FEMA has 
designated the insurance provider to receive the member bank's notice of 
the servicer's identity. This notice may be provided electronically if 
electronic transmission is satisfactory to the Director of FEMA's 
designee.
    (2) Transfer of servicing rights. The member bank shall notify the 
Director of FEMA (or the Director's designee) of any change in the 
servicer of a loan described in paragraph (j)(1) of this section within 
60 days after the effective date of the change. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (j)(1) of this section, the duty to provide 
notice under this paragraph (j)(2) shall transfer to the transferee 
servicer.

            Appendix A to Sec. 208.25 Sample Form of Notice

  Notice of Special Flood Hazards and Availability of Federal Disaster 
                            Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area using 
FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary Map for the 
following community: --------------------. This area has a one percent 
(1%) chance of a flood equal to or exceeding the base flood elevation (a 
100-year flood) in any given year. During the life of a 30-year mortgage 
loan, the risk of a 100-year flood in a special flood hazard area is 26 
percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ------ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have applied 
for if you do not purchase flood insurance. The flood insurance must be 
maintained for the life of the loan. If you fail to purchase or renew 
flood insurance on the property, Federal law authorizes and requires us 
to purchase the flood insurance for you at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy either 
directly through the NFIP or through an insurance company that 
participates in the NFIP. Flood insurance also may be available from 
private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must 
cover the lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of property 
under the NFIP.
    Flood insurance coverage under the NFIP is limited to the overall 
value of the property securing the loan minus the value of the land on 
which the property is located.
     Federal disaster relief assistance (usually in 
the form of a low-interest loan) may be available for damages incurred 
in excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ------Flood insurance coverage under the NFIP is not available for 
the property securing the loan because the community in which the 
property is located does not participate in the NFIP. In addition, if 
the non-participating community has been identified for at least one 
year as containing a special flood hazard area, properties located in 
the community will not be eligible for Federal disaster relief 
assistance in the event of a Federally declared flood disaster.

[Reg. H, 63 FR 37641, July 13, 1998, as amended at 64 FR 71274, Dec. 21, 
1999]



       Subpart C_Bank Securities and Securities-Related Activities

    Source: 63 FR 37646, July 13, 1998, unless otherwise noted.



Sec. 208.30  Authority, purpose, and scope.

    (a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart 
C) is issued by the Board of Governors of the Federal Reserve System 
under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the FDI 
Act (12 U.S.C. 1818, 1831p-1(a)(2)); and sections 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78o-5,

[[Page 197]]

78q, 78q-1, and 78w of the Securities Exchange Act of 1934 (15 U.S.C. 
78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, 78w).
    (b) Purpose and scope. This subpart C describes the requirements 
imposed upon member banks acting as transfer agents, registered clearing 
agencies, or sellers of securities under the Securities Exchange Act of 
1934. This subpart C also describes the reporting requirements imposed 
on member banks whose securities are subject to registration under the 
Securities Exchange Act of 1934.



Sec. 208.31  State member banks as transfer agents.

    (a) The rules adopted by the Securities and Exchange Commission 
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-l) prescribing procedures for registration of transfer agents 
for which the SEC is the appropriate regulatory agency (17 CFR 
240.17Ac2-1) apply to member bank transfer agents. References to the 
``Commission'' are deemed to refer to the Board.
    (b) The rules adopted by the SEC pursuant to section 17A prescribing 
operational and reporting requirements for transfer agents (17 CFR 
240.17Ac2-2 and 240.17Ad-1 through 240.17Ad-16) apply to member bank 
transfer agents.



Sec. 208.32  Notice of disciplinary sanctions imposed by registered 
clearing agency.

    (a) Notice requirement. Any member bank or any of its subsidiaries 
that is a registered clearing agency pursuant to section 17A(b) of the 
Securities Exchange Act of 1934 (the Act), and that:
    (1) Imposes any final disciplinary sanction on any participant 
therein;
    (2) Denies participation to any applicant; or
    (3) Prohibits or limits any person in respect to access to services 
offered by the clearing agency, shall file with the Board (and the 
appropriate regulatory agency, if other than the Board, for a 
participant or applicant) notice thereof in the manner prescribed in 
this section.
    (b) Notice of final disciplinary actions. (1) Any registered 
clearing agency for which the Board is the appropriate regulatory agency 
that takes any final disciplinary action with respect to any participant 
shall promptly file a notice thereof with the Board in accordance with 
paragraph (c) of this section. For the purposes of this paragraph (b), 
final disciplinary action means the imposition of any disciplinary 
sanction pursuant to section 17A(b)(3)(G) of the Act, or other action of 
a registered clearing agency which, after notice and opportunity for 
hearing, results in final disposition of charges of:
    (i) One or more violations of the rules of the registered clearing 
agency; or
    (ii) Acts or practices constituting a statutory disqualification of 
a type defined in paragraph (iv) or (v) (except prior convictions) of 
section 3(a)(39) of the Act.
    (2) However, if a registered clearing agency fee schedule specifies 
certain charges for errors made by its participants in giving 
instructions to the registered clearing agency which are de minimis on a 
per error basis, and whose purpose is, in part, to provide revenues to 
the clearing agency to compensate it for effort expended in beginning to 
process an erroneous instruction, such error charges shall not be 
considered a final disciplinary action for purposes of this paragraph 
(b).
    (c) Contents of final disciplinary action notice. Any notice filed 
pursuant to paragraph (b) of this section shall consist of the 
following, as appropriate:
    (1) The name of the respondent and the respondent's last known 
address, as reflected on the records of the clearing agency, and the 
name of the person, committee, or other organizational unit that brought 
the charges. However, identifying information as to any respondent found 
not to have violated a provision covered by a charge may be deleted 
insofar as the notice reports the disposition of that charge and, prior 
to the filing of the notice, the respondent does not request that 
identifying information be included in the notice;
    (2) A statement describing the investigative or other origin of the 
action;
    (3) As charged in the proceeding, the specific provision or 
provisions of the rules of the clearing agency violated by the 
respondent, or the statutory disqualification referred to in paragraph

[[Page 198]]

(b)(2) of this section, and a statement describing the answer of the 
respondent to the charges;
    (4) A statement setting forth findings of fact with respect to any 
act or practice in which the respondent was charged with having engaged 
in or omitted; the conclusion of the clearing agency as to whether the 
respondent violated any rule or was subject to a statutory 
disqualification as charged; and a statement of the clearing agency in 
support of its resolution of the principal issues raised in the 
proceedings;
    (5) A statement describing any sanction imposed, the reasons 
therefor, and the date upon which the sanction became or will become 
effective; and
    (6) Such other matters as the clearing agency may deem relevant.
    (d) Notice of final denial, prohibition, termination or limitation 
based on qualification or administrative rules. (1) Any registered 
clearing agency, for which the Board is the appropriate regulatory 
agency, that takes any final action that denies or conditions the 
participation of any person, or prohibits or limits access, to services 
offered by the clearing agency, shall promptly file notice thereof with 
the Board (and the appropriate regulatory agency, if other than the 
Board, for the affected person) in accordance with paragraph (e) of this 
section; but such action shall not be considered a final disciplinary 
action for purposes of paragraph (b) of this section where the action is 
based on an alleged failure of such person to:
    (i) Comply with the qualification standards prescribed by the rules 
of the registered clearing agency pursuant to section 17A(b)(4)(B) of 
the Act; or
    (ii) Comply with any administrative requirements of the registered 
clearing agency (including failure to pay entry or other dues or fees, 
or to file prescribed forms or reports) not involving charges of 
violations that may lead to a disciplinary sanction.
    (2) However, no such action shall be considered final pursuant to 
this paragraph (d) that results merely from a notice of such failure to 
comply to the person affected, if such person has not sought an 
adjudication of the matter, including a hearing, or otherwise exhausted 
the administrative remedies within the registered clearing agency with 
respect to such a matter.
    (e) Contents of notice required by paragraph (d) of this section. 
Any notice filed pursuant to paragraph (d) of this section shall consist 
of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) The specific grounds upon which the action of the clearing 
agency was based, and a statement describing the answer of the person 
concerned;
    (3) A statement setting forth findings of fact and conclusions as to 
each alleged failure of the person to comply with qualification 
standards or administrative obligations, and a statement of the clearing 
agency in support of its resolution of the principal issues raised in 
the proceeding;
    (4) The date upon which such action became or will become effective; 
and
    (5) Such other matters as the clearing agency deems relevant.
    (f) Notice of final action based on prior adjudicated statutory 
disqualifications. Any registered clearing agency for which the Board is 
the appropriate regulatory agency that takes any final action shall 
promptly file notice thereof with the Board (and the appropriate 
regulatory agency, if other than the Board, for the affected person) in 
accordance with paragraph (g) of this section, where the final action:
    (1) Denies or conditions participation to any person, or prohibits 
or limits access to services offered by the clearing agency; and
    (2) Is based upon a statutory disqualification of a type defined in 
paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of 
a prior conviction, as described in subparagraph (E) of section 3(a)(39) 
of the Act. However, no such action shall be considered final pursuant 
to this paragraph (f) that results merely from a notice of such 
disqualification to the person affected, if such person has not sought 
an adjudication of the matter, including a hearing, or otherwise 
exhausted the administrative remedies within the clearing agency with 
respect to such a matter.

[[Page 199]]

    (g) Contents of notice required by paragraph (f) of this section. 
Any notice filed pursuant to paragraph (f) of this section shall consist 
of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) A statement setting forth the principal issues raised, the 
answer of any person concerned, and a statement of the clearing agency 
in support of its resolution of the principal issues raised in the 
proceeding;
    (3) Any description furnished by or on behalf of the person 
concerned of the activities engaged in by the person since the 
adjudication upon which the disqualification is based;
    (4) A copy of the order or decision of the court, appropriate 
regulatory agency, or self-regulatory organization that adjudicated the 
matter giving rise to the statutory disqualification;
    (5) The nature of the action taken and the date upon which such 
action is to be made effective; and
    (6) Such other matters as the clearing agency deems relevant.
    (h) Notice of summary suspension of participation. Any registered 
clearing agency for which the Board is the appropriate regulatory agency 
that summarily suspends or closes the accounts of a participant pursuant 
to the provisions of section 17A(b)(5)(C) of the Act shall, within one 
business day after such action becomes effective, file notice thereof 
with the Board and the appropriate regulatory agency for the 
participant, if other than the Board, of such action in accordance with 
paragraph (i) of this section.
    (i) Contents of notice of summary suspension. Any notice pursuant to 
paragraph (h) of this section shall contain at least the following 
information, as appropriate:
    (1) The name of the participant concerned and the participant's last 
known address, as reflected in the records of the clearing agency;
    (2) The date upon which the summary action became or will become 
effective;
    (3) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of 
the self-regulatory organization, if available to the clearing agency;
    (4) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any 
delivery of funds or securities to the clearing agency;
    (5) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or 
operating difficulty of the participant based upon which the clearing 
agency determined that the suspension and closing of accounts was 
necessary for the protection of the clearing agency, its participants, 
creditors, or investors;
    (6) The nature and effective date of the suspension; and
    (7) Such other matters as the clearing agency deems relevant.



Sec. 208.33  Application for stay or review of disciplinary sanctions 
imposed by registered clearing agency.

    (a) Stays. The rules adopted by the Securities and Exchange 
Commission (SEC) pursuant to section 19 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the 
SEC is the appropriate regulatory agency for stays of disciplinary 
sanctions or summary suspensions imposed by registered clearing agencies 
(17 CFR 240.19d-2) apply to applications by member banks. References to 
the ``Commission'' are deemed to refer to the Board.
    (b) Reviews. The regulations adopted by the Securities and Exchange 
Commission pursuant to section 19 of the Securities and Exchange Act of 
1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC 
is the appropriate regulatory agency for reviews of final disciplinary 
sanctions, denials of participation, or prohibitions or limitations of 
access to services imposed by registered clearing agencies (17 CFR 
240.19d-3(a)-(f)) apply to applications by member banks. References to 
the ``Commission'' are deemed to refer to the Board. The Board's Uniform 
Rules of Practice and Procedure (12 CFR part 263) apply to review 
proceedings under this Sec. 208.33 to the extent not inconsistent with 
this Sec. 208.33.

[[Page 200]]



Sec. 208.34  Recordkeeping and confirmation of certain securities 
transactions effected by State member banks.

    (a) Exceptions and safe and sound operations. (1) A State member 
bank may be excepted from one or more of the requirements of this 
section if it meets one of the following conditions of paragraphs 
(a)(1)(i) through (a)(1)(iv) of this section:
    (i) De minimis transactions. The requirements of paragraphs (c)(2) 
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section 
shall not apply to banks having an average of less than 200 securities 
transactions per year for customers over the prior three calendar year 
period, exclusive of transactions in government securities;
    (ii) Government securities. The recordkeeping requirements of 
paragraph (c) of this section shall not apply to banks effecting fewer 
than 500 government securities brokerage transactions per year; provided 
that this exception shall not apply to government securities 
transactions by a State member bank that has filed a written notice, or 
is required to file notice, with the Federal Reserve Board that it acts 
as a government securities broker or a government securities dealer;
    (iii) Municipal securities. The municipal securities activities of a 
State member bank that are subject to regulations promulgated by the 
Municipal Securities Rulemaking Board shall not be subject to the 
requirements of this section; and
    (iv) Foreign branches. The requirements of this section shall not 
apply to the activities of foreign branches of a State member bank.
    (2) Every State member bank qualifying for an exemption under 
paragraph (a)(1) of this section that conducts securities transactions 
for customers shall, to ensure safe and sound operations, maintain 
effective systems of records and controls regarding its customer 
securities transactions that clearly and accurately reflect appropriate 
information and provide an adequate basis for an audit of the 
information.
    (b) Definitions. For purposes of this section:
    (1) Asset-backed security shall mean a security that is serviced 
primarily by the cash flows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms convert 
into cash within a finite time period plus any rights or other assets 
designed to assure the servicing or timely distribution of proceeds to 
the security holders.
    (2) Collective investment fund shall mean funds held by a State 
member bank as fiduciary and, consistent with local law, invested 
collectively as follows:
    (i) In a common trust fund maintained by such bank exclusively for 
the collective investment and reinvestment of monies contributed thereto 
by the bank in its capacity as trustee, executor, administrator, 
guardian, or custodian under the Uniform Gifts to Minors Act; or
    (ii) In a fund consisting solely of assets of retirement, pension, 
profit sharing, stock bonus or similar trusts which are exempt from 
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
    (3) Completion of the transaction effected by or through a state 
member bank shall mean:
    (i) For purchase transactions, the time when the customer pays the 
bank any part of the purchase price (or the time when the bank makes the 
book-entry for any part of the purchase price if applicable); however, 
if the customer pays for the security prior to the time payment is 
requested or becomes due, then the transaction shall be completed when 
the bank transfers the security into the account of the customer; and
    (ii) For sale transactions, the time when the bank transfers the 
security out of the account of the customer or, if the security is not 
in the bank's custody, then the time when the security is delivered to 
the bank; however, if the customer delivers the security to the bank 
prior to the time delivery is requested or becomes due then the 
transaction shall be completed when the banks makes payment into the 
account of the customer.
    (4) Crossing of buy and sell orders shall mean a security 
transaction in which

[[Page 201]]

the same bank acts as agent for both the buyer and the seller.
    (5) Customer shall mean any person or account, including any agency, 
trust, estate, guardianship, or other fiduciary account, for which a 
State member bank effects or participates in effecting the purchase or 
sale of securities, but shall not include a broker, dealer, bank acting 
as a broker or dealer, municipal securities broker or dealer, or issuer 
of the securities which are the subject of the transactions.
    (6) Debt security as used in paragraph (c) of this section shall 
mean any security, such as a bond, debenture, note or any other similar 
instrument which evidences a liability of the issuer (including any 
security of this type that is convertible into stock or similar 
security) and fractional or participation interests in one or more of 
any of the foregoing; provided, however, that securities issued by an 
investment company registered under the Investment Company Act of 1940, 
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
    (7) Government security shall mean:
    (i) A security that is a direct obligation of, or obligation 
guaranteed as to principal and interest by, the United States;
    (ii) A security that is issued or guaranteed by a corporation in 
which the United States has a direct or indirect interest and which is 
designated by the Secretary of the Treasury for exemption as necessary 
or appropriate in the public interest or for the protection of 
investors;
    (iii) A security issued or guaranteed as to principal and interest 
by any corporation whose securities are designated, by statute 
specifically naming the corporation, to constitute exempt securities 
within the meaning of the laws administered by the Securities and 
Exchange Commission; or
    (iv) Any put, call, straddle, option, or privilege on a security as 
described in paragraphs (b)(7) (i), (ii), or (iii) of this section other 
than a put, call, straddle, option, or privilege that is traded on one 
or more national securities exchanges, or for which quotations are 
disseminated though an automated quotation system operated by a 
registered securities association.
    (8) Investment discretion with respect to an account shall mean if 
the State member bank, directly or indirectly, is authorized to 
determine what securities or other property shall be purchased or sold 
by or for the account, or makes decisions as to what securities or other 
property shall be purchased or sold by or for the account even though 
some other person may have responsibility for such investment decisions.
    (9) Municipal security shall mean a security which is a direct 
obligation of, or obligation guaranteed as to principal or interest by, 
a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States, or any 
security which is an industrial development bond (as defined in 26 
U.S.C. 103(c)(2) the interest on which is excludable from gross income 
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph (4) 
or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) and 
(7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 U.S.C. 
103(c) does not apply to such security.
    (10) Periodic plan shall mean:
    (i) A written authorization for a State member bank to act as agent 
to purchase or sell for a customer a specific security or securities, in 
a specific amount (calculated in security units or dollars) or to the 
extent of dividends and funds available, at specific time intervals, and 
setting forth the commission or charges to be paid by the customer or 
the manner of calculating them (including dividend reinvestment plans, 
automatic investment plans, and employee stock purchase plans); or
    (ii) Any prearranged, automatic transfer or sweep of funds from a 
deposit account to purchase a security, or any prearranged, automatic 
redemption or sale of a security with the funds being transferred into a 
deposit account (including cash management sweep services).
    (11) Security shall mean:
    (i) Any note, stock, treasury stock, bond, debenture, certificate of 
interest or participation in any profit-sharing agreement or in any oil, 
gas, or other mineral royalty or lease, any collateral-trust 
certificate, preorganization

[[Page 202]]

certificate or subscription, transferable share, investment contract, 
voting-trust certificate, for a security, any put, call, straddle, 
option, or privilege on any security, or group or index of securities 
(including any interest therein or based on the value thereof), any 
instrument commonly known as a ``security''; or any certificate of 
interest or participation in, temporary or interim certificate for, 
receipt for, or warrant or right to subscribe to or purchase, any of the 
foregoing.
    (ii) But does not include a deposit or share account in a federally 
or state insured depository institution, a loan participation, a letter 
of credit or other form of bank indebtedness incurred in the ordinary 
course of business, currency, any note, draft, bill of exchange, or 
bankers acceptance which has a maturity at the time of issuance of not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof the maturity of which is likewise limited, units of a collective 
investment fund, interests in a variable amount (master) note of a 
borrower of prime credit, or U.S. Savings Bonds.
    (c) Recordkeeping. Except as provided in paragraph (a) of this 
section, every State member bank effecting securities transactions for 
customers, including transactions in government securities, and 
municipal securities transactions by banks not subject to registration 
as municipal securities dealers, shall maintain the following records 
with respect to such transactions for at least three years. Nothing 
contained in this section shall require a bank to maintain the records 
required by this paragraph in any given manner, provided that the 
information required to be shown is clearly and accurately reflected and 
provides an adequate basis for the audit of such information. Records 
may be maintained in hard copy, automated, or electronic form provided 
the records are easily retrievable, readily available for inspection, 
and capable of being reproduced in a hard copy. A bank may contract with 
third party service providers, including broker/dealers, to maintain 
records required under this part.
    (1) Chronological records of original entry containing an itemized 
daily record of all purchases and sales of securities. The records of 
original entry shall show the account or customer for which each such 
transaction was effected, the description of the securities, the unit 
and aggregate purchase or sale price (if any), the trade date and the 
name or other designation of the broker/dealer or other person from whom 
purchased or to whom sold;
    (2) Account records for each customer which shall reflect all 
purchases and sales of securities, all receipts and deliveries of 
securities, and all receipts and disbursements of cash with respect to 
transactions in securities for such account and all other debits and 
credits pertaining to transactions in securities;
    (3) A separate memorandum (order ticket) of each order to purchase 
or sell securities (whether executed or canceled), which shall include:
    (i) The account(s) for which the transaction was effected;
    (ii) Whether the transaction was a market order, limit order, or 
subject to special instructions;
    (iii) The time the order was received by the trader or other bank 
employee responsible for effecting the transaction;
    (iv) The time the order was placed with the broker/dealer, or if 
there was no broker/dealer, the time the order was executed or canceled;
    (v) The price at which the order was executed; and
    (vi) The broker/dealer utilized;
    (4) A record of all broker/dealers selected by the bank to effect 
securities transactions and the amount of commissions paid or allocated 
to each such broker during the calendar year; and
    (5) A copy of the written notification required by paragraphs (d) 
and (e) of this section.
    (d) Content and time of notification. Every State member bank 
effecting a securities transaction for a customer shall give or send to 
such customer either of the following types of notifications at or 
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within one business day from the bank's receipt 
of the broker/dealer's confirmation:
    (1) A copy of the confirmation of a broker/dealer relating to the 
securities

[[Page 203]]

transaction; and if the bank is to receive remuneration from the 
customer or any other source in connection with the transaction, and the 
remuneration is not determined pursuant to a prior written agreement 
between the bank and the customer, a statement of the source and the 
amount of any remuneration to be received; or
    (2) A written notification disclosing:
    (i) The name of the bank;
    (ii) The name of the customer;
    (iii) Whether the bank is acting as agent for such customer, as 
agent for both such customer and some other person, as principal for its 
own account, or in any other capacity;
    (iv) The date of execution and a statement that the time of 
execution will be furnished within a reasonable time upon written 
request of such customer specifying the identity, price and number of 
shares or units (or principal amount in the case of debt securities) of 
such security purchased or sold by such customer;
    (v) The amount of any remuneration received or to be received, 
directly or indirectly, by any broker/dealer from such customer in 
connection with the transaction;
    (vi) The amount of any remuneration received or to be received by 
the bank from the customer and the source and amount of any other 
remuneration to be received by the bank in connection with the 
transaction, unless remuneration is determined pursuant to a written 
agreement between the bank and the customer, provided, however, in the 
case of Government securities and municipal securities, this paragraph 
(d)(2)(vi) shall apply only with respect to remuneration received by the 
bank in an agency transaction. If the bank elects not to disclose the 
source and amount of remuneration it has or will receive from a party 
other than the customer pursuant to this paragraph (d)(2)(vi), the 
written notification must disclose whether the bank has received or will 
receive remuneration from a party other than the customer, and that the 
bank will furnish within a reasonable time the source and amount of this 
remuneration upon written request of the customer. This election is not 
available, however, if, with respect to a purchase, the bank was 
participating in a distribution of that security; or with respect to a 
sale, the bank was participating in a tender offer for that security;
    (vii) The name of the broker/dealer utilized; or, where there is no 
broker/dealer, the name of the person from whom the security was 
purchased or to whom it was sold, or the fact that such information will 
be furnished within a reasonable time upon written request;
    (viii) In the case of a transaction in a debt security subject to 
redemption before maturity, a statement to the effect that the debt 
security may be redeemed in whole or in part before maturity, that the 
redemption could affect the yield represented and that additional 
information is available on request;
    (ix) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (A) The dollar price at which the transaction was effected;
    (B) The yield to maturity calculated from the dollar price; 
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to 
a transaction in a debt security that either has a maturity date that 
may be extended by the issuer with a variable interest payable thereon, 
or is an asset-backed security that represents an interest in or is 
secured by a pool of receivables or other financial assets that are 
subject to continuous prepayment;
    (x) In the case of a transaction in a debt security effected on the 
basis of yield:
    (A) The yield at which the transaction was effected, including the 
percentage amount and its characterization (e.g., current yield, yield 
to maturity, or yield to call) and if effected at yield to call, the 
type of call, the call date, and the call price; and
    (B) The dollar price calculated from the yield at which the 
transaction was effected; and
    (C) If effected on a basis other than yield to maturity and the 
yield to maturity is lower than the represented yield, the yield to 
maturity as well as the represented yield; provided, however, that this 
paragraph (c)(2)(x)(C) shall not apply to a transaction in a debt 
security that either has a maturity date that may be extended by the

[[Page 204]]

issuer with a variable interest rate payable thereon, or is an asset-
backed security that represents an interest in or is secured by a pool 
of receivables or other financial assets that are subject to continuous 
prepayment;
    (xi) In the case of a transaction in a debt security that is an 
asset-backed security which represents an interest in or is secured by a 
pool of receivables or other financial assets that are subject 
continuously to prepayment, a statement indicating that the actual yield 
of such asset-backed security may vary according to the rate at which 
the underlying receivables or other financial assets are prepaid and a 
statement of the fact that information concerning the factors that 
affect yield (including at a minimum, the estimated yield, weighted 
average life, and the prepayment assumptions underlying yield) will be 
furnished upon written request of such customer; and
    (xii) In the case of a transaction in a debt security, other than a 
government security, that the security is unrated by a nationally 
recognized statistical rating organization, if that is the case.
    (e) Notification by agreement; alternative forms and times of 
notification. A State member bank may elect to use the following 
alternative procedures if a transaction is effected for:
    (1) Accounts (except periodic plans) where the bank does not 
exercise investment discretion and the bank and the customer agree in 
writing to a different arrangement as to the time and content of the 
notification; provided, however, that such agreement makes clear the 
customer's right to receive the written notification pursuant to 
paragraph (c) of this section at no additional cost to the customer;
    (2) Accounts (except collective investment funds) where the bank 
exercises investment discretion in other than an agency capacity, in 
which instance the bank shall, upon request of the person having the 
power to terminate the account or, if there is no such person, upon the 
request of any person holding a vested beneficial interest in such 
account, give or send to such person the written notification within a 
reasonable time. The bank may charge such person a reasonable fee for 
providing this information;
    (3) Accounts, where the bank exercises investment discretion in an 
agency capacity, in which instance:
    (i) The bank shall give or send to each customer not less frequently 
than once every three months an itemized statement which shall specify 
the funds and securities in the custody or possession of the bank at the 
end of such period and all debits, credits and transactions in the 
customer's accounts during such period; and
    (ii) If requested by the customer, the bank shall give or send to 
each customer within a reasonable time the written notification 
described in paragraph (c) of this section. The bank may charge a 
reasonable fee for providing the information described in paragraph (c) 
of this section;
    (4) A collective investment fund, in which instance the bank shall 
at least annually furnish a copy of a financial report of the fund, or 
provide notice that a copy of such report is available and will be 
furnished upon request, to each person to whom a regular periodic 
accounting would ordinarily be rendered with respect to each 
participating account. This report shall be based upon an audit made by 
independent public accountants or internal auditors responsible only to 
the board of directors of the bank;
    (5) A periodic plan, in which instance the bank:
    (i) Shall (except for a cash management sweep service) give or send 
to the customer a written statement not less than every three months if 
there are no securities transactions in the account, showing the 
customer's funds and securities in the custody or possession of the 
bank; all service charges and commissions paid by the customer in 
connection with the transaction; and all other debits and credits of the 
customer's account involved in the transaction; or
    (ii) Shall for a cash management sweep service or similar periodic 
plan as defined in Sec. 208.34(b)(10)(ii) give or send its customer a 
written statement in the same form as prescribed in paragraph (e)(3) 
above for each month in which a purchase or sale of a security takes 
place in a deposit account and not less than once every three months if 
there are no securities transactions

[[Page 205]]

in the account subject to any other applicable laws or regulations;
    (6) Upon the written request of the customer the bank shall furnish 
the information described in paragraph (d) of this section, except that 
any such information relating to remuneration paid in connection with 
the transaction need not be provided to the customer when paid by a 
source other than the customer. The bank may charge a reasonable fee for 
providing the information described in paragraph (d) of this section.
    (f) Settlement of securities transactions. All contracts for the 
purchase or sale of a security shall provide for completion of the 
transaction within the number of business days in the standard 
settlement cycle for the security followed by registered broker dealers 
in the United States unless otherwise agreed to by the parties at the 
time of the transaction.
    (g) Securities trading policies and procedures. Every State member 
bank effecting securities transactions for customers shall establish 
written policies and procedures providing:
    (1) Assignment of responsibility for supervision of all officers or 
employees who:
    (i) Transmit orders to or place orders with broker/dealers;
    (ii) Execute transactions in securities for customers; or
    (iii) Process orders for notification and/or settlement purposes, or 
perform other back office functions with respect to securities 
transactions effected for customers; provided that procedures 
established under this paragraph (g)(1)(iii) should provide for 
supervision and reporting lines that are separate from supervision of 
personnel under paragraphs (g)(1)(i) and (g)(1)(ii) of this section;
    (2) For the fair and equitable allocation of securities and prices 
to accounts when orders for the same security are received at 
approximately the same time and are placed for execution either 
individually or in combination;
    (3) Where applicable and where permissible under local law, for the 
crossing of buy and sell orders on a fair and equitable basis to the 
parties to the transaction; and
    (4) That bank officers and employees who make investment 
recommendations or decisions for the accounts of customers, who 
participate in the determination of such recommendations or decisions, 
or who, in connection with their duties, obtain information concerning 
which securities are being purchased or sold or recommended for such 
action, must report to the bank, within ten days after the end of the 
calendar quarter, all transactions in securities made by them or on 
their behalf, either at the bank or elsewhere in which they have a 
beneficial interest. The report shall identify the securities purchased 
or sold and indicate the dates of the transactions and whether the 
transactions were purchases or sales. Excluded from this requirement are 
transactions for the benefit of the officer or employee over which the 
officer or employee has no direct or indirect influence or control, 
transactions in mutual fund shares, and all transactions involving in 
the aggregate $10,000 or less during the calendar quarter. For purposes 
of this paragraph (g)(4), the term securities does not include 
government securities.



Sec. 208.35  Qualification requirements for transactions in certain 
securities. [Reserved]



Sec. 208.36  Reporting requirements for State member banks subject to 
the Securities Exchange Act of 1934.

    (a) Filing, disclosure and other requirements--(1) General. Except 
as otherwise provided in this section, a member bank whose securities 
are subject to registration pursuant to section 12(b) or section 12(g) 
of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l(b) 
and (g)) shall comply with the rules, regulations and forms adopted by 
the Securities and Exchange Commission (Commission) pursuant to--
    (i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of 
the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and 
78p); and
    (ii) Sections 302, 303, 304, 306, 401(b), 404, 406 and 407 of the 
Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243, 
7244, 7261, 7262, 7264 and 7265).

[[Page 206]]

    (2) References to the Commission. Any references to the ``Securities 
and Exchange Commission'' or the ``Commission'' in the rules, 
regulations and forms described in paragraph (a)(1) of this section 
shall with respect to securities issued by member banks be deemed to 
refer to the Board unless the context otherwise requires.
    (b) Elections permitted for member banks with total assets of $150 
million or less. (1) Notwithstanding paragraph (a) of this section or 
the rules and regulations promulgated by the Commission pursuant to the 
1934 Act a member bank that has total assets of $150 million or less as 
of the end of its most recent fiscal year, and no foreign offices, may 
elect to substitute for the financial statements required by the 
Commission's Form 10-Q, the balance sheet and income statement from the 
quarterly report of condition required to be filed by the bank with the 
Board under section 9 of the Federal Reserve Act (12 U.S.C. 324) 
(Federal Financial Institutions Examination Council Form 033 or 034).
    (2) A member bank qualifying for and electing to file financial 
statements from its quarterly report of condition pursuant to paragraph 
(b)(1) of this section in its form 10-Q shall include earnings per share 
or net loss per share data prepared in accordance with GAAP and disclose 
any material contingencies, as required by Article 10 of the 
Commission's Regulation S-X (17 CFR 210.10-01), in the Management's 
Discussion and Analysis of Financial Condition and Results of Operations 
section of Form 10-Q.
    (c) Required filings. (1) Place and timing of filing. All papers 
required to be filed with the Board, pursuant to the 1934 Act or 
regulations thereunder, shall be submitted to the Division of Banking 
Supervision and Regulation, Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. 
Material may be filed by delivery to the Board, through the mails, or 
otherwise. The date on which papers are actually received by the Board 
shall be the date of filing thereof if all of the requirements with 
respect to the filing have been complied with.
    (2) Filing fees. No filing fees specified by the Commission's rules 
shall be paid to the Board.
    (3) Public inspection. Copies of the registration statement, 
definitive proxy solicitation materials, reports, and annual reports to 
shareholders required by this section (exclusive of exhibits) shall be 
available for public inspection at the Board's offices in Washington, 
DC, as well as at the Federal Reserve Banks of New York, Chicago, and 
San Francisco and at the Reserve Bank in the district in which the 
reporting bank is located.
    (d) Confidentiality of filing. Any person filing any statement, 
report, or document under the 1934 Act may make written objection to the 
public disclosure of any information contained therein in accordance 
with the following procedure:
    (1) The person shall omit from the statement, report, or document, 
when it is filed, the portion thereof that the person desires to keep 
undisclosed (hereinafter called the confidential portion). The person 
shall indicate at the appropriate place in the statement, report, or 
document that the confidential portion has been omitted and filed 
separately with the Board.
    (2) The person shall file the following with the copies of the 
statement, report, or document filed with the Board:
    (i) As many copies of the confidential portion, each clearly marked 
``CONFIDENTIAL TREATMENT,'' as there are copies of the statement, 
report, or document filed with the Board. Each copy of the confidential 
portion shall contain the complete text of the item and, notwithstanding 
that the confidential portion does not constitute the whole of the 
answer, the entire answer thereto; except that in case the confidential 
portion is part of a financial statement or schedule, only the 
particular financial statement or schedule need be included. All copies 
of the confidential portion shall be in the same form as the remainder 
of the statement, report, or document; and
    (ii) An application making objection to the disclosure of the 
confidential portion. The application shall be on a sheet or sheets 
separate from the confidential portion, and shall:

[[Page 207]]

    (A) Identify the portion of the statement, report, or document that 
has been omitted;
    (B) Include a statement of the grounds of objection; and
    (C) Include the name of each exchange, if any, with which the 
statement, report, or document is filed.
    (3) The copies of the confidential portion and the application filed 
in accordance with this paragraph shall be enclosed in a separate 
envelope marked ``CONFIDENTIAL TREATMENT,'' and addressed to Secretary, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    (4) Pending determination by the Board on the objection filed in 
accordance with this paragraph, the confidential portion shall not be 
disclosed by the Board.
    (5) If the Board determines to sustain the objection, a notation to 
that effect shall be made at the appropriate place in the statement, 
report, or document.
    (6) If the Board determines not to sustain the objection because 
disclosure of the confidential portion is in the public interest, a 
finding and determination to that effect shall be entered and notice of 
the finding and determination sent by registered or certified mail to 
the person.
    (7) If the Board determines not to sustain the objection, pursuant 
to paragraph (d)(6) of this section, the confidential portion shall be 
made available to the public:
    (i) 15 days after notice of the Board's determination not to sustain 
the objection has been given, as required by paragraph (d)(6) of this 
section, provided that the person filing the objection has not 
previously filed with the Board a written statement that he intends, in 
good faith, to seek judicial review of the finding and determination; or
    (ii) 60 days after notice of the Board's determination not to 
sustain the objection has been given as required by paragraph (d)(6) of 
this section and the person filing the objection has filed with the 
Board a written statement of intent to seek judicial review of the 
finding and determination, but has failed to file a petition for 
judicial review of the Board's determination; or
    (iii) Upon final judicial determination, if adverse to the party 
filing the objection.
    (8) If the confidential portion is made available to the public, a 
copy thereof shall be attached to each copy of the statement, report, or 
document filed with the Board.

[63 FR 37646, July 13, 1998, as amended at 67 FR 57941, Sept. 13, 2002; 
68 FR 4096, Jan. 28, 2003]



Sec. 208.37  Government securities sales practices.

    (a) Scope. This subpart is applicable to state member banks that 
have filed notice as, or are required to file notice as, government 
securities brokers or dealers pursuant to section 15C of the Securities 
Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules 
under section 15C (17 CFR 400.1(d) and part 401).
    (b) Definitions. For purposes of this section:
    (1) Bank that is a government securities broker or dealer means a 
state member bank that has filed notice, or is required to file notice, 
as a government securities broker or dealer pursuant to section 15C of 
the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the 
Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
    (2) Customer does not include a broker or dealer or a government 
securities broker or dealer.
    (3) Government security has the same meaning as this term has in 
section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(42)).
    (4) Non-institutional customer means any customer other than:
    (i) A bank, savings association, insurance company, or registered 
investment company;
    (ii) An investment adviser registered under section 203 of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
    (iii) Any entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.
    (c) Business conduct. A bank that is a government securities broker 
or dealer shall observe high standards of commercial honor and just and 
equitable principles of trade in the conduct of its

[[Page 208]]

business as a government securities broker or dealer.
    (d) Recommendations to customers. In recommending to a customer the 
purchase, sale or exchange of a government security, a bank that is a 
government securities broker or dealer shall have reasonable grounds for 
believing that the recommendation is suitable for the customer upon the 
basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and as to the customer'ancial 
situation and needs.
    (e) Customer information. Prior to the execution of a transaction 
recommended to a non-institutional customer, a bank that is a government 
securities broker or dealer shall make reasonable efforts to obtain 
information concerning:
    (1) The customer's financial status;
    (2) The customer's tax status;
    (3) The customer's investment objectives; and
    (4) Such other information used or considered to be reasonable by 
the bank in making recommendations to the customer.



                   Subpart D_Prompt Corrective Action

    Source: 63 FR 37652, July 13, 1998, unless otherwise noted.



Sec. 208.40  Authority, purpose, scope, other supervisory authority, and 
disclosure of capital categories.

    (a) Authority. Subpart D of Regulation H (12 CFR part 208, Subpart 
D) is issued by the Board of Governors of the Federal Reserve System 
(Board) under section 38 (section 38) of the FDI Act as added by section 
131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 
(Pub. L. 102-242, 105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
    (b) Purpose and scope. This subpart D defines the capital measures 
and capital levels that are used for determining the supervisory actions 
authorized under section 38 of the FDI Act. (Section 38 of the FDI Act 
establishes a framework of supervisory actions for insured depository 
institutions that are not adequately capitalized.) This subpart also 
establishes procedures for submission and review of capital restoration 
plans and for issuance and review of directives and orders pursuant to 
section 38. Certain of the provisions of this subpart apply to officers, 
directors, and employees of state member banks. Other provisions apply 
to any company that controls a member bank and to the affiliates of the 
member bank.
    (c) Other supervisory authority. Neither section 38 nor this subpart 
in any way limits the authority of the Board under any other provision 
of law to take supervisory actions to address unsafe or unsound 
practices or conditions, deficient capital levels, violations of law, or 
other practices. Action under section 38 of the FDI Act and this subpart 
may be taken independently of, in conjunction with, or in addition to 
any other enforcement action available to the Board, including issuance 
of cease and desist orders, capital directives, approval or denial of 
applications or notices, assessment of civil money penalties, or any 
other actions authorized by law.
    (d) Disclosure of capital categories. The assignment of a bank under 
this subpart within a particular capital category is for purposes of 
implementing and applying the provisions of section 38. Unless permitted 
by the Board or otherwise required by law, no bank may state in any 
advertisement or promotional material its capital category under this 
subpart or that the Board or any other Federal banking agency has 
assigned the bank to a particular capital category.



Sec. 208.41  Definitions for purposes of this subpart.

    For purposes of this subpart, except as modified in this section or 
unless the context otherwise requires, the terms used have the same 
meanings as set forth in section 38 and section 3 of the FDI Act.
    (a) Control--(1) Control has the same meaning assigned to it in 
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the term 
controlled shall be construed consistently with the term control.
    (2) Exclusion for fiduciary ownership. No insured depository 
institution or

[[Page 209]]

company controls another insured depository institution or company by 
virtue of its ownership or control of shares in a fiduciary capacity. 
Shares shall not be deemed to have been acquired in a fiduciary capacity 
if the acquiring insured depository institution or company has sole 
discretionary authority to exercise voting rights with respect to the 
shares.
    (3) Exclusion for debts previously contracted. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares acquired in 
securing or collecting a debt previously contracted in good faith, until 
two years after the date of acquisition. The two-year period may be 
extended at the discretion of the appropriate Federal banking agency for 
up to three one-year periods.
    (b) Controlling person means any person having control of an insured 
depository institution and any company controlled by that person.
    (c) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the Board's 
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage 
Measure (Appendix B to this part).
    (d) Management fee means any payment of money or provision of any 
other thing of value to a company or individual for the provision of 
management services or advice to the bank, or related overhead expenses, 
including payments related to supervisory, executive, managerial, or 
policy making functions, other than compensation to an individual in the 
individual's capacity as an officer or employee of the bank.
    (e) Risk-weighted assets means total weighted risk assets, as 
calculated in accordance with the Board's Capital Adequacy Guidelines 
for State Member Banks: Risk-Based Measure (Appendix A to this part).
    (f) Tangible equity means the amount of core capital elements as 
defined in the Board's Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of 
outstanding cumulative perpetual preferred stock (including related 
surplus), minus all intangible assets except mortgage servicing assets 
to the extent that the Board determines that mortgage servicing assets 
may be included in calculating the bank's Tier 1 capital.
    (g) Tier 1 capital means the amount of Tier 1 capital as defined in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
    (h) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets, as calculated in accordance with the 
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based 
Measure (Appendix A to this part).
    (i) Total assets means quarterly average total assets as reported in 
a bank's Report of Condition and Income (Call Report), minus intangible 
assets as provided in the definition of tangible equity. At its 
discretion the Federal Reserve may calculate total assets using a bank's 
period-end assets rather than quarterly average assets.
    (j) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets, as calculated in accordance with 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).

[63 FR 37652, July 13, 1998, as amended at 63 FR 42674, Aug. 10, 1998]



Sec. 208.42  Notice of capital category.

    (a) Effective date of determination of capital category. A member 
bank shall be deemed to be within a given capital category for purposes 
of section 38 of the FDI Act and this subpart as of the date the bank is 
notified of, or is deemed to have notice of, its capital category, 
pursuant to paragraph (b) of this section.
    (b) Notice of capital category. A member bank shall be deemed to 
have been notified of its capital levels and its capital category as of 
the most recent date:
    (1) A Report of Condition and Income (Call Report) is required to be 
filed with the Board;
    (2) A final report of examination is delivered to the bank; or

[[Page 210]]

    (3) Written notice is provided by the Board to the bank of its 
capital category for purposes of section 38 of the FDI Act and this 
subpart or that the bank's capital category has changed as provided in 
paragraph (c) of this section or Sec. 208.43(c).
    (c) Adjustments to reported capital levels and capital category--(1) 
Notice of adjustment by bank. A member bank shall provide the Board with 
written notice that an adjustment to the bank's capital category may 
have occurred no later than 15 calendar days following the date that any 
material event occurred that would cause the bank to be placed in a 
lower capital category from the category assigned to the bank for 
purposes of section 38 and this subpart on the basis of the bank's most 
recent Call Report or report of examination.
    (2) Determination by Board to change capital category. After 
receiving notice pursuant to paragraph (c)(1) of this section, the Board 
shall determine whether to change the capital category of the bank and 
shall notify the bank of the Board's determination.



Sec. 208.43  Capital measures and capital category definitions.

    (a) Capital measures. For purposes of section 38 and this subpart, 
the relevant capital measures are:
    (1) The total risk-based capital ratio;
    (2) The Tier 1 risk-based capital ratio; and
    (3) The leverage ratio.
    (b) Capital categories. For purposes of section 38 and this subpart, 
a member bank is deemed to be:
    (1) ``Well capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 10.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or 
greater; and
    (iii) Has a leverage ratio of 5.0 percent or greater; and
    (iv) Is not subject to any written agreement, order, capital 
directive, or prompt corrective action directive issued by the Board 
pursuant to section 8 of the FDI Act, the International Lending 
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, 
or any regulation thereunder, to meet and maintain a specific capital 
level for any capital measure.
    (2) ``Adequately capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or 
greater; and
    (iii) Has:
    (A) A leverage ratio of 4.0 percent or greater; or
    (B) A leverage ratio of 3.0 percent or greater if the bank is rated 
composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth; and
    (iv) Does not meet the definition of a ``well capitalized'' bank.
    (3) ``Undercapitalized'' if the bank has:
    (i) A total risk-based capital ratio that is less than 8.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (iii) Except as provided in paragraph (b)(2)(iii)(B) of this 
section, has a leverage ratio that is less than 4.0 percent; or
    (iv) A leverage ratio that is less than 3.0 percent, if the bank is 
rated composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth.
    (4) ``Significantly undercapitalized'' if the bank has:
    (i) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 3.0 
percent; or
    (iii) A leverage ratio that is less than 3.0 percent.
    (5) ``Critically undercapitalized'' if the bank has a ratio of 
tangible equity to total assets that is equal to or less than 2.0 
percent.
    (c) Reclassification based on supervisory criteria other than 
capital. The Board may reclassify a well capitalized member bank as 
adequately capitalized and may require an adequately-capitalized or an 
undercapitalized member bank to comply with certain mandatory or 
discretionary supervisory actions as if the bank were in the next lower 
capital category (except that the Board may not reclassify a 
significantly undercapitalized bank as critically undercapitalized) 
(each of these

[[Page 211]]

actions are hereinafter referred to generally as ``reclassifications'') 
in the following circumstances:
    (1) Unsafe or unsound condition. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the 
bank is in unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in 
the most recent examination of the bank, the bank received and has not 
corrected, a less-than-satisfactory rating for any of the categories of 
asset quality, management, earnings, liquidity, or sensitivity to market 
risk.



Sec. 208.44  Capital restoration plans.

    (a) Schedule for filing plan. (1) In general. A member bank shall 
file a written capital restoration plan with the appropriate Reserve 
Bank within 45 days of the date that the bank receives notice or is 
deemed to have notice that the bank is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless the Board 
notifies the bank in writing that the plan is to be filed within a 
different period. An adequately capitalized bank that has been required, 
pursuant to Sec. 208.43(c), to comply with supervisory actions as if 
the bank were undercapitalized is not required to submit a capital 
restoration plan solely by virtue of the reclassification.
    (2) Additional capital restoration plans. Notwithstanding paragraph 
(a)(1) of this section, a bank that has already submitted and is 
operating under a capital restoration plan approved under section 38 and 
this subpart is not required to submit an additional capital restoration 
plan based on a revised calculation of its capital measures or a 
reclassification of the institution under Sec. 208.43(c), unless the 
Board notifies the bank that it must submit a new or revised capital 
plan. A bank that is notified that it must submit a new or revised 
capital restoration plan shall file the plan in writing with the 
appropriate Reserve Bank within 45 days of receiving such notice, unless 
the Board notifies the bank in writing that the plan is to be filed 
within a different period.
    (b) Contents of plan. All financial data submitted in connection 
with a capital restoration plan shall be prepared in accordance with the 
instructions provided on the Call Report, unless the Board instructs 
otherwise. The capital restoration plan shall include all of the 
information required to be filed under section 38(e)(2) of the FDI Act. 
A bank that is required to submit a capital restoration plan as the 
result of a reclassification of the bank pursuant to Sec. 208.43(c) 
shall include a description of the steps the bank will take to correct 
the unsafe or unsound condition or practice. No plan shall be accepted 
unless it includes any performance guarantee described in section 
38(e)(2)(C) of that Act by each company that controls the bank.
    (c) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this subpart, the Board shall 
provide written notice to the bank of whether the plan has been 
approved. The Board may extend the time within which notice regarding 
approval of a plan shall be provided.
    (d) Disapproval of capital plan. If the Board does not approve a 
capital restoration plan, the bank shall submit a revised capital 
restoration plan within the time specified by the Board. Upon receiving 
notice that its capital restoration plan has not been approved, any 
undercapitalized member bank (as defined in Sec. 208.43(b)(3)) shall be 
subject to all of the provisions of section 38 and this subpart 
applicable to significantly undercapitalized institutions. These 
provisions shall be applicable until such time as the Board approves a 
new or revised capital restoration plan submitted by the bank.
    (e) Failure to submit capital restoration plan. A member bank that 
is undercapitalized (as defined in Sec. 208.43(b)(3)) and that fails to 
submit a written capital restoration plan within the period provided in 
this section shall, upon the expiration of that period, be subject to 
all of the provisions of section 38 and this subpart applicable to 
significantly undercapitalized institutions.
    (f) Failure to implement capital restoration plan. Any 
undercapitalized member bank that fails in any material respect to 
implement a capital restoration plan shall be subject to all of the

[[Page 212]]

provisions of section 38 and this subpart applicable to significantly 
undercapitalized institutions.
    (g) Amendment of capital plan. A bank that has filed an approved 
capital restoration plan may, after prior written notice to and approval 
by the Board, amend the plan to reflect a change in circumstance. Until 
such time as a proposed amendment has been approved, the bank shall 
implement the capital restoration plan as approved prior to the proposed 
amendment.
    (h) Notice to FDIC. Within 45 days of the effective date of Board 
approval of a capital restoration plan, or any amendment to a capital 
restoration plan, the Board shall provide a copy of the plan or 
amendment to the Federal Deposit Insurance Corporation.
    (i) Performance guarantee by companies that control a bank. (1) 
Limitation on Liability. (i) Amount limitation. The aggregate liability 
under the guarantee provided under section 38 and this subpart for all 
companies that control a specific member bank that is required to submit 
a capital restoration plan under this subpart shall be limited to the 
lesser of:
    (A) An amount equal to 5.0 percent of the bank's total assets at the 
time the bank was notified or deemed to have notice that the bank was 
undercapitalized; or
    (B) The amount necessary to restore the relevant capital measures of 
the bank to the levels required for the bank to be classified as 
adequately capitalized, as those capital measures and levels are defined 
at the time that the bank initially fails to comply with a capital 
restoration plan under this subpart.
    (ii) Limit on duration. The guarantee and limit of liability under 
section 38 and this subpart shall expire after the Board notifies the 
bank that it has remained adequately capitalized for each of four 
consecutive calendar quarters. The expiration or fulfillment by a 
company of a guarantee of a capital restoration plan shall not limit the 
liability of the company under any guarantee required or provided in 
connection with any capital restoration plan filed by the same bank 
after expiration of the first guarantee.
    (iii) Collection on guarantee. Each company that controls a bank 
shall be jointly and severally liable for the guarantee for such bank as 
required under section 38 and this subpart, and the Board may require 
and collect payment of the full amount of that guarantee from any or all 
of the companies issuing the guarantee.
    (2) Failure to provide guarantee. In the event that a bank that is 
controlled by a company submits a capital restoration plan that does not 
contain the guarantee required under section 38(e)(2) of the FDI Act, 
the bank shall, upon submission of the plan, be subject to the 
provisions of section 38 and this subpart that are applicable to banks 
that have not submitted an acceptable capital restoration plan.
    (3) Failure to perform guarantee. Failure by any company that 
controls a bank to perform fully its guarantee of any capital plan shall 
constitute a material failure to implement the plan for purposes of 
section 38(f) of the FDI Act. Upon such failure, the bank shall be 
subject to the provisions of section 38 and this subpart that are 
applicable to banks that have failed in a material respect to implement 
a capital restoration plan.



Sec. 208.45  Mandatory and discretionary supervisory actions under 
section 38.

    (a) Mandatory supervisory actions. (1) Provisions applicable to all 
banks. All member banks are subject to the restrictions contained in 
section 38(d) of the FDI Act on payment of capital distributions and 
management fees.
    (2) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized banks. Immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.42 or Sec. 208.44, that the bank is undercapitalized, 
significantly undercapitalized, or critically undercapitalized, the bank 
shall become subject to the provisions of section 38 of the FDI Act:
    (i) Restricting payment of capital distributions and management fees 
(section 38(d));
    (ii) Requiring that the Board monitor the condition of the bank 
(section 38(e)(1));

[[Page 213]]

    (iii) Requiring submission of a capital restoration plan within the 
schedule established in this subpart (section 38(e)(2));
    (iv) Restricting the growth of the bank's assets (section 38(e)(3)); 
and
    (v) Requiring prior approval of certain expansion proposals (section 
3(e)(4)).
    (3) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized banks. In addition to 
the provisions of section 38 of the FDI Act described in paragraph 
(a)(2) of this section, immediately upon receiving notice or being 
deemed to have notice, as provided in Sec. 208.42 or Sec. 208.44, that 
the bank is significantly undercapitalized, or critically 
undercapitalized, or that the bank is subject to the provisions 
applicable to institutions that are significantly undercapitalized 
because the bank failed to submit or implement in any material respect 
an acceptable capital restoration plan, the bank shall become subject to 
the provisions of section 38 of the FDI Act that restrict compensation 
paid to senior executive officers of the institution (section 38(f)(4)).
    (4) Additional provisions applicable to critically undercapitalized 
banks. In addition to the provisions of section 38 of the FDI Act 
described in paragraphs (a)(2) and (a)(3) of this section, immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.32, that the bank is critically undercapitalized, the bank 
shall become subject to the provisions of section 38 of the FDI Act:
    (i) Restricting the activities of the bank (section 38(h)(1)); and
    (ii) Restricting payments on subordinated debt of the bank (section 
38(h)(2)).
    (b) Discretionary supervisory actions. In taking any action under 
section 38 that is within the Board's discretion to take in connection 
with: A member bank that is deemed to be undercapitalized, significantly 
undercapitalized, or critically undercapitalized, or has been 
reclassified as undercapitalized, or significantly undercapitalized; an 
officer or director of such bank; or a company that controls such bank, 
the Board shall follow the procedures for issuing directives under 12 
CFR 263.202 and 263.204, unless otherwise provided in section 38 or this 
subpart.



          Subpart E_Real Estate Lending and Appraisal Standards

    Source: 63 FR 37655, July 13, 1998, unless otherwise noted.



Sec. 208.50  Authority, purpose, and scope.

    (a) Authority. Subpart E of Regulation H (12 CFR part 208, subpart 
E) is issued by the Board of Governors of the Federal Reserve System 
under section 304 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991, 12 U.S.C. 1828(o) and Title 11 of the Financial 
Institutions Reform, Recovery, and Enforcement Act (12 U.S.C. 3331-
3351).
    (b) Purpose and scope. This subpart E prescribes standards for real 
estate lending to be used by member banks in adopting internal real 
estate lending policies. The standards applicable to appraisals rendered 
in connection with federally related transactions entered into by member 
banks are set forth in 12 CFR part 225, subpart G (Regulation Y).



Sec. 208.51  Real estate lending standards.

    (a) Adoption of written policies. Each state bank that is a member 
of the Federal Reserve System shall adopt and maintain written policies 
that establish appropriate limits and standards for extensions of credit 
that are secured by liens on or interests in real estate, or that are 
made for the purpose of financing permanent improvements to real estate.
    (b) Requirements of lending policies. (1) Real estate lending 
policies adopted pursuant to this section shall be:
    (i) Consistent with safe and sound banking practices;
    (ii) Appropriate to the size of the institution and the nature and 
scope of its operations; and
    (iii) Reviewed and approved by the bank's board of directors at 
least annually.
    (2) The lending policies shall establish:
    (i) Loan portfolio diversification standards;

[[Page 214]]

    (ii) Prudent underwriting standards, including loan-to-value limits, 
that are clear and measurable;
    (iii) Loan administration procedures for the bank's real estate 
portfolio; and
    (iv) Documentation, approval, and reporting requirements to monitor 
compliance with the bank's real estate lending policies.
    (c) Monitoring conditions. Each member bank shall monitor conditions 
in the real estate market in its lending area to ensure that its real 
estate lending policies continue to be appropriate for current market 
conditions.
    (d) Interagency guidelines. The real estate lending policies adopted 
pursuant to this section should reflect consideration of the Interagency 
Guidelines for Real Estate Lending Policies (contained in appendix C of 
this part) established by the Federal bank and thrift supervisory 
agencies.



                  Subpart F_Miscellaneous Requirements

    Source: 63 FR 37655, July 13, 1998, unless otherwise noted.



Sec. 208.60  Authority, purpose, and scope.

    (a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart 
F) is issued by the Board of Governors of the Federal Reserve System 
under sections 9, 11, 21, 25 and 25A of the Federal Reserve Act (12 
U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 and 611), section 7 of the 
International Banking Act (12 U.S.C. 3105), section 3 of the Bank 
Protection Act of 1968 (12 U.S.C. 1882), sections 1814, 1816, 1818, 
1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 1816, 1818, 
1831o, 1831p-1 and 1831r-1), and the Bank Secrecy Act (31 U.S.C. 5318).
    (b) Purpose and scope. This subpart F describes a member bank's 
obligation to implement security procedures to discourage certain 
crimes, to file suspicious activity reports, and to comply with the Bank 
Secrecy Act's requirements for reporting and recordkeeping of currency 
and foreign transactions. It also describes the examination schedule for 
certain small insured member banks.



Sec. 208.61  Bank security procedures.

    (a) Authority, purpose, and scope. Pursuant to section 3 of the Bank 
Protection Act of 1968 (12 U.S.C. 1882), member banks are required to 
adopt appropriate security procedures to discourage robberies, 
burglaries, and larcenies, and to assist in the identification and 
prosecution of persons who commit such acts. It is the responsibility of 
the member bank's board of directors to comply with the provisions of 
this section and ensure that a written security program for the bank's 
main office and branches is developed and implemented.
    (b) Designation of security officer. Upon becoming a member of the 
Federal Reserve System, a member bank's board of directors shall 
designate a security officer who shall have the authority, subject to 
the approval of the board of directors, to develop, within a reasonable 
time, but no later than 180 days, and to administer a written security 
program for each banking office.
    (c) Security program. (1) The security program shall:
    (i) Establish procedures for opening and closing for business and 
for the safekeeping of all currency, negotiable securities, and similar 
valuables at all times;
    (ii) Establish procedures that will assist in identifying persons 
committing crimes against the institution and that will preserve 
evidence that may aid in their identification and prosecution. Such 
procedures may include, but are not limited to: maintaining a camera 
that records activity in the banking office; using identification 
devices, such as prerecorded serial-numbered bills, or chemical and 
electronic devices; and retaining a record of any robbery, burglary, or 
larceny committed against the bank;
    (iii) Provide for initial and periodic training of officers and 
employees in their responsibilities under the security program and in 
proper employee conduct during and after a burglary, robbery, or 
larceny; and
    (iv) Provide for selecting, testing, operating, and maintaining 
appropriate security devices, as specified in paragraph (c)(2) of this 
section.

[[Page 215]]

    (2) Security devices. Each member bank shall have, at a minimum, the 
following security devices:
    (i) A means of protecting cash and other liquid assets, such as a 
vault, safe, or other secure space;
    (ii) A lighting system for illuminating, during the hours of 
darkness, the area around the vault, if the vault is visible from 
outside the banking office;
    (iii) Tamper-resistant locks on exterior doors and exterior windows 
that may be opened;
    (iv) An alarm system or other appropriate device for promptly 
notifying the nearest responsible law enforcement officers of an 
attempted or perpetrated robbery or burglary; and
    (v) Such other devices as the security officer determines to be 
appropriate, taking into consideration: the incidence of crimes against 
financial institutions in the area; the amount of currency and other 
valuables exposed to robbery, burglary, or larceny; the distance of the 
banking office from the nearest responsible law enforcement officers; 
the cost of the security devices; other security measures in effect at 
the banking office; and the physical characteristics of the structure of 
the banking office and its surroundings.
    (d) Annual reports. The security officer for each member bank shall 
report at least annually to the bank's board of directors on the 
implementation, administration, and effectiveness of the security 
program.
    (e) Reserve Banks. Each Reserve Bank shall develop and maintain a 
written security program for its main office and branches subject to 
review and approval of the Board.



Sec. 208.62  Suspicious activity reports.

    (a) Purpose. This section ensures that a member bank files a 
Suspicious Activity Report when it detects a known or suspected 
violation of Federal law, or a suspicious transaction related to a money 
laundering activity or a violation of the Bank Secrecy Act. This section 
applies to all member banks.
    (b) Definitions. For the purposes of this section:
    (1) FinCEN means the Financial Crimes Enforcement Network of the 
Department of the Treasury.
    (2) Institution-affiliated party means any institution-affiliated 
party as that term is defined in 12 U.S.C. 1786(r), or 1813(u) and 
1818(b) (3), (4) or (5).
    (3) SAR means a Suspicious Activity Report on the form prescribed by 
the Board.
    (c) SARs required. A member bank shall file a SAR with the 
appropriate Federal law enforcement agencies and the Department of the 
Treasury in accordance with the form's instructions by sending a 
completed SAR to FinCEN in the following circumstances:
    (1) Insider abuse involving any amount. Whenever the member bank 
detects any known or suspected Federal criminal violation, or pattern of 
criminal violations, committed or attempted against the bank or 
involving a transaction or transactions conducted through the bank, 
where the bank believes that it was either an actual or potential victim 
of a criminal violation, or series of criminal violations, or that the 
bank was used to facilitate a criminal transaction, and the bank has a 
substantial basis for identifying one of its directors, officers, 
employees, agents or other institution-affiliated parties as having 
committed or aided in the commission of a criminal act regardless of the 
amount involved in the violation.
    (2) Violations aggregating $5,000 or more where a suspect can be 
identified. Whenever the member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, committed 
or attempted against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $5,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, and the bank has a substantial basis for identifying a 
possible suspect or group of suspects. If it is determined prior to 
filing this report that the identified suspect or group of suspects has 
used an ``alias,'' then information regarding the true identity of the 
suspect or group of suspects, as well as alias identifiers, such as 
drivers' licenses or

[[Page 216]]

social security numbers, addresses and telephone numbers, must be 
reported.
    (3) Violations aggregating $25,000 or more regardless of a potential 
suspect. Whenever the member bank detects any known or suspected Federal 
criminal violation, or pattern of criminal violations, committed or 
attempted against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $25,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, even though there is no substantial basis for identifying a 
possible suspect or group of suspects.
    (4) Transactions aggregating $5,000 or more that involve potential 
money laundering or violations of the Bank Secrecy Act. Any transaction 
(which for purposes of this paragraph (c)(4) means a deposit, 
withdrawal, transfer between accounts, exchange of currency, loan, 
extension of credit, purchase or sale of any stock, bond, certificate of 
deposit, or other monetary instrument or investment security, or any 
other payment, transfer, or delivery by, through, or to a financial 
institution, by whatever means effected) conducted or attempted by, at 
or through the member bank and involving or aggregating $5,000 or more 
in funds or other assets, if the bank knows, suspects, or has reason to 
suspect that:
    (i) The transaction involves funds derived from illegal activities 
or is intended or conducted in order to hide or disguise funds or assets 
derived from illegal activities (including, without limitation, the 
ownership, nature, source, location, or control of such funds or assets) 
as part of a plan to violate or evade any law or regulation or to avoid 
any transaction reporting requirement under federal law;
    (ii) The transaction is designed to evade any regulations 
promulgated under the Bank Secrecy Act; or
    (iii) The transaction has no business or apparent lawful purpose or 
is not the sort in which the particular customer would normally be 
expected to engage, and the bank knows of no reasonable explanation for 
the transaction after examining the available facts, including the 
background and possible purpose of the transaction.
    (d) Time for reporting. A member bank is required to file a SAR no 
later than 30 calendar days after the date of initial detection of facts 
that may constitute a basis for filing a SAR. If no suspect was 
identified on the date of detection of the incident requiring the 
filing, a member bank may delay filing a SAR for an additional 30 
calendar days to identify a suspect. In no case shall reporting be 
delayed more than 60 calendar days after the date of initial detection 
of a reportable transaction. In situations involving violations 
requiring immediate attention, such as when a reportable violation is 
on-going, the financial institution shall immediately notify, by 
telephone, an appropriate law enforcement authority and the Board in 
addition to filing a timely SAR.
    (e) Reports to state and local authorities. Member banks are 
encouraged to file a copy of the SAR with state and local law 
enforcement agencies where appropriate.
    (f) Exceptions. (1) A member bank need not file a SAR for a robbery 
or burglary committed or attempted that is reported to appropriate law 
enforcement authorities.
    (2) A member bank need not file a SAR for lost, missing, 
counterfeit, or stolen securities if it files a report pursuant to the 
reporting requirements of 17 CFR 240.17f-1.
    (g) Retention of records. A member bank shall maintain a copy of any 
SAR filed and the original or business record equivalent of any 
supporting documentation for a period of five years from the date of the 
filing of the SAR. Supporting documentation shall be identified and 
maintained by the bank as such, and shall be deemed to have been filed 
with the SAR. A member bank must make all supporting documentation 
available to appropriate law enforcement agencies upon request.
    (h) Notification to board of directors. The management of a member 
bank shall promptly notify its board of directors, or a committee 
thereof, of any report filed pursuant to this section.

[[Page 217]]

    (i) Compliance. Failure to file a SAR in accordance with this 
section and the instructions may subject the member bank, its directors, 
officers, employees, agents, or other institution affiliated parties to 
supervisory action.
    (j) Confidentiality of SARs. SARs are confidential. Any member bank 
subpoenaed or otherwise requested to disclose a SAR or the information 
contained in a SAR shall decline to produce the SAR or to provide any 
information that would disclose that a SAR has been prepared or filed 
citing this section, applicable law (e.g., 31 U.S.C. 5318(g)), or both, 
and notify the Board.
    (k) Safe harbor. The safe harbor provisions of 31 U.S.C. 5318(g), 
which exempts any member bank that makes a disclosure of any possible 
violation of law or regulation from liability under any law or 
regulation of the United States, or any constitution, law or regulation 
of any state or political subdivision, covers all reports of suspected 
or known criminal violations and suspicious activities to law 
enforcement and financial institution supervisory authorities, including 
supporting documentation, regardless of whether such reports are filed 
pursuant to this section or are filed on a voluntary basis.



Sec. 208.63  Procedures for monitoring Bank Secrecy Act compliance.

    (a) Purpose. This section is issued to assure that all state member 
banks establish and maintain procedures reasonably designed to assure 
and monitor their compliance with the provisions of the Bank Secrecy Act 
(31 U.S.C. 5311, et seq.) and the implementing regulations promulgated 
thereunder by the Department of Treasury at 31 CFR part 103, requiring 
recordkeeping and reporting of currency transactions.
    (b) Establishment of BSA compliance program--(1) Program 
requirement. Each bank shall develop and provide for the continued 
administration of a program reasonably designed to ensure and monitor 
compliance with the recordkeeping and reporting requirements set forth 
in subchapter II of chapter 53 of title 31, United States Code, the Bank 
Secrecy Act, and the implementing regulations promulgated thereunder by 
the Department of the Treasury at 31 CFR part 103. The compliance 
program shall be reduced to writing, approved by the board of directors, 
and noted in the minutes.
    (2) Customer identification program. Each bank is subject to the 
requirements of 31 U.S.C. 5318(l) and the implementing regulation 
jointly promulgated by the Board and the Department of the Treasury at 
31 CFR 103.121, which require a customer identification program to be 
implemented as part of the BSA compliance program required under this 
section.
    (c) Contents of compliance program. The compliance program shall, at 
a minimum:
    (1) Provide for a system of internal controls to assure ongoing 
compliance;
    (2) Provide for independent testing for compliance to be conducted 
by bank personnel or by an outside party;
    (3) Designate an individual or individuals responsible for 
coordinating and monitoring day-to-day compliance; and
    (4) Provide training for appropriate personnel.

[63 FR 37655, July 13, 1998, as amended at 68 FR 25111, May 9, 2003]



Sec. 208.64  Frequency of examination.

    (a) General. The Federal Reserve examines insured member banks 
pursuant to authority conferred by 12 U.S.C. 325 and the requirements of 
12 U.S.C. 1820(d). The Federal Reserve is required to conduct a full-
scope, on-site examination of every insured member bank at least once 
during each 12-month period.
    (b) 18-month rule for certain small institutions. The Federal 
Reserve may conduct a full-scope, on-site examination of an insured 
member bank at least once during each 18-month period, rather than each 
12-month period as provided in paragraph (a) of this section, if the 
following conditions are satisfied:
    (1) The bank has total assets of $250 million or less;
    (2) The bank is well capitalized as defined in subpart D of this 
part (Sec. 208.43);
    (3) At the most recent examination conducted by either the Federal 
Reserve or applicable State banking agency, the Federal Reserve found 
the bank to be well managed;

[[Page 218]]

    (4) At the most recent examination conducted by either the Federal 
Reserve or applicable State banking agency, the Federal Reserve assigned 
the bank a CAMELS rating of 1 or 2;
    (5) The bank currently is not subject to a formal enforcement 
proceeding or order by the FDIC, OCC, or Federal Reserve System; and
    (6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been 
required but for this section.
    (c) Authority to conduct more frequent examinations. This section 
does not limit the authority of the Federal Reserve to examine any 
member bank as frequently as the agency deems necessary.



         Subpart G_Financial Subsidiaries of State Member Banks

    Source: Reg. H, 66 FR 42933, Aug. 16, 2001, unless otherwise noted.



Sec. 208.71  What are the requirements to invest in or control a financial 
subsidiary?

    (a) In general. A state member bank may control, or hold an interest 
in, a financial subsidiary only if:
    (1) The state member bank and each depository institution affiliate 
of the state member bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the state member bank do not exceed the lesser of:
    (i) 45 percent of the consolidated total assets of the parent bank; 
or
    (ii) $50 billion, which dollar amount shall be adjusted according to 
an indexing mechanism jointly established by the Board and the Secretary 
of the Treasury;
    (3) The state member bank, if it is one of the largest 100 insured 
banks (based on consolidated total assets as of the end of the previous 
calendar year), meets the debt rating or alternative requirement of 
paragraph (b) of this section, if applicable; and
    (4) The Board or the appropriate Reserve Bank has approved the bank 
to acquire the interest in or control the financial subsidiary under 
Sec. 208.76.
    (b) Debt rating or alternative requirement for 100 largest insured 
banks--(1) General. A state member bank meets the debt rating or 
alternative requirement of this paragraph (b) if:
    (i) The bank has at least one issue of eligible debt outstanding 
that is currently rated in one of the three highest investment grade 
rating categories by a nationally recognized statistical rating 
organization; or
    (ii) If the bank is one of the second 50 largest insured banks 
(based on consolidated total assets as of the end of the previous 
calendar year), the bank has a current long-term issuer credit rating 
from at least one nationally recognized statistical rating organization 
that is within the three highest investment grade rating categories used 
by the organization.
    (2) Financial subsidiaries engaged in financial activities only as 
agent. This paragraph (b) does not apply to a state member bank if the 
financial subsidiaries of the bank engage in financial activities 
described in Sec. 208.72(a)(1) and (2) only in an agency capacity and 
not directly or indirectly as principal.



Sec. 208.72  What activities may a financial subsidiary conduct?

    (a) Authorized activities. A financial subsidiary of a state member 
bank may engage in only the following activities:
    (1) Any financial activity listed in Sec. 225.86(a), (b), or (c) of 
the Board's Regulation Y (12 CFR 225.86(a), (b), or (c));
    (2) Any activity that the Secretary of the Treasury, in consultation 
with the Board, has determined to be financial in nature or incidental 
to a financial activity and permissible for financial subsidiaries 
pursuant to Section 5136A(b) of the Revised Statutes of the United 
States (12 U.S.C. 24a(b)); and
    (3) Any activity that the state member bank is permitted to engage 
in directly (subject to the same terms and conditions that govern the 
conduct of the activity by the state member bank).
    (b) Impermissible activities. Notwithstanding paragraph (a) of this 
section, a financial subsidiary may not engage as principal in the 
following activities:
    (1) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability or death (except to the

[[Page 219]]

extent permitted under applicable state law and section 302 or 303(c) of 
the Gramm-Leach-Bliley Act (15 U.S.C. 6712 or 6713(c));
    (2) Providing or issuing annuities the income of which is subject to 
tax treatment under section 72 of the Internal Revenue Code of 1986 (26 
U.S.C. 72);
    (3) Real estate development or real estate investment, unless 
otherwise expressly authorized by applicable state and Federal law; and
    (4) Any merchant banking or insurance company investment activity 
permitted for financial holding companies by section 4(k)(4)(H) or (I) 
of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H) and (I)).



Sec. 208.73  What additional provisions are applicable to state member 
banks with financial subsidiaries?

    (a) Capital deduction required. A state member bank that controls or 
holds an interest in a financial subsidiary must comply with the 
following rules in determining its compliance with applicable regulatory 
capital standards (including the well capitalized standard of Sec. 
208.71(a)(1)):
    (1) The bank must not consolidate the assets and liabilities of any 
financial subsidiary with those of the bank.
    (2) For purposes of determining the bank's risk-based capital ratios 
under Appendix A of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from both the bank's Tier 1 capital and Tier 2 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's risk-weighted assets.
    (3) For purposes of determining the bank's leverage capital ratio 
under Appendix B of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's Tier 1 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's average total assets.
    (4) For purposes of determining the bank's ratio of tangible equity 
to total assets under Sec. 208.43(b)(5), the bank must deduct the 
entire amount of the bank's outstanding equity investment (including 
retained earnings) in all financial subsidiaries from the bank's 
tangible equity and total assets.
    (5) If the deduction from Tier 2 capital required by paragraph 
(a)(2)(i) of this section exceeds the bank's Tier 2 capital, any excess 
must be deducted from the bank's Tier 1 capital.
    (b) Financial statement disclosure of capital deduction. Any 
published financial statement of a state member bank that controls or 
holds an interest in a financial subsidiary must, in addition to 
providing information prepared in accordance with generally accepted 
accounting principles, separately present financial information for the 
bank reflecting the capital deduction and adjustments required by 
paragraph (a) of this section.
    (c) Safeguards for the bank. A state member bank that establishes, 
controls or holds an interest in a financial subsidiary must:
    (1) Establish and maintain procedures for identifying and managing 
financial and operational risks within the state member bank and the 
financial subsidiary that adequately protect the state member bank from 
such risks; and
    (2) Establish and maintain reasonable policies and procedures to 
preserve the separate corporate identity and limited liability of the 
state member bank and the financial subsidiary.
    (d) Application of Sections 23A and 23B of the Federal Reserve Act. 
For purposes of sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1):
    (1) A financial subsidiary of a state member bank shall be deemed an 
affiliate, and not a subsidiary, of the bank;
    (2) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with 
respect to covered transactions between the bank and any individual 
financial subsidiary of the bank;

[[Page 220]]

    (3) The bank's investment in a financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (4) Any purchase of, or investment in, the securities of a financial 
subsidiary by an affiliate of the bank will be considered to be a 
purchase of, or investment in, such securities by the bank; and
    (5) Any extension of credit by an affiliate of the bank to a 
financial subsidiary of the bank will be considered to be an extension 
of credit by the bank to the financial subsidiary if the Board 
determines that such treatment is necessary or appropriate to prevent 
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
    (e) Application of anti-tying prohibitions. A financial subsidiary 
of a state member bank shall be deemed a subsidiary of a bank holding 
company and not a subsidiary of the bank for purposes of the anti-tying 
prohibitions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971 et seq.).



Sec. 208.74  What happens if the state member bank or a depository 
institution affiliate fails to continue to meet certain requirements?

    (a) Qualifications and safeguards. The following procedures apply to 
a state member bank that controls or holds an interest in a financial 
subsidiary.
    (1) Notice by Board. If the Board finds that a state member bank or 
any of its depository institution affiliates fails to continue to be 
well capitalized and well managed, or the state member bank is not in 
compliance with the asset limitation set forth in Sec. 208.71(a)(2) or 
the safeguards set forth in Sec. 208.73(c), the Board will notify the 
state member bank in writing and identify the areas of noncompliance. 
The Board may provide this notice at any time before or after receiving 
notice from the state member bank under paragraph (a)(2) of this 
section.
    (2) Notification by state member bank. A state member bank must 
notify the appropriate Reserve Bank in writing within 15 calendar days 
of becoming aware that any depository institution affiliate of the bank 
has ceased to be well capitalized or well managed. The notification must 
identify the depository institution affiliate and the area(s) of 
noncompliance.
    (3) Execution of agreement. Within 45 days after receiving a notice 
from the Board under paragraph (a)(1) of this section, or such 
additional period of time as the Board may permit, the:
    (i) State member bank must execute an agreement acceptable to the 
Board to comply with all applicable capital, management, asset and 
safeguard requirements; and
    (ii) Any relevant depository institution affiliate of the state 
member bank must execute an agreement acceptable to its appropriate 
Federal banking agency to comply with all applicable capital and 
management requirements.
    (4) Agreement requirements. Any agreement required by paragraph 
(a)(3)(i) of this section must:
    (i) Explain the specific actions that the state member bank will 
take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken; and
    (iii) Provide any other information the Board may require.
    (5) Imposition of limits. Until the Board determines that the 
conditions described in the notice under paragraph (a)(1) of this 
section are corrected:
    (i) The Board may impose any limitations on the conduct or 
activities of the state member bank or any subsidiary of the bank as the 
Board determines to be appropriate under the circumstances and 
consistent with the purposes of section 121 of the Gramm-Leach-Bliley 
Act, including requiring the Board's prior approval for any financial 
subsidiary of the bank to acquire any company or engage in any 
additional activity; and
    (ii) The appropriate Federal banking agency for any relevant 
depository institution affiliate may impose any limitations on the 
conduct or activities of the depository institution or any subsidiary of 
that institution as the agency determines to be appropriate under the 
circumstances and consistent with the purposes of section 121 of the 
Gramm-Leach-Bliley Act.
    (6) Divestiture. The Board may require a state member bank to divest 
control

[[Page 221]]

of any financial subsidiary if the conditions described in a notice 
under paragraph (a)(1) of this section are not corrected within 180 days 
of receipt of the notice or such additional period of time as the Board 
may permit. Any divestiture must be completed in accordance with any 
terms and conditions established by the Board.
    (7) Consultation. The Board will consult with all relevant Federal 
and state regulatory authorities in taking any action under this 
paragraph (a).
    (b) Debt rating or alternative requirement. If a state member bank 
does not continue to meet any applicable debt rating or alternative 
requirement of Sec. 208.71(b), the bank may not, directly or through a 
subsidiary, purchase or acquire any additional equity capital of any 
financial subsidiary until the bank restores its compliance with the 
requirements of that section. For purposes of this paragraph (b), the 
term ``equity capital'' includes, in addition to any equity instrument, 
any debt instrument issued by the financial subsidiary if the debt 
instrument qualifies as capital of the subsidiary under any Federal or 
state law, regulation or interpretation applicable to the subsidiary.



Sec. 208.75  What happens if the state member bank or any of its insured 

depository institution affiliates receives less than a ``satisfactory'' 
CRA rating?

    (a) Limits on establishment of financial subsidiaries and expansion 
of existing financial subsidiaries. If a state member bank, or any 
insured depository institution affiliate of the bank, has received less 
than a ``satisfactory'' rating in meeting community credit needs in its 
most recent examination under the Community Reinvestment Act of 1977 (12 
U.S.C. 2901 et seq.):
    (1) The state member bank may not, directly or indirectly, acquire 
control of any financial subsidiary; and
    (2) Any financial subsidiary controlled by the state member bank may 
not commence any additional activity or acquire control, including all 
or substantially all of the assets, of any company.
    (b) Exception for certain activities. The prohibition in paragraph 
(a)(2) of this section does not apply to any activity, or to the 
acquisition of control of any company that is engaged only in 
activities, that the state member bank is permitted to conduct directly 
and that are conducted on the same terms and conditions that govern the 
conduct of the activity by the state member bank.
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as the state member bank and each insured depository institution 
affiliate of the state member bank has achieved at least a 
``satisfactory'' rating in meeting community credit needs in its most 
recent examination under the Community Reinvestment Act.



Sec. 208.76  What Federal Reserve approvals are necessary for financial 
subsidiaries?

    (a) Notice requirements. (1) A state member bank may not acquire 
control of, or an interest in, a financial subsidiary unless it files a 
notice (in letter form, with enclosures) with the appropriate Reserve 
Bank.
    (2) A state member bank may not engage in any additional activity 
pursuant to Sec. 208.72(a)(1) or (2) through an existing financial 
subsidiary unless the state member bank files a notice (in letter form, 
with enclosures) with the appropriate Reserve Bank.
    (b) Contents of Notice. Any notice required by paragraph (a) of this 
section must:
    (1) In the case of a notice filed under paragraph (a)(1) of this 
section, describe the transaction(s) through which the bank proposes to 
acquire control of, or an interest in, the financial subsidiary;
    (2) Provide the name and head office address of the financial 
subsidiary;
    (3) Provide a description of the current and proposed activities of 
the financial subsidiary and the specific authority permitting each 
activity;
    (4) Provide the capital ratios as of the close of the previous 
calendar quarter for all relevant capital measures, as defined in 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for 
the bank and each of its depository institution affiliates;
    (5) Certify that the bank and each of its depository institution 
affiliates was

[[Page 222]]

well capitalized at the close of the previous calendar quarter and is 
well capitalized as of the date the bank files its notice;
    (6) Certify that the bank and each of its depository institution 
affiliates is well managed as of the date the bank files its notice;
    (7) Certify that the bank meets the debt rating or alternative 
requirement of Sec. 208.71(b), if applicable; and
    (8) Certify that the bank and its financial subsidiaries are in 
compliance with the asset limit set forth in Sec. 208.71(a)(2) both 
before the proposal and on a pro forma basis.
    (c) Insurance activities. (1) If a notice filed under paragraph (a) 
of this section relates to the initial affiliation of the bank with a 
company engaged in insurance activities, the notice must describe the 
type of insurance activity that the company is engaged in or plans to 
conduct and identify each state where the company holds an insurance 
license and the state insurance regulatory authority that issued the 
license.
    (2) The appropriate Reserve Bank will send a copy of any notice 
described in paragraph (c)(1) of this section to the appropriate state 
insurance regulatory authorities and provide such authorities with an 
opportunity to comment on the proposal.
    (d) Approval procedures. A notice filed with the appropriate Reserve 
Bank under paragraph (a) of this section will be deemed approved on the 
fifteenth day after receipt of a complete notice by the appropriate 
Reserve Bank, unless prior to that date the Board or the appropriate 
Reserve Bank notifies the bank that the notice is approved, that the 
notice will require additional review, or that the bank does not meet 
the requirements of this subpart. Any notification of early approval of 
a notice must be in writing.



Sec. 208.77  Definitions.

    The following definitions shall apply for purposes of this subpart:
    (a) Affiliate, Company, Control, and Subsidiary. The terms 
``affiliate'', ``company'', ``control'', and ``subsidiary'' have the 
meanings given those terms in section 2 of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841).
    (b) Appropriate Federal Banking Agency, Depository Institution, 
Insured Bank and Insured Depository Institution. The terms ``appropriate 
Federal banking agency'', ``depository institution'', ``insured bank'' 
and ``insured depository institution'' have the meanings given those 
terms in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813).
    (c) Capital-related definitions.
    (1) The terms ``Tier 1 capital'', ``tangible equity'', ``risk-
weighted assets'' and ``total assets'' have the meanings given those 
terms in Sec. 208.41 of this part.
    (2) The terms ``Tier 2 capital'' and ``average total assets'' have 
the meanings given those terms in Appendix A and Appendix B of this 
part, respectively.
    (d) Eligible Debt. The term ``eligible debt'' means unsecured debt 
with an initial maturity of more than 360 days that:
    (1) Is not supported by any form of credit enhancement, including a 
guarantee or standby letter of credit; and
    (2) Is not held in whole or in any significant part by any 
affiliate, officer, director, principal shareholder, or employee of the 
bank or any other person acting on behalf of or with funds from the bank 
or an affiliate of the bank.
    (e) Financial Subsidiary--(1) In general. The term ``financial 
subsidiary'' means any company that is controlled by one or more insured 
depository institutions other than:
    (i) A subsidiary that engages only in activities that the state 
member bank is permitted to engage in directly and that are conducted on 
the same terms and conditions that govern the conduct of the activities 
by the state member bank; or
    (ii) A subsidiary that the state member bank is specifically 
authorized by the express terms of a Federal statute (other than section 
9 of the Federal Reserve Act (12 U.S.C. 335)), and not by implication or 
interpretation, to control, such as by section 25 or 25A of the Federal 
Reserve Act (12 U.S.C. 601-604a, 611-631) or the Bank Service Company 
Act (12 U.S.C. 1861 et seq.).
    (2) Subsidiaries of financial subsidiaries. A financial subsidiary 
includes

[[Page 223]]

any company that is directly or indirectly controlled by the financial 
subsidiary.
    (f) Long-term Issuer Credit Rating. The term ``long-term issuer 
credit rating'' means a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, dollar-
denominated financial obligations maturing in not less than one year.
    (g) Well Capitalized--(1) Insured depository institutions. An 
insured depository institution is ``well capitalized'' if it has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines adopted by the 
institution's appropriate Federal banking agency under section 38 of the 
Federal Deposit Insurance Act (12 U.S.C. 1831o).
    (2) Uninsured depository institutions. A depository institution the 
deposits of which are not insured by the Federal Deposit Insurance 
Corporation is ``well capitalized'' if the institution has and maintains 
at least the capital levels required for an insured depository 
institution to be well capitalized.
    (h) Well Managed--(1) In general. The term ``well managed'' means:
    (i) Unless otherwise determined in writing by the appropriate 
Federal banking agency, the institution has received a composite rating 
of 1 or 2 under the Uniform Financial Institutions Rating System (or an 
equivalent rating under an equivalent rating system) and at least a 
rating of 2 for management (if such rating is given) in connection with 
its most recent examination or subsequent review by the institution's 
appropriate Federal banking agency (or the appropriate state banking 
agency in an examination described in section 10(d) of the Federal 
Deposit Insurance Act (12 U.S.C. 1820(d)); or
    (ii) In the case of any depository institution that has not been 
examined by its appropriate Federal banking agency or been subject to an 
examination by its appropriate state banking agency that meets the 
requirements of section 10(d) of the Federal Deposit Insurance Act (18 
U.S.C. 1820(d)), the existence and use of managerial resources that the 
appropriate Federal banking agency determines are satisfactory.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed will 
be considered to be well managed unless the appropriate Federal banking 
agency for the resulting depository institution determines otherwise.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a well managed depository 
institution with one or more depository institutions that are not well 
managed or that have not been examined shall be considered to be well 
managed if the appropriate Federal banking agency for the resulting 
depository institution determines that the institution is well managed.



           Subpart H_Consumer Protection in Sales of Insurance

    Source: 65 FR 75841, Dec. 4, 2000, unless otherwise noted.



Sec. 208.81  Purpose and scope.

    This subpart establishes consumer protections in connection with 
retail sales practices, solicitations, advertising, or offers of any 
insurance product or annuity to a consumer by:
    (a) Any state member bank; or
    (b) Any other person that is engaged in such activities at an office 
of the bank or on behalf of the bank.



Sec. 208.82  Definitions for purposes of this subpart.

    As used in this subpart:
    (a) Affiliate means a company that controls, is controlled by, or is 
under common control with another company.
    (b) Bank means a state member bank.
    (c) Company means any corporation, partnership, business trust, 
association or similar organization, or any other trust (unless by its 
terms the trust must terminate within twenty-five years or not later 
than twenty-one years and ten months after the death of individuals 
living on the effective date of the trust). It does not include any 
corporation the majority of the

[[Page 224]]

shares of which are owned by the United States or by any State, or a 
qualified family partnership, as defined in section 2(o)(10) of the Bank 
Holding Company Act of 1956, as amended (12 U.S.C. 1841(o)(10)).
    (d) Consumer means an individual who purchases, applies to purchase, 
or is solicited to purchase from you insurance products or annuities 
primarily for personal, family, or household purposes.
    (e) Control of a company has the same meaning as in section 3(w)(5) 
of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(5)).
    (f) Domestic violence means the occurrence of one or more of the 
following acts by a current or former family member, household member, 
intimate partner, or caretaker:
    (1) Attempting to cause or causing or threatening another person 
physical harm, severe emotional distress, psychological trauma, rape, or 
sexual assault;
    (2) Engaging in a course of conduct or repeatedly committing acts 
toward another person, including following the person without proper 
authority, under circumstances that place the person in reasonable fear 
of bodily injury or physical harm;
    (3) Subjecting another person to false imprisonment; or
    (4) Attempting to cause or causing damage to property so as to 
intimidate or attempt to control the behavior of another person.
    (g) Electronic media includes any means for transmitting messages 
electronically between you and a consumer in a format that allows visual 
text to be displayed on equipment, for example, a personal computer 
monitor.
    (h) Office means the premises of a bank where retail deposits are 
accepted from the public.
    (i) Subsidiary has the same meaning as in section 3(w)(4) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(w)(4)).
    (j)(1) You means:
    (i) A bank; or
    (ii) Any other person only when the person sells, solicits, 
advertises, or offers an insurance product or annuity to a consumer at 
an office of the bank or on behalf of a bank.
    (2) For purposes of this definition, activities on behalf of a bank 
include activities where a person, whether at an office of the bank or 
at another location sells, solicits, advertises, or offers an insurance 
product or annuity and at least one of the following applies:
    (i) The person represents to a consumer that the sale, solicitation, 
advertisement, or offer of any insurance product or annuity is by or on 
behalf of the bank;
    (ii) If the bank refers a consumer to a seller of insurance products 
or annuities and the bank has a contractual arrangement to receive 
commissions or fees derived from the sale of an insurance product or 
annuity resulting from that referral; or
    (iii) Documents evidencing the sale, solicitation, advertising, or 
offer of an insurance product or annuity identify or refer to the bank.



Sec. 208.83  Prohibited practices.

    (a) Anticoercion and antitying rules. You may not engage in any 
practice that would lead a consumer to believe that an extension of 
credit, in violation of section 106(b) of the Bank Holding Company Act 
Amendments of 1970 (12 U.S.C. 1972), is conditional upon either:
    (1) The purchase of an insurance product or annuity from the bank or 
any of its affiliates; or
    (2) An agreement by the consumer not to obtain, or a prohibition on 
the consumer from obtaining, an insurance product or annuity from an 
unaffiliated entity.
    (b) Prohibition on misrepresentations generally. You may not engage 
in any practice or use any advertisement at any office of, or on behalf 
of, the bank or a subsidiary of the bank that could mislead any person 
or otherwise cause a reasonable person to reach an erroneous belief with 
respect to:
    (1) The fact that an insurance product or annuity sold or offered 
for sale by you or any subsidiary of the bank is not backed by the 
Federal government or the bank or the fact that the insurance product or 
annuity is not insured by the Federal Deposit Insurance Corporation;

[[Page 225]]

    (2) In the case of an insurance product or annuity that involves 
investment risk, the fact that there is an investment risk, including 
the potential that principal may be lost and that the product may 
decline in value; or
    (3) In the case of a bank or subsidiary of the bank at which 
insurance products or annuities are sold or offered for sale, the fact 
that:
    (i) The approval of an extension of credit to a consumer by the bank 
or subsidiary may not be conditioned on the purchase of an insurance 
product or annuity by the consumer from the bank or a subsidiary of the 
bank; and
    (ii) The consumer is free to purchase the insurance product or 
annuity from another source.
    (c) Prohibition on domestic violence discrimination. You may not 
sell or offer for sale, as principal, agent, or broker, any life or 
health insurance product if the status of the applicant or insured as a 
victim of domestic violence or as a provider of services to victims of 
domestic violence is considered as a criterion in any decision with 
regard to insurance underwriting, pricing, renewal, or scope of coverage 
of such product, or with regard to the payment of insurance claims on 
such product, except as required or expressly permitted under State law.



Sec. 208.84  What you must disclose.

    (a) Insurance disclosures. In connection with the initial purchase 
of an insurance product or annuity by a consumer from you, you must 
disclose to the consumer, except to the extent the disclosure would not 
be accurate, that:
    (1) The insurance product or annuity is not a deposit or other 
obligation of, or guaranteed by, the bank or an affiliate of the bank;
    (2) The insurance product or annuity is not insured by the Federal 
Deposit Insurance Corporation (FDIC) or any other agency of the United 
States, the bank, or (if applicable) an affiliate of the bank; and
    (3) In the case of an insurance product or annuity that involves an 
investment risk, there is investment risk associated with the product, 
including the possible loss of value.
    (b) Credit disclosure. In the case of an application for credit in 
connection with which an insurance product or annuity is solicited, 
offered, or sold, you must disclose that the bank may not condition an 
extension of credit on either:
    (1) The consumer's purchase of an insurance product or annuity from 
the bank or any of its affiliates; or
    (2) The consumer's agreement not to obtain, or a prohibition on the 
consumer from obtaining, an insurance product or annuity from an 
unaffiliated entity.
    (c) Timing and method of disclosures--(1) In general. The 
disclosures required by paragraph (a) of this section must be provided 
orally and in writing before the completion of the initial sale of an 
insurance product or annuity to a consumer. The disclosure required by 
paragraph (b) of this section must be made orally and in writing at the 
time the consumer applies for an extension of credit in connection with 
which insurance is solicited, offered, or sold.
    (2) Exceptions for transactions by mail. If a sale of an insurance 
product or annuity is conducted by mail, you are not required to make 
the oral disclosures required by paragraph (a) of this section. If you 
take an application for credit by mail, you are not required to make the 
oral disclosure required by paragraph (b) of this section.
    (3) Exception for transactions by telephone. If a sale of an 
insurance product or annuity is conducted by telephone, you may provide 
the written disclosures required by paragraph (a) of this section by 
mail within 3 business days beginning on the first business day after 
the sale, excluding Sundays and the legal public holidays specified in 5 
U.S.C 6103(a). If you take an application for such credit by telephone, 
you may provide the written disclosure required by paragraph (b) of this 
section by mail, provided you mail it to the consumer within three days 
beginning the first business day after the application is taken, 
excluding Sundays and the legal public holidays specified in 5 U.S.C. 
6103(a).
    (4) Electronic form of disclosures. (i) Subject to the requirements 
of section 101(c) of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001(c)), you may provide the

[[Page 226]]

written disclosures required by paragraphs (a) and (b) of this section 
through electronic media instead of on paper, if the consumer 
affirmatively consents to receiving the disclosures electronically and 
if the disclosures are provided in a format that the consumer may retain 
or obtain later, for example, by printing or storing electronically 
(such as by downloading).
    (ii) Any disclosures required by paragraphs (a) or (b) of this 
section that are provided by electronic media are not required to be 
provided orally.
    (5) Disclosures must be readily understandable. The disclosures 
provided shall be conspicuous, simple, direct, readily understandable, 
and designed to call attention to the nature and significance of the 
information provided. For instance, you may use the following 
disclosures, in visual media, such as television broadcasting, ATM 
screens, billboards, signs, posters and written advertisements and 
promotional materials, as appropriate and consistent with paragraphs (a) 
and (b) of this section:

 NOT A DEPOSIT
 NOT FDIC-INSURED
 NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
 NOT GUARANTEED BY THE BANK
 MAY GO DOWN IN VALUE

    (6) Disclosures must be meaningful. (i) You must provide the 
disclosures required by paragraphs (a) and (b) of this section in a 
meaningful form. Examples of the types of methods that could call 
attention to the nature and significance of the information provided 
include:
    (A) A plain-language heading to call attention to the disclosures;
    (B) A typeface and type size that are easy to read;
    (C) Wide margins and ample line spacing;
    (D) Boldface or italics for key words; and
    (E) Distinctive type size, style, and graphic devices, such as 
shading or sidebars, when the disclosures are combined with other 
information.
    (ii) You have not provided the disclosures in a meaningful form if 
you merely state to the consumer that the required disclosures are 
available in printed material, but you do not provide the printed 
material when required and do not orally disclose the information to the 
consumer when required.
    (iii) With respect to those disclosures made through electronic 
media for which paper or oral disclosures are not required, the 
disclosures are not meaningfully provided if the consumer may bypass the 
visual text of the disclosures before purchasing an insurance product or 
annuity.
    (7) Consumer acknowledgment. You must obtain from the consumer, at 
the time a consumer receives the disclosures required under paragraphs 
(a) or (b) of this section, or at the time of the initial purchase by 
the consumer of an insurance product or annuity, a written 
acknowledgment by the consumer that the consumer received the 
disclosures. You may permit a consumer to acknowledge receipt of the 
disclosures electronically or in paper form. If the disclosures required 
under paragraphs (a) or (b) of this section are provided in connection 
with a transaction that is conducted by telephone, you must:
    (i) Obtain an oral acknowledgment of receipt of the disclosures and 
maintain sufficient documentation to show that the acknowledgment was 
given; and
    (ii) Make reasonable efforts to obtain a written acknowledgment from 
the consumer.
    (d) Advertisements and other promotional material for insurance 
products or annuities. The disclosures described in paragraph (a) of 
this section are required in advertisements and promotional material for 
insurance products or annuities unless the advertisements and 
promotional materials are of a general nature describing or listing the 
services or products offered by the bank.



Sec. 208.85  Where insurance activities may take place.

    (a) General rule. A bank must, to the extent practicable, keep the 
area where the bank conducts transactions involving insurance products 
or annuities physically segregated from areas where retail deposits are 
routinely accepted from the general public, identify the areas where 
insurance product or annuity sales activities occur, and clearly 
delineate and distinguish those areas

[[Page 227]]

from the areas where the bank's retail deposit-taking activities occur.
    (b) Referrals. Any person who accepts deposits from the public in an 
area where such transactions are routinely conducted in the bank may 
refer a consumer who seeks to purchase an insurance product or annuity 
to a qualified person who sells that product only if the person making 
the referral receives no more than a one-time, nominal fee of a fixed 
dollar amount for each referral that does not depend on whether the 
referral results in a transaction.



Sec. 208.86  Qualification and licensing requirements for insurance 
sales personnel.

    A bank may not permit any person to sell or offer for sale any 
insurance product or annuity in any part of its office or on its behalf, 
unless the person is at all times appropriately qualified and licensed 
under applicable State insurance licensing standards with regard to the 
specific products being sold or recommended.

     Appendix A to Subpart H of Part 208--Consumer Grievance Process

    Any consumer who believes that any bank or any other person selling, 
soliciting, advertising, or offering insurance products or annuities to 
the consumer at an office of the bank or on behalf of the bank has 
violated the requirements of this subpart should contact the Consumer 
Complaints Section, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System at the following address: 20th & 
C Streets, NW, Washington, D.C. 20551.



                        Subpart I_Interpretations

    Source: Reg. H, 63 FR 37658, July 13, 1998, unless otherwise noted. 
Redesignated at 65 FR 14814, Mar. 20, 2000. Redesignated further at 65 
FR 75841, Dec. 4, 2000.



Sec. 208.100  Sale of bank's money orders off premises as establishment 
of branch office.

    (a) The Board of Governors has been asked to consider whether the 
appointment by a member bank of an agent to sell the bank's money 
orders, at a location other than the premises of the bank, constitutes 
the establishment of a branch office.
    (b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is 
also applicable to member banks, defines the term branch as including 
``any branch bank, branch office, branch agency, additional office, or 
any branch place of business * * * at which deposits are received, or 
checks paid, or money lent.'' The basic question is whether the sale of 
a bank's money orders by an agent amounts to the receipt of deposits at 
a branch place of business within the meaning of this statute.
    (c) Money orders are classified as deposits for certain purposes. 
However, they bear a strong resemblance to traveler's checks that are 
issued by banks and sold off premises. In both cases, the purchaser does 
not intend to establish a deposit account in the bank, although a 
liability on the bank's part is created. Even though they result in a 
deposit liability, the Board is of the opinion that the issuance of a 
bank's money orders by an authorized agent does not involve the receipt 
of deposits at a ``branch place of business'' and accordingly does not 
require the Board's permission to establish a branch.



Sec. 208.101  Obligations concerning institutional customers.

    (a) As a result of broadened authority provided by the Government 
Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the Board 
is adopting sales practice rules for the government securities market, a 
market with a particularly broad institutional component. Accordingly, 
the Board believes it is appropriate to provide further guidance to 
banks on their suitability obligations when making recommendations to 
institutional customers.
    (b) The Board's Suitability Rule, Sec. 208.37(d), is fundamental to 
fair dealing and is intended to promote ethical sales practices and high 
standards of professional conduct. Banks' responsibilities include 
having a reasonable basis for recommending a particular security or 
strategy, as well as having reasonable grounds for believing the 
recommendation is suitable for the customer to whom it is made. Banks 
are expected to meet the same high standards of competence, 
professionalism, and good faith regardless of

[[Page 228]]

the financial circumstances of the customer.
    (c) In recommending to a customer the purchase, sale, or exchange of 
any government security, the bank shall have reasonable grounds for 
believing that the recommendation is suitable for the customer upon the 
basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and financial situation and needs.
    (d) The interpretation in this section concerns only the manner in 
which a bank determines that a recommendation is suitable for a 
particular institutional customer. The manner in which a bank fulfills 
this suitability obligation will vary, depending on the nature of the 
customer and the specific transaction. Accordingly, the interpretation 
in this section deals only with guidance regarding how a bank may 
fulfill customer-specific suitability obligations under Sec. 
208.37(d).\7\
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    \7\ The interpretation in this section does not address the 
obligation related to suitability that requires that a bank have''* * * 
a `reasonable basis' to believe that the recommendation could be 
suitable for at least some customers.'' In the Matter of the Application 
of F.J. Kaufman and Company of Virginia and Frederick J. Kaufman, Jr., 
50 SEC 164 (1989).
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    (e) While it is difficult to define in advance the scope of a bank's 
suitability obligation with respect to a specific institutional customer 
transaction recommended by a bank, the Board has identified certain 
factors that may be relevant when considering compliance with Sec. 
208.37(d). These factors are not intended to be requirements or the only 
factors to be considered but are offered merely as guidance in 
determining the scope of a bank's suitability obligations.
    (f) The two most important considerations in determining the scope 
of a bank's suitability obligations in making recommendations to an 
institutional customer are the customer's capability to evaluate 
investment risk independently and the extent to which the customer is 
exercising independent judgement in evaluating a bank's recommendation. 
A bank must determine, based on the information available to it, the 
customer's capability to evaluate investment risk. In some cases, the 
bank may conclude that the customer is not capable of making independent 
investment decisions in general. In other cases, the institutional 
customer may have general capability, but may not be able to understand 
a particular type of instrument or its risk. This is more likely to 
arise with relatively new types of instruments, or those with 
significantly different risk or volatility characteristics than other 
investments generally made by the institution. If a customer is either 
generally not capable of evaluating investment risk or lacks sufficient 
capability to evaluate the particular product, the scope of a bank's 
customer-specific obligations under Sec. 208.37(d) would not be 
diminished by the fact that the bank was dealing with an institutional 
customer. On the other hand, the fact that a customer initially needed 
help understanding a potential investment need not necessarily imply 
that the customer did not ultimately develop an understanding and make 
an independent investment decision.
    (g) A bank may conclude that a customer is exercising independent 
judgement if the customer's investment decision will be based on its own 
independent assessment of the opportunities and risks presented by a 
potential investment, market factors and other investment 
considerations. Where the bank has reasonable grounds for concluding 
that the institutional customer is making independent investment 
decisions and is capable of independently evaluating investment risk, 
then a bank's obligations under Sec. 208.25(d) for a particular 
customer are fulfilled.\8\ Where a customer has delegated decision-
making authority to an agent, such as an investment advisor or a bank 
trust department, the interpretation in this section shall be applied to 
the agent.
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    \8\ See footnote 7 in paragraph (d) of this section.
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    (h) A determination of capability to evaluate investment risk 
independently will depend on an examination of the customer's capability 
to make its own investment decisions, including the resources available 
to the customer

[[Page 229]]

to make informed decisions. Relevant considerations could include:
    (1) The use of one or more consultants, investment advisers, or bank 
trust departments;
    (2) The general level of experience of the institutional customer in 
financial markets and specific experience with the type of instruments 
under consideration;
    (3) The customer's ability to understand the economic features of 
the security involved;
    (4) The customer's ability to independently evaluate how market 
developments would affect the security; and
    (5) The complexity of the security or securities involved.
    (i) A determination that a customer is making independent investment 
decisions will depend on the nature of the relationship that exists 
between the bank and the customer. Relevant considerations could 
include:
    (1) Any written or oral understanding that exists between the bank 
and the customer regarding the nature of the relationship between the 
bank and the customer and the services to be rendered by the bank;
    (2) The presence or absence of a pattern of acceptance of the bank's 
recommendations;
    (3) The use by the customer of ideas, suggestions, market views and 
information obtained from other government securities brokers or dealers 
or market professionals, particularly those relating to the same type of 
securities; and
    (4) The extent to which the bank has received from the customer 
current comprehensive portfolio information in connection with 
discussing recommended transactions or has not been provided important 
information regarding its portfolio or investment objectives.
    (j) Banks are reminded that these factors are merely guidelines that 
will be utilized to determine whether a bank has fulfilled its 
suitability obligation with respect to a specific institutional customer 
transaction and that the inclusion or absence of any of these factors is 
not dispositive of the determination of suitability. Such a 
determination can only be made on a case-by-case basis taking into 
consideration all the facts and circumstances of a particular bank/
customer relationship, assessed in the context of a particular 
transaction.
    (k) For purposes of the interpretation in this section, an 
institutional customer shall be any entity other than a natural person. 
In determining the applicability of the interpretation in this section 
to an institutional customer, the Board will consider the dollar value 
of the securities that the institutional customer has in its portfolio 
and/or under management. While the interpretation in this section is 
potentially applicable to any institutional customer, the guidance 
contained in this section is more appropriately applied to an 
institutional customer with at least $10 million invested in securities 
in the aggregate in its portfolio and/or under management.

  Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
                        Banks: Risk-Based Measure

                               I. Overview

    The Board of Governors of the Federal Reserve System has adopted a 
risk-based capital measure to assist in the assessment of the capital 
adequacy of state member banks.\1\ The principal objectives of this 
measure are to: (i) Make regulatory capital requirements more sensitive 
to differences in risk profiles among banks; (ii) factor off-balance 
sheet exposures into the assessment of capital adequacy; (iii) minimize 
disincentives to holding liquid, low-risk assets; and (iv) achieve 
greater consistency in the evaluation of the capital adequacy of major 
banks throughout the world.\2\
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    \1\ Supervisory ratios that relate capital to total assets for state 
member banks are outlined in appendix B of this part and in appendix B 
to part 225 of the Federal Reserve's Regulation Y, 12 CFR part 225.
    \2\ The risk-based capital measure is based upon a framework 
developed jointly by supervisory authorities from the countries 
represented on the Basle Committee on Banking Regulations and 
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the 
Group of Ten Central Bank Governors. The framework is described in a 
paper prepared by the BSC entitled ``International Convergence of 
Capital Measurement,'' July 1988.
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    The risk-based capital guidelines include both a definition of 
capital and a framework for calculating weighted risk assets by 
assigning assets and off-balance sheet items to

[[Page 230]]

broad risk categories. A bank's risk-based capital ratio is calculated 
by dividing its qualifying capital (the numerator of the ratio) by its 
weighted risk assets (the denominator).\3\ The definition of qualifying 
capital is outlined below in section II, and the procedures for 
calculating weighted risk assets are discussed in Section III. 
Attachment I illustrates a sample calculation of weighted risk assets 
and the risk-based capital ratio.
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    \3\ Banks will initially be expected to utilize period-end amounts 
in calculating their risk-based capital ratios. When necessary and 
appropriate, ratios based on average balances may also be calculated on 
a case-by-case basis. Moreover, to the extent banks have data on average 
balances that can be used to calculate risk-based ratios, the Federal 
Reserve will take such data into account.
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    In addition, when certain banks that engage in trading activities 
calculate their risk-based capital ratio under this appendix A, they 
must also refer to appendix E of this part, which incorporates capital 
charges for certain market risks into the risk-based capital ratio. When 
calculating their risk-based capital ratio under this appendix A, such 
banks are required to refer to appendix E of this part for supplemental 
rules to determine qualifying and excess capital, calculate risk-
weighted assets, calculate market risk equivalent assets, and calculate 
risk-based capital ratios adjusted for market risk.
    The risk-based capital guidelines also establish a schedule for 
achieving a minimum supervisory standard for the ratio of qualifying 
capital to weighted risk assets and provide for transitional 
arrangements during a phase-in period to facilitate adoption and 
implementation of the measure at the end of 1992. These interim 
standards and transitional arrangements are set forth in section IV.
    The risk-based guidelines apply to all state member banks on a 
consolidated basis. They are to be used in the examination and 
supervisory process as well as in the analysis of applications acted 
upon by the Federal Reserve. Thus, in considering an application filed 
by a state member bank, the Federal Reserve will take into account the 
bank's risk-based capital ratio, the reasonableness of its capital 
plans, and the degree of progress it has demonstrated toward meeting the 
interim and final risk-based capital standards.
    The risk-based capital ratio focuses principally on broad categories 
of credit risk, although the framework for assigning assets and off-
balance-sheet items to risk categories does incorporate elements of 
transfer risk, as well as limited instances of interest rate and market 
risk. The framework incorporates risks arising from traditional banking 
activities as well as risks arising from nontraditional activities. The 
risk-based ratio does not, however, incorporate other factors that can 
affect an institution's financial condition. These factors include 
overall interest-rate exposure; liquidity, funding and market risks; the 
quality and level of earnings; investment, loan portfolio, and other 
concentrations of credit; certain risks arising from nontraditional 
activities; the quality of loans and investments; the effectiveness of 
loan and investment policies; and management's overall ability to 
monitor and control financial and operating risks, including the risks 
presented by concentrations of credit and nontraditional activities.
    In addition to evaluating capital ratios, an overall assessment of 
capital adequacy must take account of those factors, including, in 
particular, the level and severity of problem and classified assets as 
well as a bank's exposure to declines in the economic value of its 
capital due to changes in interest rates. For this reason, the final 
supervisory judgment on a bank's capital adequacy may differ 
significantly from conclusions that might be drawn solely from the level 
of its risk-based capital ratio.
    The risk-based capital guidelines establish minimum ratios of 
capital to weighted risk assets. In light of the considerations just 
discussed, banks generally are expected to operate well above the 
minimum risk-based ratios. In particular, banks contemplating 
significant expansion proposals are expected to maintain strong capital 
levels substantially above the minimum ratios and should not allow 
significant diminution of financial strength below these strong levels 
to fund their expansion plans. Institutions with high or inordinate 
levels of risk are also expected to operate well above minimum capital 
standards. In all cases, institutions should hold capital commensurate 
with the level and nature of the risks to which they are exposed. Banks 
that do not meet the minimum risk-based standard, or that are otherwise 
considered to be inadequately capitalized, are expected to develop and 
implement plans acceptable to the Federal Reserve for achieving adequate 
levels of capital within a reasonable period of time.
    The Board will monitor the implementation and effect of these 
guidelines in relation to domestic and international developments in the 
banking industry. When necessary and appropriate, the Board will 
consider the need to modify the guidelines in light of any significant 
changes in the economy, financial markets, banking practices, or other 
relevant factors.

  II. Definition of Qualifying Capital for the Risk-Based Capital Ratio

    A bank's qualifying total capital consists of two types of capital 
components: ``core capital elements'' (comprising tier 1 capital)

[[Page 231]]

and ``supplementary capital elements'' (comprising tier 2 capital). 
These capital elements and the various limits, restrictions, and 
deductions to which they are subject, are discussed below and are set 
forth in Attachment II.
    The Federal Reserve will, on a case-by-case basis, determine whether 
and, if so, how much of any instrument that does not fit wholly within 
the terms of one of the capital categories set forth below or that does 
not have an ability to absorb losses commensurate with the capital 
treatment otherwise specified below will be counted as an element of 
tier 1 or tier 2 capital. In making such a determination, the Federal 
Reserve will consider the similarity of the instrument to instruments 
explicitly treated in the guidelines, the ability of the instrument to 
absorb losses while the bank operates as a going concern, the maturity 
and redemption features of the instrument, and other relevant terms and 
factors. To qualify as an element of tier 1 or tier 2 capital, a capital 
instrument may not contain or be covered by any covenants, terms, or 
restrictions that are inconsistent with safe and sound banking 
practices.
    Redemptions of permanent equity or other capital instruments before 
stated maturity could have a significant impact on a bank's overall 
capital structure. Consequently, a bank considering such a step should 
consult with the Federal Reserve before redeeming any equity or debt 
capital instrument (prior to maturity) if such redemption could have a 
material effect on the level or composition of the institution's capital 
base.\4\
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    \4\ Consultation would not ordinarily be necessary if an instrument 
were redeemed with the proceeds of, or replaced by, a like amount of a 
similar or higher quality capital instrument and the organization's 
capital position is considered fully adequate by the Federal Reserve.
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                 A. The Components of Qualifying Capital

    1. Core capital elements (tier 1 capital). The tier 1 component of a 
bank's qualifying capital must represent at least 50 percent of 
qualifying total capital and may consist of the following items that are 
defined as core capital elements:
    (i) Common stockholders' equity;
    (ii) Qualifying noncumulative perpetual preferred stock (including 
related surplus); and
    (iii) Minority interest in the equity accounts of consolidated 
subsidiaries.
    Tier 1 capital is generally defined as the sum of core capital 
elements \5\ less any amounts of goodwill, other intangible assets, 
interest-only strips receivables and nonfinancial equity investments 
that are required to be deducted in accordance with section II.B. of 
this appendix A.
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    \5\ [Reserved]
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    a. Common stockholders' equity. For purposes of calculating the 
risk-based capital ratio, common stockholders' equity is limited to 
common stock; related surplus; and retained earnings, including capital 
reserves and adjustments for the cumulative effect of foreign currency 
translation, net of any treasury stock; less net unrealized holding 
losses on available-for-sale equity securities with readily determinable 
fair values. For this purpose, net unrealized holding gains on such 
equity securities and net unrealized holding gains (losses) on 
available-for-sale debt securities are not included in common 
stockholders' equity.
    b. Perpetual preferred stock. Perpetual preferred stock is defined 
as preferred stock that does not have a maturity date, that cannot be 
redeemed at the option of the holder of the instrument, and that has no 
other provisions that will require future redemption of the issue. 
Consistent with these provisions, any perpetual preferred stock with a 
feature permitting redemption at the option of the issuer may qualify as 
capital only if the redemption is subject to prior approval of the 
Federal Reserve. In general, preferred stock will qualify for inclusion 
in capital only if it can absorb losses while the issuer operates as a 
going concern (a fundamental characteristic of equity capital) and only 
if the issuer has the ability and legal right to defer or eliminate 
preferred dividends.
    The only form of perpetual preferred stock that state member banks 
may consider as an element of Tier 1 capital is noncumulative perpetual 
preferred. While the guidelines allow for the inclusion of noncumulative 
perpetual preferred stock in Tier 1, it is desirable from a supervisory 
standpoint that voting common stockholders' equity remain the dominant 
form of Tier 1 capital. Thus, state member banks should avoid 
overreliance on preferred stock or non-voting equity elements within 
Tier 1.
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    \6\ [Reserved]
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    Perpetual preferred stock in which the dividend is reset 
periodically based, in whole or in part, upon the bank's current credit 
standing (that is, auction rate perpetual preferred stock, including so-
called Dutch auction, money market, and remarketable preferred) will not 
qualify for inclusion in Tier 1 capital.\7\ Such instruments, however, 
qualify for inclusion in Tier 2 capital.
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    \7\ Adjustable rate noncumulative perpetual preferred stock (that 
is, perpetual preferred stock in which the dividend rate is not affected 
by the issuer's credit standing or financial condition but is adjusted 
periodically according to a formula based solely on general market 
interest rates) may be included in Tier 1.

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[[Page 232]]

    c. Minority interest in equity accounts of consolidated 
subsidiaries. This element is included in tier 1 capital because, as a 
general rule, it represents equity that is freely available to absorb 
losses in operating subsidiaries whose assets are included in a bank's 
risk-weighted asset base. While not subject to an explicit sublimit 
within tier 1, banks are expected to avoid using minority interest in 
the equity accounts of consolidated subsidiaries as an avenue for 
introducing into their capital structures elements that might not 
otherwise qualify as tier 1 capital or that would, in effect, result in 
an excessive reliance on preferred stock within tier 1. Minority 
interests in small business investment companies, investment funds that 
hold nonfinancial equity investments (as defined in section II.B.5.b. of 
this appendix A), and subsidiaries engaged in nonfinancial activities, 
are not included in the bank's tier 1 or total capital base if the 
bank's interest in the company or fund is held under one of the legal 
authorities listed in section II.B.5.b. In addition, minority interests 
in consolidated asset-backed commercial paper programs (ABCP) (as 
defined in section III.B.6. of this appendix A) that are sponsored by a 
bank are not to be included in the bank's tier 1 or total capital base 
if the bank excludes the consolidated assets of such programs from risk-
weighted assets pursuant to section III.B.6. of this appendix.
    2. Supplementary capital elements (tier 2 capital). The tier 2 
component of a bank's qualifying capital may consist of the following 
items that are defined as supplementary capital elements:
    (i) Allowance for loan and lease losses (subject to limitations 
discussed below);
    (ii) Perpetual preferred stock and related surplus (subject to 
conditions discussed below);
    (iii) Hybrid capital instruments (as defined below), and mandatory 
convertible debt securities;
    (iv) Term subordinated debt and intermediate-term preferred stock, 
including related surplus (subject to limitations discussed below);
    (v) Unrealized holding gains on equity securities (subject to 
limitations discussed in section II.A.2.e. of this appendix).
    The maximum amount of tier 2 capital that may be included in a 
bank's qualifying total capital is limited to 100 percent of tier 1 
capital (net of goodwill, other intangible assets, interest-only strips 
receivables and nonfinancial equity investments that are required to be 
deducted in accordance with section II.B. of this appendix A).
    The elements of supplementary capital are discussed in greater 
detail below.
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    \8\ [Reserved]
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    a. Allowance for loan and lease losses. Allowances for loan and 
lease losses are reserves that have been established through a charge 
against earnings to absorb future losses on loans or lease financing 
receivables. Allowances for loan and lease losses exclude ``allocated 
transfer risk reserves,'' \9\ and reserves created against identified 
losses.
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    \9\ Allocated transfer risk reserves are reserves that have been 
established in accordance with Section 905(a) of the International 
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain 
assets whose value U.S. supervisory authorities have found to be 
significantly impaired by protracted transfer risk problems.
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    During the transition period, the risk-based capital guidelines 
provide for reducing the amount of this allowance that may be included 
in an institution's total capital. Initially, it is unlimited. However, 
by year-end 1990, the amount of the allowance for loan and lease losses 
that will qualify as capital will be limited to 1.5 percent of an 
institution's weighted risk assets. By the end of the transition period, 
the amount of the allowance qualifying for inclusion in Tier 2 capital 
may not exceed 1.25 percent of weighted risk assets.\10\
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    \10\ The amount of the allowance for loan and lease losses that may 
be included in Tier 2 capital is based on a percentage of gross weighted 
risk assets. A bank may deduct reserves for loan and lease losses in 
excess of the amount permitted to be included in Tier 2 capital, as well 
as allocated transfer risk reserves, from the sum of gross weighted risk 
assets and use the resulting net sum of weighted risk assets in 
computing the denominator of the risk-based capital ratio.
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    b. Perpetual preferred stock. Perpetual preferred stock, as noted 
above, is defined as preferred stock that has no maturity date, that 
cannot be redeemed at the option of the holder, and that has no other 
provisions that will require future redemption of the issue. Such 
instruments are eligible for inclusion in Tier 2 capital without 
limit.\11\
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    \11\ Long-term preferred stock with an original maturity of 20 years 
or more (including related surplus) will also qualify in this category 
as an element of Tier 2. If the holder of such an instrument has a right 
to require the issuer to redeem, repay, or repurchase the instrument 
prior to the original stated maturity, maturity would be defined, for 
risk-based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing bank.

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[[Page 233]]

    c. Hybrid capital instruments and mandatory convertible debt 
securities. Hybrid capital instruments include instruments that are 
essentially permanent in nature and that have certain characteristics of 
both equity and debt. Such instruments may be included in Tier 2 without 
limit. The general criteria hybrid capital instruments must meet in 
order to qualify for inclusion in Tier 2 capital are listed below:
    (1) The instrument must be unsecured; fully paid-up; and 
subordinated to general creditors and must also be subordinated to 
claims of depositors.
    (2) The instrument must not be redeemable at the option of the 
holder prior to maturity, except with the prior approval of the Federal 
Reserve. (Consistent with the Board's criteria for perpetual debt and 
mandatory convertible securities, this requirement implies that holders 
of such instruments may not accelerate the payment of principal except 
in the event of bankruptcy, insolvency, or reorganization.)
    (3) The instrument must be available to participate in losses while 
the issuer is operating as a going concern. (Term subordinated debt 
would not meet this requirement.) To satisfy this requirement, the 
instrument must convert to common or perpetual preferred stock in the 
event that the accumulated losses exceed the sum of the retained 
earnings and capital surplus accounts of the issuer.
    (4) The instrument must provide the option for the issuer to defer 
interest payments if: (a) The issuer does not report a profit in the 
preceding annual period (defined as combined profits for the most recent 
four quarters), and (b) the issuer eliminates cash dividends on common 
and preferred stock.
    Mandatory convertible debt securities in the form of equity contract 
notes that meet the criteria set forth in 12 CFR part 225, appendix B, 
also qualify as unlimited elements of Tier 2 capital. In accordance with 
that appendix, equity commitment notes issued prior to May 15, 1985 also 
qualify for inclusion in Tier 2.
    d. Subordinated debt and intermediate term preferred stock. (i) The 
aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of Tier 1 
capital (net of goodwill and other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix). Amounts 
in excess of these limits may be issued and, while not included in the 
ratio calculation, will be taken into account in the overall assessment 
of a bank's funding and financial condition.
    (ii) Subordinated debt and intermediate-term preferred stock must 
have an original weighted average maturity of at least five years to 
qualify as supplementary capital. (If the holder has the option to 
require the issuer to redeem, repay, or repurchase the instrument prior 
to the original stated maturity, maturity would be defined, for risk-
based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing bank.) \12\ In the 
case of subordinated debt, the instrument must be unsecured and must 
clearly state on its face that it is not a deposit and is not insured by 
a Federal agency. To qualify as capital in banks, debt must be 
subordinated to general creditors and claims of depositors. Consistent 
with current regulatory requirements, if a state member bank wishes to 
redeem subordinated debt before the stated maturity, it must receive 
prior approval of the Federal Reserve.
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    \12\ As a limited-life capital instrument approaches maturity it 
begins to take on characteristics of a short-term obligation. For this 
reason, the outstanding amount of term subordinated debt and limited-
life preferred stock eligible for inclusion in Tier 2 is reduced, or 
discounted, as these instruments approach maturity: one-fifth of the 
original amount (less redemptions) is excluded each year during the 
instrument's last five years before maturity. When the remaining 
maturity is less than one year, the instrument is excluded from Tier 2 
capital.
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    e. Unrealized gains on equity securities and unrealized gains 
(losses) on other assets. Up to 45 percent of pretax net unrealized 
holding gains (that is, the excess, if any, of the fair value over 
historical cost) on available-for-sale equity securities with readily 
determinable fair values may be included in supplementary capital. 
However, the Federal Reserve may exclude all or a portion of these 
unrealized gains from Tier 2 capital if the Federal Reserve determines 
that the equity securities are not prudently valued. Unrealized gains 
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but 
the Federal Reserve may take these unrealized gains (losses) into 
account as additional factors when assessing a bank's overall capital 
adequacy.
    f. Revaluation reserves. i. Such reserves reflect the formal balance 
sheet restatement or revaluation for capital purposes of asset carrying 
values to reflect current market values. The federal banking agencies 
generally have not included unrealized asset appreciation in capital 
ratio calculations, although they have long taken such values into 
account as a separate factor in assessing the overall financial strength 
of a bank.
    ii. Consistent with long-standing supervisory practice, the excess 
of market values over book values for assets held by state

[[Page 234]]

member banks will generally not be recognized in supplementary capital 
or in the calculation of the risk-based capital ratio. However, all 
banks are encouraged to disclose their equivalent of premises (building) 
and security revaluation reserves. The Federal Reserve will consider any 
appreciation, as well as any depreciation, in specific asset values as 
additional considerations in assessing overall capital strength and 
financial condition.

            B. Deductions from Capital and Other Adjustments

    Certain assets are deducted from a bank's capital for the purpose of 
calculating the risk-based capital ratio.\13\ These assets include:
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    \13\ Any assets deducted from capital in computing the numerator of 
the ratio are not included in weighted risk assets in computing the 
denominator of the ratio.
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    (i)(a) Goodwill--deducted from the sum of core capital elements.
    (b) Certain identifiable intangible assets, that is, intangible 
assets other than goodwill--deducted from the sum of core capital 
elements in accordance with section II.B.1.b. of this appendix.
    (c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with 
sections II.B.1.c. through e. of this appendix.
    (ii) Investments in banking and finance subsidiaries that are not 
consolidated for accounting or supervisory purposes and, on a case-by-
case basis, investments in other designated subsidiaries or associated 
companies at the discretion of the Federal Reserve--deducted from total 
capital components.
    (iii) Reciprocal holdings of capital instruments of banking 
organizations--deducted from total capital components.
    (iv) Deferred tax assets--portions are deducted from the sum of core 
capital elements in accordance with section II.B.4. of this Appendix A.
    (v) Nonfinancial equity investments-portions are deducted from the 
sum of core capital elements in accordance with section II.B.5 of this 
appendix.
    1. Goodwill and other intangible assets.--a. Goodwill. Goodwill in 
an intangible asset that represents the excess of the purchase price 
over the fair market value of identifiable assets acquired less 
liabilities assumed in acquisitions accounted for under the purchase 
method of accounting. State member banks generally have not been allowed 
to include goodwill in regulatory capital under current supervisory 
policies. Consistent with this policy, all goodwill in state member 
banks will be deducted from Tier 1 capital.
    b. Other intangible assets. i. All servicing assets, including 
servicing assets on assets other than mortgages (i.e., nonmortgage 
servicing assets), are included in this appendix as identifiable 
intangible assets. The only types of identifiable intangible assets that 
may be included in, that is, not deducted from, a bank's capital are 
readily marketable mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships. The total amount of 
these assets that may be included in capital is subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank's 
capital ratios for supervisory and applications purposes. However, in 
making an overall assessment of a bank's capital adequacy for 
applications purposes, the Board may, if it deems appropriate, take into 
account the quality and composition of a bank's capital, together with 
the quality and value of its tangible and intangible assets.
    c. Credit-enhancing interest-only strips receivables (I/Os). i. 
Credit-enhancing I/Os are on-balance sheet assets that, in form or in 
substance, represent the contractual right to receive some or all of the 
interest due on transferred assets and expose the bank to credit risk 
directly or indirectly associated with transferred assets that exceeds a 
pro rata share of the bank's claim on the assets, whether through 
subordination provisions or other credit enhancement techniques. Such I/
Os, whether purchased or retained, including other similar ``spread'' 
assets, may be included in, that is, not deducted from, a bank's capital 
subject to the limitations described below in sections II.B.1.d. and e. 
of this appendix.
    ii. Both purchased and retained credit-enhancing I/Os, on a non-tax 
adjusted basis, are included in the total amount that is used for 
purposes of determining whether a bank exceeds the tier 1 limitation 
described below in this section. In determining whether an I/O or other 
types of spread assets serve as a credit enhancement, the Federal 
Reserve will look to the economic substance of the transaction.
    d. Fair value limitation. The amount of mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships 
that a bank may include in capital shall be the lesser of 90 percent of 
their fair value, as determined in accordance with section II.B.1.f. of 
this appendix, or 100 percent of their book value, as adjusted for 
capital purposes in accordance with the instructions in the commercial 
bank Consolidated Reports of Condition and Income (Call Reports). The 
amount of I/Os that a bank may include in capital shall be its fair 
value. If both the application of the limits on mortgage servicing 
assets, nonmortgage servicing

[[Page 235]]

assets, and purchased credit card relationships and the adjustment of 
the balance sheet amount for these assets would result in an amount 
being deducted from capital, the bank would deduct only the greater of 
the two amounts from its core capital elements in determining tier 1 
capital.
    e. Tier 1 capital limitation. i. The total amount of mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships that may be included in capital, in the aggregate, 
cannot exceed 100 percent of tier 1 capital. The aggregate of 
nonmortgage servicing assets and purchased credit card relationships are 
subject to a separate sublimit of 25 percent of tier 1 capital. In 
addition, the total amount of credit-enhancing I/Os (both purchased and 
retained) that may be included in capital cannot exceed 25 percent of 
tier 1 capital.\14\
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    \14\ Amounts of servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os (both retained and purchased) 
in excess of these limitations, as well as all other identifiable 
intangible assets, including core deposit intangibles and favorable 
leaseholds, are to be deducted from a bank's core capital elements in 
determining tier 1 capital. However, identifiable intangible assets 
(other than mortgage servicing assets and purchased credit card 
relationships) acquired on or before February 19, 1992, generally will 
not be deducted from capital for supervisory purposes, although they 
will continue to be deducted for applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing assets, nonmortgage servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os, tier 1 capital is defined as 
the sum of core capital elements, net of goodwill, and net of all 
identifiable intangible assets other than mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships, 
but prior to the deduction of any disallowed mortgage servicing assets, 
any disallowed nonmortgage servicing assets, any disallowed purchased 
credit card relationships, any disallowed credit-enhancing I/Os (both 
purchased and retained), any disallowed deferred tax assets, and any 
nonfinancial equity investments.
    iii. Banks may elect to deduct disallowed mortgage servicing assets, 
disallowed nonmortgage servicing assets, and disallowed credit-enhancing 
I/Os (both purchased and retained) on a basis that is net of any 
associated deferred tax liability. Deferred tax liabilities netted in 
this manner cannot also be netted against deferred-tax assets when 
determining the amount of deferred-tax assets that are dependent upon 
future taxable income.
    f. Valuation. Banks must review the book value of all intangible 
assets at least quarterly and make adjustments to these values as 
necessary. The fair value of mortgage servicing assets, nonmortgage 
servicing assets, purchased credit card relationships, and credit-
enhancing I/Os also must be determined at least quarterly. This 
determination shall include adjustments for any significant changes in 
original valuation assumptions, including changes in prepayment 
estimates or account attrition rates. Examiners will review both the 
book value and the fair value assigned to these assets, together with 
supporting documentation, during the examination process. In addition, 
the Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank's intangible assets or credit-enhancing I/Os.
    g. Growing organizations. Consistent with long-standing Board 
policy, banks experiencing substantial growth, whether internally or by 
acquisition, are expected to maintain strong capital positions 
substantially above minimum supervisory levels, without significant 
reliance on intangible assets or credit-enhancing I/Os.
    2. Investments in certain subsidiaries. The aggregate amount of 
investments in banking or finance subsidiaries \15\ whose financial 
statements are not consolidated for accounting or bank regulatory 
reporting purposes will be deducted from a bank's total capital 
components.\16\ Generally, investments for this purpose are defined as 
equity and debt capital investments and any other instruments that are 
deemed to be capital in the particular subsidiary.
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    \15\ For this purpose, a banking and finance subsidiary generally is 
defined as any company engaged in banking or finance in which the parent 
institution holds directly or indirectly more than 50 percent of the 
outstanding voting stock, or which is otherwise controlled or capable of 
being controlled by the parent institution.
    \16\ An exception to this deduction would be made in the case of 
shares acquired in the regular course of securing or collecting a debt 
previously contracted in good faith. The requirements for consolidation 
are spelled out in the instructions to the Call Report.
---------------------------------------------------------------------------

    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to the subsidiary 
that are not deemed to be capital will generally not be deducted from a 
bank's capital. Rather, such advances generally will be included in the 
bank's consolidated assets and be assigned to the 100 percent risk 
category, unless such obligations are backed by recognized collateral or 
guarantees, in which case they will be assigned to the risk category 
appropriate to such collateral or guarantees. These advances may, 
however, also be deducted from the bank's capital if, in the judgment of 
the Federal Reserve, the risks

[[Page 236]]

stemming from such advances are comparable to the risks associated with 
capital investments or if the advances involve other risk factors that 
warrant such an adjustment to capital for supervisory purposes. These 
other factors could include, for example, the absence of collateral 
support.
    Inasmuch as the assets of unconsolidated banking and finance 
subsidiaries are not fully reflected in a bank's consolidated total 
assets, such assets may be viewed as the equivalent of off-balance sheet 
exposures since the operations of an unconsolidated subsidiary could 
expose the bank to considerable risk. For this reason, it is generally 
appropriate to view the capital resources invested in these 
unconsolidated entities as primarily supporting the risks inherent in 
these off-balance sheet assets, and not generally available to support 
risks or absorb losses elsewhere in the bank.
    The Federal Reserve may, on a case-by-case basis, also deduct from a 
bank's capital, investments in certain other subsidiaries in order to 
determine if the consolidated bank meets minimum supervisory capital 
requirements without reliance on the resources invested in such 
subsidiaries.
    The Federal Reserve will not automatically deduct investments in 
other consolidated subsidiaries or investments in joint ventures and 
associated companies.\17\ Nonetheless, the resources invested in these 
entities, like investments in unconsolidated banking and finance 
subsidiaries, support assets not consolidated with the rest of the 
bank's activities and, therefore, may not be generally available to 
support additional leverage or absorb losses elsewhere in the bank. 
Moreover, experience has shown that banks stand behind the losses of 
affiliated institutions, such as joint ventures and associated 
companies, in order to protect the reputation of the organization as a 
whole. In some cases, this has led to losses that have exceeded the 
investments in such organizations.
---------------------------------------------------------------------------

    \17\ The definition of such entities is contained in the 
instructions to the commercial bank Call Report. Under regulatory 
reporting procedures, associated companies and joint ventures generally 
are defined as companies in which the bank owns 20 to 50 percent of the 
voting stock.
---------------------------------------------------------------------------

    For this reason, the Federal Reserve will monitor the level and 
nature of such investments for individual banks and, on a case-by-case 
basis may, for risk-based capital purposes, deduct such investments from 
total capital components, apply an appropriate risk-weighted capital 
charge against the bank's proportionate share of the assets of its 
associated companies, require a line-by-line consolidation of the entity 
(in the event that the bank's control over the entity makes it the 
functional equivalent of a subsidiary), or otherwise require the bank to 
operate with a risk-based capital ratio above the minimum.
    In considering the appropriateness of such adjustments or actions, 
the Federal Reserve will generally take into account whether:
    (1) The bank has significant influence over the financial or 
managerial policies or operations of the subsidiary, joint venture, or 
associated company;
    (2) The bank is the largest investor in the affiliated company; or
    (3) Other circumstances prevail that appear to closely tie the 
activities of the affiliated company to the bank.
    3. Reciprocal holdings of banking organizations' capital 
instruments. Reciprocal holdings of banking organizations' capital 
instruments (that is, instruments that qualify as Tier 1 or Tier 2 
capital) \18\ will be deducted from a bank's total capital components 
for the purpose of determining the numerator of the risk-based capital 
ratio.
---------------------------------------------------------------------------

    \18\ See 12 CFR part 225, appendix A for instruments that qualify as 
Tier 1 and Tier 2 capital for bank holding companies.
---------------------------------------------------------------------------

    Reciprocal holdings are cross-holdings resulting from formal or 
informal arrangements in which two or more banking organizations swap, 
exchange, or otherwise agree to hold each other's capital instruments. 
Generally, deductions will be limited to intentional cross-holdings. At 
present, the Board does not intend to require banks to deduct non-
reciprocal holdings of such capital instruments.\19\
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    \19\ Deductions of holdings of capital securities also would not be 
made in the case of interstate ``stake out'' investments that comply 
with the Board's Policy Statement on Nonvoting Equity Investments, 12 
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal 
Reserve Bulletin 413 (1982)). In addition, holdings of capital 
instruments issued by other banking organizations but taken in 
satisfaction of debts previously contracted would be exempt from any 
deduction from capital. The Board intends to monitor nonreciprocal 
holdings of other banking organizations' capital instruments and to 
provide information on such holdings to the Basle Supervisors' Committee 
as called for under the Basle capital framework.
---------------------------------------------------------------------------

    4. Deferred-tax assets. a. The amount of deferred-tax assets that is 
dependent upon future taxable income, net of the valuation allowance for 
deferred-tax assets, that may be included in, that is, not deducted 
from, a bank's capital may not exceed the lesser of:
    i. The amount of these deferred-tax assets that the bank is expected 
to realize within one year of the calendar quarter-end date,

[[Page 237]]

based on its projections of future taxable income for that year,\20\ or
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    \20\ To determine the amount of expected deferred-tax assets 
realizable in the next 12 months, an institution should assume that all 
existing temporary differences fully reverse as of the report date. 
Projected future taxable income should not include net operating loss 
carry-forwards to be used during that year or the amount of existing 
temporary differences a bank expects to reverse within the year. Such 
projections should include the estimated effect of tax-planning 
strategies that the organization expects to implement to realize net 
operating losses or tax-credit carry-forwards that would otherwise 
expire during the year. Institutions do not have to prepare a new 12-
month projection each quarter. Rather, on interim report dates, 
institutions may use the future-taxable income projections for their 
current fiscal year, adjusted for any significant changes that have 
occurred or are expected to occur.
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    ii. 10 percent of tier 1 capital.
    b. The reported amount of deferred-tax assets, net of any valuation 
allowance for deferred-tax assets, in excess of the lesser of these two 
amounts is to be deducted from a bank's core capital elements in 
determining tier 1 capital. For purposes of calculating the 10 percent 
limitation, tier 1 capital is defined as the sum of core capital 
elements, net of goodwill and net of all identifiable intangible assets 
other than mortgage servicing assets, nonmortgage servicing assets, and 
purchased credit card relationships, but prior to the deduction of any 
disallowed mortgage servicing assets, any disallowed nonmortgage 
servicing assets, any disallowed purchased credit card relationships, 
any disallowed credit-enhancing I/Os, any disallowed deferred-tax 
assets, and any nonfinancial equity investments. There generally is no 
limit in tier 1 capital on the amount of deferred-tax assets that can be 
realized from taxes paid in prior carry-back years or from future 
reversals of existing taxable temporary differences.
    5. Nonfinancial equity investments--a. General. A bank must deduct 
from its core capital elements the sum of the appropriate percentages 
(as determined below) of the adjusted carrying value of all nonfinancial 
equity investments held by the bank or by its direct or indirect 
subsidiaries. For purposes of this section II.B.5, investments held by a 
bank include all investments held directly or indirectly by the bank or 
any of its subsidiaries.
    b. Scope of nonfinancial equity investments. A nonfinancial equity 
investment means any equity investment held by the bank in a 
nonfinancial company: through a small business investment company (SBIC) 
under section 302(b) of the Small Business Investment Act of 1958 (15 
U.S.C. 682(b)); \21\ or under the portfolio investment provisions of the 
Board's Regulation K (12 CFR 211.8(c)(3)). A nonfinancial company is an 
entity that engages in any activity that has not been determined to be 
permissible for the bank to conduct directly, or to be financial in 
nature or incidental to financial activities under section 4(k) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)).
---------------------------------------------------------------------------

    \21\ An equity investment made under section 302(b) of the Small 
Business Investment Act of 1958 in an SBIC that is not consolidated with 
the bank is treated as a nonfinancial equity investment.
---------------------------------------------------------------------------

    c. Amount of deduction from core capital. i. The bank must deduct 
from its core capital elements the sum of the appropriate percentages, 
as set forth in Table 1, of the adjusted carrying value of all 
nonfinancial equity investments held by the bank. The amount of the 
percentage deduction increases as the aggregate amount of nonfinancial 
equity investments held by the bank increases as a percentage of the 
bank's Tier 1 capital.

         Table 1--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
 Aggregate adjusted carrying value of all
   nonfinancial equity investments held     Deduction from Core Capital
 directly or indirectly by the bank (as a   Elements (as a percentage of
 percentage of the Tier 1 capital of the    the adjusted carrying value
                bank) \1\                        of the investment)
------------------------------------------------------------------------
Less than 15 percent.....................  8 percent.
15 percent to 24.99 percent..............  12 percent.
25 percent and above.....................  25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
  nonfinancial equity investments as a percentage of Tier 1 capital,
  Tier 1 capital is defined as the sum of core capital elements net of
  goodwill and net of all identifiable intangible assets other than
  mortgage servicing assets, nonmortgage servicing assets and purchased
  credit card relationships, but prior to the deduction for any
  disallowed mortgage servicing assets, any disallowed nonmortgage
  servicing assets, any disallowed purchased credit card relationships,
  any disallowed credit enhancing I/Os (both purchased and retained),
  any disallowed deferred tax assets, and any nonfinancial equity
  investments.

    ii. These deductions are applied on a marginal basis to the portions 
of the adjusted carrying value of nonfinancial equity investments that 
fall within the specified ranges of

[[Page 238]]

the parent bank's Tier 1 capital. For example, if the adjusted carrying 
value of all nonfinancial equity investments held by a bank equals 20 
percent of the Tier 1 capital of the bank, then the amount of the 
deduction would be 8 percent of the adjusted carrying value of all 
investments up to 15 percent of the bank's Tier 1 capital, and 12 
percent of the adjusted carrying value of all investments in excess of 
15 percent of the bank's Tier 1 capital.
    iii. The total adjusted carrying value of any nonfinancial equity 
investment that is subject to deduction under this paragraph is excluded 
from the bank's risk-weighted assets for purposes of computing the 
denominator of the bank's risk-based capital ratio.\22\
---------------------------------------------------------------------------

    \22\ For example, if 8 percent of the adjusted carrying value of a 
nonfinancial equity investment is deducted from Tier 1 capital, the 
entire adjusted carrying value of the investment will be excluded from 
risk-weighted assets in calculating the denominator for the risk-based 
capital ratio.
---------------------------------------------------------------------------

    iv. As noted in section I, this appendix establishes minimum risk-
based capital ratios and banks are at all times expected to maintain 
capital commensurate with the level and nature of the risks to which 
they are exposed. The risk to a bank from nonfinancial equity 
investments increases with its concentration in such investments and 
strong capital levels above the minimum requirements are particularly 
important when a bank has a high degree of concentration in nonfinancial 
equity investments (e.g., in excess of 50 percent of Tier 1 capital). 
The Federal Reserve intends to monitor banks and apply heightened 
supervision to equity investment activities as appropriate, including 
where the bank has a high degree of concentration in nonfinancial equity 
investments, to ensure that each bank maintains capital levels that are 
appropriate in light of its equity investment activities. The Federal 
Reserve also reserves authority to impose a higher capital charge in any 
case where the circumstances, such as the level of risk of the 
particular investment or portfolio of investments, the risk management 
systems of the bank, or other information, indicate that a higher 
minimum capital requirement is appropriate.
    d. SBIC investments. i. No deduction is required for nonfinancial 
equity investments that are held by a bank through one or more SBICs 
that are consolidated with the bank or in one or more SBICs that are not 
consolidated with the bank to the extent that all such investments, in 
the aggregate, do not exceed 15 percent of the bank's Tier 1 capital. 
Any nonfinancial equity investment that is held through or in an SBIC 
and that is not required to be deducted from Tier 1 capital under this 
section II.B.5.d. will be assigned a 100 percent risk-weight and 
included in the bank's consolidated risk-weighted assets.\23\
---------------------------------------------------------------------------

    \23\ If a bank has an investment in an SBIC that is consolidated for 
accounting purposes but that is not wholly owned by the bank, the 
adjusted carrying value of the bank's nonfinancial equity investments 
through the SBIC is equal to the bank's proportionate share of the 
adjusted carrying value of the SBIC's equity investments in nonfinancial 
companies. The remainder of the SBIC's adjusted carrying value (i.e., 
the minority interest holders' proportionate share) is excluded from the 
risk-weighted assets of the bank. If a bank has an investment in an SBIC 
that is not consolidated for accounting purposes and has current 
information that identifies the percentage of the SBIC's assets that are 
equity investments in nonfinancial companies, the bank may reduce the 
adjusted carrying value of its investment in the SBIC proportionately to 
reflect the percentage of the adjusted carrying value of the SBIC's 
assets that are not equity investments in nonfinancial companies. If a 
bank reduces the adjusted carrying value of its investment in a non-
consolidated SBIC to reflect financial investments of the SBIC, the 
amount of the adjustment will be risk weighted at 100 percent and 
included in the bank's risk-weighted assets.
---------------------------------------------------------------------------

    ii. To the extent the adjusted carrying value of all nonfinancial 
equity investments that a bank holds through one or more SBICs that are 
consolidated with the bank or in one or more SBICs that are not 
consolidated with the bank exceeds, in the aggregate, 15 percent of the 
bank's Tier 1 capital, the appropriate percentage of such amounts (as 
set forth in Table 1) must be deducted from the bank's core capital 
elements. In addition, the aggregate adjusted carrying value of all 
nonfinancial equity investments held through a consolidated SBIC and in 
a non-consolidated SBIC (including any investments for which no 
deduction is required) must be included in determining, for purposes of 
Table 1, the total amount of nonfinancial equity investments held by the 
bank in relation to its Tier 1 capital.
    e. Transition provisions. No deduction under this section II.B.5 is 
required to be made with respect to the adjusted carrying value of any 
nonfinancial equity investment (or portion of such an investment) that 
was made by the bank prior to March 13, 2000, or that was made by the 
bank after such date pursuant to a binding written commitment \24\

[[Page 239]]

entered into prior to March 13, 2000, provided that in either case the 
bank has continuously held the investment since the relevant investment 
date.\25\ For purposes of this section II.B.5.e., a nonfinancial equity 
investment made prior to March 13, 2000, includes any shares or other 
interests received by the bank through a stock split or stock dividend 
on an investment made prior to March 13, 2000, provided the bank 
provides no consideration for the shares or interests received and the 
transaction does not materially increase the bank's proportional 
interest in the company. The exercise on or after March 13, 2000, of 
options or warrants acquired prior to March 13, 2000, is not considered 
to be an investment made prior to March 13, 2000, if the bank provides 
any consideration for the shares or interests received upon exercise of 
the options or warrants. Any nonfinancial equity investment (or portion 
thereof) that is not required to be deducted from Tier 1 capital under 
this section II.B.5.e. must be included in determining the total amount 
of nonfinancial equity investments held by the bank in relation to its 
Tier 1 capital for purposes of Table 1. In addition, any nonfinancial 
equity investment (or portion thereof) that is not required to be 
deducted from Tier 1 capital under this section II.B.5.e. will be 
assigned a 100-percent risk weight and included in the bank's 
consolidated risk-weighted assets.
---------------------------------------------------------------------------

    \24\ A ``binding written commitment'' means a legally binding 
written agreement that requires the bank to acquire shares or other 
equity of the company, or make a capital contribution to the company, 
under terms and conditions set forth in the agreement. Options, 
warrants, and other agreements that give a bank the right to acquire 
equity or make an investment, but do not require the bank to take such 
actions, are not considered a binding written commitment for purposes of 
this section II.B.5.
    \25\ For example, if a bank made an equity investment in 100 shares 
of a nonfinancial company prior to March 13, 2000, the adjusted carrying 
value of that investment would not be subject to a deduction under this 
section II.B.5. However, if the bank made any additional equity 
investment in the company after March 13, 2000, such as by purchasing 
additional shares of the company (including through the exercise of 
options or warrants acquired before or after March 13, 2000) or by 
making a capital contribution to the company and such investment was not 
made pursuant to a binding written commitment entered into before March 
13, 2000, the adjusted carrying value of the additional investment would 
be subject to a deduction under this section II.B.5. In addition, if the 
bank sold and repurchased, after March 13, 2000, 40 shares of the 
company, the adjusted carrying value of those 40 shares would be subject 
to a deduction under this section II.B.5.
---------------------------------------------------------------------------

    f. Adjusted carrying value. i. For purposes of this section II.B.5., 
the ``adjusted carrying value'' of investments is the aggregate value at 
which the investments are carried on the balance sheet of the bank 
reduced by any unrealized gains on those investments that are reflected 
in such carrying value but excluded from the bank's Tier 1 capital and 
associated deferred tax liabilities. For example, for investments held 
as available-for-sale (AFS), the adjusted carrying value of the 
investments would be the aggregate carrying value of the investments (as 
reflected on the consolidated balance sheet of the bank) less any 
unrealized gains on those investments that are included in other 
comprehensive income and not reflected in Tier 1 capital, and associated 
deferred tax liabilities.\26\
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    \26\ Unrealized gains on AFS equity investments may be included in 
supplementary capital to the extent permitted under section II.A.2.e. of 
this appendix A. In addition, the unrealized losses on AFS equity 
investments are deducted from Tier 1 capital in accordance with section 
II.A.1.a. of this appendix A.
---------------------------------------------------------------------------

    ii. As discussed above with respect to consolidated SBICs, some 
equity investments may be in companies that are consolidated for 
accounting purposes. For investments in a nonfinancial company that is 
consolidated for accounting purposes under generally accepted accounting 
principles, the bank's adjusted carrying value of the investment is 
determined under the equity method of accounting (net of any intangibles 
associated with the investment that are deducted from the bank's core 
capital in accordance with section II.B.1. of this appendix A). Even 
though the assets of the nonfinancial company are consolidated for 
accounting purposes, these assets (as well as the credit equivalent 
amounts of the company's off-balance sheet items) should be excluded 
from the bank's risk-weighted assets for regulatory capital purposes.
    g. Equity investments. For purposes of this section II.B.5., an 
equity investment means any equity instrument (including common stock, 
preferred stock, partnership interests, interests in limited liability 
companies, trust certificates and warrants and call options that give 
the holder the right to purchase an equity instrument), any equity 
feature of a debt instrument (such as a warrant or call option), and any 
debt instrument that is convertible into equity where the instrument or 
feature is held under one of the legal authorities listed in section 
II.B.5.b. of this appendix A. An investment in any other instrument 
(including subordinated debt) may be treated as an equity investment if, 
in the judgment of the Federal Reserve, the instrument is the functional 
equivalent of equity or exposes the state member bank to essentially the 
same risks as an equity instrument.

[[Page 240]]

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet 
                                  Items

                              A. Procedures

    Assets and credit equivalent amounts of off-balance sheet items of 
state member banks are assigned to one of several broad risk categories, 
according to the obligor, or, if relevant, the guarantor or the nature 
of the collateral. The aggregate dollar value of the amount in each 
category is then multiplied by the risk weight associated with that 
category. The resulting weighted values from each of the risk categories 
are added together, and this sum is the bank's total weighted risk 
assets that comprise the denominator of the risk-based capital ratio. 
Attachment I provides a sample calculation.
    Risk weights for all off-balance sheet items are determined by a 
two-step process. First, the ``credit equivalent amount'' of off-balance 
sheet items is determined, in most cases by multiplying the off-balance 
sheet item by a credit conversion factor. Second, the credit equivalent 
amount is treated like any balance sheet asset and generally is assigned 
to the appropriate risk category according to the obligor, or, if 
relevant, the guarantor or the nature of the collateral.
    In general, if a particular item qualifies for placement in more 
than one risk category, it is assigned to the category that has the 
lowest risk weight. A holding of a U.S. municipal revenue bond that is 
fully guaranteed by a U.S. bank, for example, would be assigned the 20 
percent risk weight appropriate to claims guaranteed by U.S. banks, 
rather than the 50 percent risk weight appropriate to U.S. municipal 
revenue bonds.\27\
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    \27\ An investment in shares of a fund whose portfolio consists 
primarily of various securities or money market instruments that, if 
held separately, would be assigned to different risk categories, 
generally is assigned to the risk category appropriate to the highest 
risk-weighted asset that the fund is permitted to hold in accordance 
with the stated investment objectives set forth in its prospectus. A 
bank may, at its option, assign a fund investment on a pro rata basis to 
different risk categories according to the investment limits in the 
fund's prospectus. In no case will an investment in shares in any fund 
be assigned to a total risk weight less than 20 percent. If a bank 
chooses to assign a fund investment on a pro rata basis, and the sum of 
the investment limits of assets in the fund's prospectus exceeds 100 
percent, the bank must assign risk weights in descending order. If, in 
order to maintain a necessary degree of short-term liquidity, a fund is 
permitted to hold an insignificant amount of its assets in short-term, 
highly liquid securities of superior credit quality that do not qualify 
for a preferential risk weight, such securities generally will be 
disregarded when determining the risk category into which the bank's 
holding in the overall fund should be assigned. The prudent use of 
hedging instruments by a fund to reduce the risk of its assets also will 
not increase the risk weighting of the fund investment. For example, the 
use of hedging instruments by a fund to reduce the interest rate risk of 
its government bond portfolio will not increase the risk weight of that 
fund above the 20 percent category. Nonetheless, if a fund engages in 
any activities that appear speculative in nature or has any other 
characteristics that are inconsistent with the preferential risk 
weighting assigned to the fund's assets, holdings in the fund will be 
assigned to the 100 percent risk category.
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    The terms claims and securities used in the context of the 
discussion of risk weights, unless otherwise specified, refer to loans 
or debt obligations of the entity on whom the claim is held. Assets in 
the form of stock or equity holdings in commercial or financial firms 
are assigned to the 100 percent risk category, unless some other 
treatment is explicitly permitted.
    The Federal Reserve will, on a case-by-case basis, determine the 
appropriate risk weight for any asset or credit equivalent amount of an 
off-balance sheet item that does not fit wholly within one of the risk 
weight categories set forth below or that imposes risks on a bank that 
are incommensurate with the risk weight otherwise specified below for 
the asset or off-balance sheet item. In addition, the Federal Reserve 
will, on a case-by-case basis, determine the appropriate credit 
conversion factor for any off-balance sheet item that does not fit 
wholly within one of the credit conversion factors set forth below or 
that imposes risks on a bank that are incommensurate with the credit 
conversion factors otherwise specified below for the off-balance sheet 
item. In making such a determination, the Federal Reserve will consider 
the similarity of the asset or off-balance sheet item to assets or off-
balance sheet items explicitly treated in the guidelines, as well as 
other relevant factors.

           B. Collateral, Guarantees, and Other Considerations

    1. Collateral. The only forms of collateral that are formally 
recognized by the risk-based capital framework are: Cash on deposit in 
the bank; securities issued or guaranteed by the central governments of 
the OECD-based group of countries,\28\ U.S. Government

[[Page 241]]

agencies, or U.S. Government-sponsored agencies; and securities issued 
by multilateral lending institutions or regional development banks. 
Claims fully secured by such collateral generally are assigned to the 20 
percent risk-weight category. Collateralized transactions meeting all 
the conditions described in section III.C.1. may be assigned a zero 
percent risk weight.
---------------------------------------------------------------------------

    \28\The OECD-based group of countries comprises all full members of 
the Organization for Economic Cooperation and Development (OECD) 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements to Borrow, but excludes 
any country that has rescheduled its external sovereign debt within the 
previous five years. As of November 1995, the OECD included the 
following countries: Australia, Austria, Belgium, Canada, Denmark, 
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, 
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, 
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United 
States; and Saudi Arabia had concluded special lending arrangements with 
the IMF associated with the IMF's General Arrangements to Borrow. A 
rescheduling of external sovereign debt generally would include any 
renegotiation of terms arising from a country's inability or 
unwillingness to meet its external debt service obligations, but 
generally would not include renegotiations of debt in the normal course 
of business, such as a renegotiation to allow the borrower to take 
advantage of a decline in interest rates or other change in market 
conditions.
---------------------------------------------------------------------------

    With regard to collateralized claims that may be assigned to the 20 
percent risk-weight category, the extent to which qualifying securities 
are recognized as collateral is determined by their current market 
value. If such a claim is only partially secured, that is, the market 
value of the pledged securities is less than the face amount of a 
balance-sheet asset or an off-balance-sheet item, the portion that is 
covered by the market value of the qualifying collateral is assigned to 
the 20 percent risk category, and the portion of the claim that is not 
covered by collateral in the form of cash or a qualifying security is 
assigned to the risk category appropriate to the obligor or, if 
relevant, the guarantor. For example, to the extent that a claim on a 
private sector obligor is collateralized by the current market value of 
U.S. Government securities, it would be placed in the 20 percent risk 
category, and the balance would be assigned to the 100 percent risk 
category.
    2. Guarantees. Guarantees of the OECD and non-OECD central 
governments, U.S. Government agencies, U.S. Government-sponsored 
agencies, state and local governments of the OECD-based group of 
countries, multilateral lending institutions and regional development 
banks, U.S. depository institutions, and foreign banks are also 
recognized. If a claim is partially guaranteed, that is, coverage of the 
guarantee is less than the face amount of a balance sheet asset or an 
off-balance sheet item, the portion that is not fully covered by the 
guarantee is assigned to the risk category appropriate to the obligor 
or, if relevant, to any collateral. The face amount of a claim covered 
by two types of guarantees that have different risk weights, such as a 
U.S. Government guarantee and a state guarantee, is to be apportioned 
between the two risk categories appropriate to the guarantors.
    The existence of other forms of collateral or guarantees that the 
risk-based capital framework does not formally recognize may be taken 
into consideration in evaluating the risks inherent in a bank's loan 
portfolio--which, in turn, would affect the overall supervisory 
assessment of the bank's capital adequacy.
    3. Recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities. Direct credit 
substitutes, assets transferred with recourse, and securities issued in 
connection with asset securitizations and structured financings are 
treated as described below. The term ``asset securitizations'' or 
``securitizations'' in this rule includes structured financings, as well 
as asset securitization transactions.
    a. Definitions--i. Credit derivative means a contract that allows 
one party (the ``protection purchaser'') to transfer the credit risk of 
an asset or off-balance sheet credit exposure to another party (the 
``protection provider''). The value of a credit derivative is dependent, 
at least in part, on the credit performance of the ``reference asset.''
    ii. Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of assets (including loan servicing assets) and that 
obligate the bank to protect investors from losses arising from credit 
risk in the assets transferred or the loans serviced. Credit-enhancing 
representations and warranties include promises to protect a party from 
losses resulting from the default or nonperformance of another party or 
from an insufficiency in the value of the collateral. Credit-enhancing 
representations and warranties do not include:
    1. Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50 percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 year 
of the date of transfer;
    2. Premium refund clauses that cover assets guaranteed, in whole or 
in part, by the U.S. Government, a U.S. Government agency or a 
government-sponsored enterprise, provided the premium refund clauses are 
for a

[[Page 242]]

period not to exceed 120 days from the date of transfer; or
    3. Warranties that permit the return of assets in instances of 
misrepresentation, fraud or incomplete documentation.
    iii. Direct credit substitute means an arrangement in which a bank 
assumes, in form or in substance, credit risk associated with an on- or 
off-balance sheet credit exposure that was not previously owned by the 
bank (third-party asset) and the risk assumed by the bank exceeds the 
pro rata share of the bank's interest in the third-party asset. If the 
bank has no claim on the third-party asset, then the bank's assumption 
of any credit risk with respect to the third party asset is a direct 
credit substitute. Direct credit substitutes include, but are not 
limited to:
    1. Financial standby letters of credit that support financial claims 
on a third party that exceed a bank's pro rata share of losses in the 
financial claim;
    2. Guarantees, surety arrangements, credit derivatives, and similar 
instruments backing financial claims that exceed a bank's pro rata share 
in the financial claim;
    3. Purchased subordinated interests or securities that absorb more 
than their pro rata share of losses from the underlying assets;
    4. Credit derivative contracts under which the bank assumes more 
than its pro rata share of credit risk on a third party exposure;
    5. Loans or lines of credit that provide credit enhancement for the 
financial obligations of an account party;
    6. Purchased loan servicing assets if the servicer is responsible 
for credit losses or if the servicer makes or assumes credit-enhancing 
representations and warranties with respect to the loans serviced. 
Mortgage servicer cash advances that meet the conditions of section 
III.B.3.a.viii. of this appendix are not direct credit substitutes;
    7. Clean-up calls on third party assets. Clean-up calls that are 10 
percent or less of the original pool balance that are exercisable at the 
option of the bank are not direct credit substitutes; and
    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).
    iv. Eligible ABCP liquidity facility means a liquidity facility 
supporting ABCP, in form or in substance, that is subject to an asset 
quality test at the time of draw that precludes funding against assets 
that are 90 days or more past due or in default. In addition, if the 
assets that an eligible ABCP liquidity facility is required to fund 
against are externally rated assets or exposures at the inception of the 
facility, the facility can be used to fund only those assets or 
exposures that are externally rated investment grade at the time of 
funding. Notwithstanding the eligibility requirements set forth in the 
two preceding sentences, a liquidity facility will be considered an 
eligible ABCP liquidity facility if the assets that are funded under the 
liquidity facility and which do not meet the eligibility requirements 
are guaranteed, either conditionally or unconditionally, by the U.S. 
government or its agencies, or by the central government of an OECD 
country.
    v. Externally rated means that an instrument or obligation has 
received a credit rating from a nationally recognized statistical rating 
organization.
    vi. Face amount means the notional principal, or face value, amount 
of an off-balance sheet item; the amortized cost of an asset not held 
for trading purposes; and the fair value of a trading asset.
    vii. Financial asset means cash or other monetary instrument, 
evidence of debt, evidence of an ownership interest in an entity, or a 
contract that conveys a right to receive or exchange cash or another 
financial instrument from another party.
    viii. Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:
    1. To repay money borrowed by, or advanced to, or for the account 
of, a second party (the account party), or
    2. To make payment on behalf of the account party, in the event that 
the account party fails to fulfill its obligation to the beneficiary.
    ix. Liquidity Facility means a legally binding commitment to provide 
liquidity support to ABCP by lending to, or purchasing assets from, any 
structure, program, or conduit in the event that funds are required to 
repay maturing ABCP.
    x. Mortgage servicer cash advance means funds that a residential 
mortgage loan servicer advances to ensure an uninterrupted flow of 
payments, including advances made to cover foreclosure costs or other 
expenses to facilitate the timely collection of the loan. A mortgage 
servicer cash advance is not a recourse obligation or a direct credit 
substitute if:
    1. The servicer is entitled to full reimbursement and this right is 
not subordinated to other claims on the cash flows from the underlying 
asset pool; or
    2. For any one loan, the servicer's obligation to make 
nonreimbursable advances is contractually limited to an insignificant 
amount of the outstanding principal balance of that loan.
    xi. Nationally recognized statistical rating organization (NRSRO) 
means an entity recognized by the Division of Market Regulation of the 
Securities and Exchange Commission (or any successor Division) 
(Commission) as a nationally recognized statistical rating organization 
for various purposes, including

[[Page 243]]

the Commission's uniform net capital requirements for brokers and 
dealers.
    xii. Recourse means the retention, by a bank, in form or in 
substance, of any credit risk directly or indirectly associated with an 
asset it has transferred and sold that exceeds a pro rata share of the 
bank's claim on the asset. If a bank has no claim on a transferred 
asset, then the retention of any risk of credit loss is recourse. A 
recourse obligation typically arises when a bank transfers assets and 
retains an explicit obligation to repurchase the assets or absorb losses 
due to a default on the payment of principal or interest or any other 
deficiency in the performance of the underlying obligor or some other 
party. Recourse may also exist implicitly if a bank provides credit 
enhancement beyond any contractual obligation to support assets it has 
sold. The following are examples of recourse arrangements:
    1. Credit-enhancing representations and warranties made on the 
transferred assets;
    2. Loan servicing assets retained pursuant to an agreement under 
which the bank will be responsible for credit losses associated with the 
loans being serviced. Mortgage servicer cash advances that meet the 
conditions of section III.B.3.a.x. of this appendix are not recourse 
arrangements;
    3. Retained subordinated interests that absorb more than their pro 
rata share of losses from the underlying assets;
    4. Assets sold under an agreement to repurchase, if the assets are 
not already included on the balance sheet;
    5. Loan strips sold without contractual recourse where the maturity 
of the transferred loan is shorter than the maturity of the commitment 
under which the loan is drawn;
    6. Credit derivatives issued that absorb more than the bank's pro 
rata share of losses from the transferred assets;
    7. Clean-up calls at inception that are greater than 10 percent of 
the balance of the original pool of transferred loans. Clean-up calls 
that are 10 percent or less of the original pool balance that are 
exercisable at the option of the bank are not recourse arrangements; and
    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).
    xiii. Residual interest means any on-balance sheet asset that 
represents an interest (including a beneficial interest) created by a 
transfer that qualifies as a sale (in accordance with generally accepted 
accounting principles) of financial assets, whether through a 
securitization or otherwise, and that exposes the bank to credit risk 
directly or indirectly associated with the transferred assets that 
exceeds a pro rata share of the bank's claim on the assets, whether 
through subordination provisions or other credit enhancement techniques. 
Residual interests generally include credit-enhancing I/Os, spread 
accounts, cash collateral accounts, retained subordinated interests, 
other forms of over-collateralization, and similar assets that function 
as a credit enhancement. Residual interests further include those 
exposures that, in substance, cause the bank to retain the credit risk 
of an asset or exposure that had qualified as a residual interest before 
it was sold. Residual interests generally do not include interests 
purchased from a third party, except that purchased credit-enhancing I/
Os are residual interests for purposes of this appendix.
    xiv. Risk participation means a participation in which the 
originating party remains liable to the beneficiary for the full amount 
of an obligation (e.g., a direct credit substitute) notwithstanding that 
another party has acquired a participation in that obligation.
    xv. Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures into securities that 
can be sold to investors. Securitization includes transactions that 
create stratified credit risk positions whose performance is dependent 
upon an underlying pool of credit exposures, including loans and 
commitments.
    xvi. Sponsor means a bank that establishes an ABCP program; approves 
the sellers permitted to participate in the program; approves the asset 
pools to be purchased by the program; or administers the program by 
monitoring the assets, arranging for debt placement, compiling monthly 
reports, or ensuring compliance with the program documents and with the 
program's credit and investment policy.
    xvii. Structured finance program means a program where receivable 
interests and asset-backed securities issued by multiple participants 
are purchased by a special purpose entity that repackages those 
exposures into securities that can be sold to investors. Structured 
finance programs allocate credit risks, generally, between the 
participants and credit enhancement provided to the program.
    xviii. Traded position means a position that is externally rated and 
is retained, assumed, or issued in connection with an asset 
securitization, where there is a reasonable expectation that, in the 
near future, the rating will be relied upon by unaffiliated investors to 
purchase the position; or an unaffiliated third party to enter into a 
transaction involving the position, such as a purchase, loan, or 
repurchase agreement.
    b. Credit equivalent amounts and risk weight of recourse obligations 
and direct credit substitutes. i. Credit equivalent amount. Except as 
otherwise provided in sections III.B.3.c. through f. and III.B.5. of 
this appendix, the credit equivalent amount for a recourse obligation or 
direct credit substitute is the full amount of the credit-enhanced 
assets for

[[Page 244]]

which the bank directly or indirectly retains or assumes credit risk 
multiplied by a 100 percent conversion factor.
    ii. Risk-weight factor. To determine the bank's risk-weight factor 
for off-balance sheet recourse obligations and direct credit 
substitutes, the credit equivalent amount is assigned to the risk 
category appropriate to the obligor in the underlying transaction, after 
considering any associated guarantees or collateral. For a direct credit 
substitute that is an on-balance sheet asset (e.g., a purchased 
subordinated security), a bank must calculate risk-weighted assets using 
the amount of the direct credit substitute and the full amount of the 
assets it supports, i.e., all the more senior positions in the 
structure. The treatment of direct credit substitutes that have been 
syndicated or in which risk participations have been conveyed or 
acquired is set forth in section III.D.1 of this appendix.
    c. Externally-rated positions: credit equivalent amounts and risk 
weights of recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities (including asset-
backed commercial paper). i. Traded positions. With respect to a 
recourse obligation, direct credit substitute, residual interest (other 
than a credit-enhancing I/O strip) or asset- and mortgage-backed 
security (including asset-backed commercial paper) that is a traded 
position and that has received an external rating on a long-term 
position that is one grade below investment grade or better or a short-
term rating that is investment grade, the bank may multiply the face 
amount of the position by the appropriate risk weight, determined in 
accordance with the tables below. Stripped mortgage-backed securities 
and other similar instruments, such as interest-only or principal-only 
strips that are not credit enhancements, must be assigned to the 100 
percent risk category. If a traded position has received more than one 
external rating, the lowest single rating will apply.

------------------------------------------------------------------------
                                                            Risk weight
     Long-term rating category            Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............              20
 investment grade.
Third highest investment grade....  A...................              50
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.


------------------------------------------------------------------------
                                                            Risk weight
         Short-term rating                Examples         (In percent)
------------------------------------------------------------------------
Highest investment grade..........  A-1, P-1............              20
Second highest investment grade...  A-2, P-2............              50
Lowest investment grade...........  A-3, P-3............             100
------------------------------------------------------------------------

    ii. Non-traded positions. A recourse obligation, direct credit 
substitute, or residual interest (but not a credit-enhancing I/O strip) 
extended in connection with a securitization that is not a traded 
position may be assigned a risk weight in accordance with section 
III.B.3.c.i. of this appendix if:
    1. It has been externally rated by more than one NRSRO;
    2. It has received an external rating on a long-term position that 
is one grade below investment grade or better or on a short-term 
position that is investment grade by all NRSROs providing a rating;
    3. The ratings are publicly available; and
    4. The ratings are based on the same criteria used to rate traded 
positions.
    If the ratings are different, the lowest rating will determine the 
risk category to which the recourse obligation, direct credit 
substitute, or residual interest will be assigned.
    d. Senior positions not externally rated. For a recourse obligation, 
direct credit substitute, residual interest, or asset- or mortgage-
backed security that is not externally rated but is senior or preferred 
in all features to a traded position (including collateralization and 
maturity), a bank may apply a risk weight to the face amount of the 
senior position in accordance with section III.B.3.c.i. of this 
appendix, based on the traded position, subject to any current or 
prospective supervisory guidance and the bank satisfying the Federal 
Reserve that this treatment is appropriate. This section will apply only 
if the traded subordinated position provides substantive credit support 
to the unrated position until the unrated position matures.
    e. Capital requirement for residual interests--i. Capital 
requirement for credit-enhancing I/O strips. After applying the 
concentration limit to credit-enhancing I/O strips (both purchased and 
retained) in accordance with sections II.B.2.c. through e. of this 
appendix, a bank must maintain risk-based capital for a credit-enhancing 
I/O strip (both purchased and retained), regardless of the external 
rating on that position, equal to the remaining amount of the credit-
enhancing I/O strip (net of any existing associated deferred tax 
liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets

[[Page 245]]

transferred. Transactions that, in substance, result in the retention of 
credit risk associated with a transferred credit-enhancing I/O strip 
will be treated as if the credit-enhancing I/O strip was retained by the 
bank and not transferred.
    ii. Capital requirement for other residual interests. 1. If a 
residual interest does not meet the requirements of sections III.B.3.c. 
or d. of this appendix, a bank must maintain risk-based capital equal to 
the remaining amount of the residual interest that is retained on the 
balance sheet (net of any existing associated deferred tax liability), 
even if the amount of risk-based capital required to be maintained 
exceeds the full risk-based capital requirement for the assets 
transferred. Transactions that, in substance, result in the retention of 
credit risk associated with a transferred residual interest will be 
treated as if the residual interest was retained by the bank and not 
transferred.
    2. Where the aggregate capital requirement for residual interests 
and other recourse obligation in connection with the same transfer of 
assets exceed the full risk-based capital requirement for those assets, 
a bank must maintain risk-based capital equal to the greater of the 
risk-based capital requirement for the residual interest as calculated 
under section III.B.3.e.ii.1 of this appendix or the full risk-based 
capital requirement for the assets transferred.
    f. Positions that are not rated by an NRSRO. A position (but not a 
residual interest) maintained in connection with a securitization and 
that is not rated by a NRSRO may be risk-weighted based on the bank's 
determination of the credit rating of the position, as specified in the 
table below, multiplied by the face amount of the position. In order to 
obtain this treatment, the bank's system for determining the credit 
rating of the position must meet one of the three alternative standards 
set out in sections III.B.3.f.i. through III.B.3.f.iii. of this 
appendix.

------------------------------------------------------------------------
                                                            Risk weight
          Rating category                 Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA,AA..............             100
 investment grade.
Third highet investment grade.....  A...................             100
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.
------------------------------------------------------------------------

    i. Internal risk rating used for asset-backed programs. A direct 
credit substitute (other than a purchased credit-enhancing I/O) is 
assumed in connection with an asset-backed commercial paper program 
sponsored by the bank and the bank is able to demonstrate to the 
satisfaction of the Federal Reserve, prior to relying upon its use, that 
the bank's internal credit risk rating system is adequate. Adequate 
internal credit risk rating systems usually contain the following 
criteria:
    1. The internal credit risk system is an integral part of the bank's 
risk management system, which explicitly incorporates the full range of 
risks arising from a bank's participation in securitization activities;
    2. Internal credit ratings are linked to measurable outcomes, such 
as the probability that the position will experience any loss, the 
position's expected loss given default, and the degree of variance in 
losses given default on that position;
    3. The bank's internal credit risk system must separately consider 
the risk associated with the underlying loans or borrowers, and the risk 
associated with the structure of a particular securitization 
transaction;
    4. The bank's internal credit risk system must identify gradations 
of risk among ``pass'' assets and other risk positions;
    5. The bank must have clear, explicit criteria that are used to 
classify assets into each internal risk grade, including subjective 
factors;
    6. The bank must have independent credit risk management or loan 
review personnel assigning or reviewing the credit risk ratings;
    7. The bank must have an internal audit procedure that periodically 
verifies that the internal credit risk ratings are assigned in 
accordance with the established criteria;
    8. The bank must monitor the performance of the internal credit risk 
ratings assigned to nonrated, nontraded direct credit substitutes over 
time to determine the appropriateness of the initial credit risk rating 
assignment and adjust individual credit risk ratings, or the overall 
internal credit risk ratings system, as needed; and
    9. The internal credit risk system must make credit risk rating 
assumptions that are consistent with, or more conservative than, the 
credit risk rating assumptions and methodologies of NRSROs.
    ii. Program Ratings. A direct credit substitute or recourse 
obligation (other than a residual interest) is assumed or retained in 
connection with a structured finance program and a NRSRO has reviewed 
the terms of the program and stated a rating for positions associated 
with the program. If the program has options for different combinations 
of assets, standards, internal credit enhancements and other relevant 
factors, and

[[Page 246]]

the NRSRO specifies ranges of rating categories to them, the bank may 
apply the rating category that corresponds to the bank's position. In 
order to rely on a program rating, the bank must demonstrate to the 
Federal Reserve's satisfaction that the credit risk rating assigned to 
the program meets the same standards generally used by NRSROs for rating 
traded positions. The bank must also demonstrate to the Federal 
Reserve's satisfaction that the criteria underlying the NRSRO's 
assignment of ratings for the program are satisfied for the particular 
position. If a bank participates in a securitization sponsored by 
another party, the Federal Reserve may authorize the bank to use this 
approach based on a programmatic rating obtained by the sponsor of the 
program.
    iii. Computer Program. The bank is using an acceptable credit 
assessment computer program to determine the rating of a direct credit 
substitute or recourse obligation (but not residual interest) issued in 
connection with a structured finance program. A NRSRO must have 
developed the computer program, and the bank must demonstrate to the 
Federal Reserve's satisfaction that ratings under the program correspond 
credibly and reliably with the rating of traded positions.
    g. Limitations on risk-based capital requirements--i. Low-level 
exposure. If the maximum contractual exposure to loss retained or 
assumed by a bank in connection with a recourse obligation or a direct 
credit substitute is less than the effective risk-based capital 
requirement for the enhanced assets, the risk-based capital requirement 
is limited to the maximum contractual exposure, less any recourse 
liability account established in accordance with generally accepted 
accounting principles. This limitation does not apply when a bank 
provides credit enhancement beyond any contractual obligation to support 
assets it has sold.
    ii. Mortgage-related securities or participation certificates 
retained in a mortgage loan swap. If a bank holds a mortgage-related 
security or a participation certificate as a result of a mortgage loan 
swap with recourse, capital is required to support the recourse 
obligation plus the percentage of the mortgage-related security or 
participation certificate that is not covered by the recourse 
obligation. The total amount of capital required for the on-balance 
sheet asset and the recourse obligation, however, is limited to the 
capital requirement for the underlying loans, calculated as if the bank 
continued to hold these loans as on-balance sheet assets.
    iii. Related on-balance sheet assets. If a recourse obligation or 
direct credit substitute subject to section III.B.3. of this appendix 
also appears as a balance sheet asset, the balance sheet asset is not 
included in a bank's risk-weighted assets to the extent the value of the 
balance sheet asset is already included in the off-balance sheet credit 
equivalent amount for the recourse obligation or direct credit 
substitute, except in the case of loan servicing assets and similar 
arrangements with embedded recourse obligations or direct credit 
substitutes. In that case, both the on-balance sheet assets and the 
related recourse obligations and direct credit substitutes must be 
separately risk-weighted and incorporated into the risk-based capital 
calculation.
    4. Maturity. Maturity is generally not a factor in assigning items 
to risk categories with the exception of claims on non-OECD banks, 
commitments, and interest rate and foreign exchange rate contracts. 
Except for commitments, short-term is defined as one year or less 
remaining maturity and long-term is defined as over one year remaining 
maturity. In the case of commitments, short-term is defined as one year 
or less original maturity and long-term is defined as over one year 
original maturity.
    5. Small Business Loans and Leases on Personal Property Transferred 
with Recourse. a. Notwithstanding other provisions of this appendix A, a 
qualifying bank that has transferred small business loans and leases on 
personal property (small business obligations) with recourse shall 
include in weighted-risk assets only the amount of retained recourse, 
provided two conditions are met. First, the transaction must be treated 
as a sale under GAAP and, second, the bank must establish pursuant to 
GAAP a non-capital reserve sufficient to meet the bank's reasonably 
estimated liability under the recourse arrangement. Only loans and 
leases to businesses that meet the criteria for a small business concern 
established by the Small Business Administration under section 3(a) of 
the Small Business Act are eligible for this capital treatment.
    b. For purposes of this appendix A, a bank is qualifying if it meets 
the criteria set forth in the Board's prompt corrective action 
regulation (12 CFR 208.40) for well capitalized or, by order of the 
Board, adequately capitalized. For purposes of determining whether a 
bank meets the criteria, its capital ratios must be calculated without 
regard to the preferential capital treatment for transfers of small 
business obligations with recourse specified in section III.B.5.a. of 
this appendix A. The total outstanding amount of recourse retained by a 
qualifying bank on transfers of small business obligations receiving the 
preferential capital treatment cannot exceed 15 percent of the bank's 
total risk-based capital. By order, the Board may approve a higher 
limit.
    c. If a bank ceases to be qualifying or exceeds the 15 percent 
capital limitation, the preferential capital treatment will continue to 
apply to any transfers of small business

[[Page 247]]

obligations with recourse that were consummated during the time that the 
bank was qualifying and did not exceed the capital limit.
    d. The risk-based capital ratios of the bank shall be calculated 
without regard to the preferential capital treatment for transfers of 
small business obligations with recourse specified in section III.B.5.a. 
of this appendix A for purposes of:
    (i) Determining whether a bank is adequately capitalized, 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under prompt corrective action (12 CFR 208.43(b)(1)); 
and
    (ii) Reclassifying a well capitalized bank to adequately capitalized 
and requiring an adequately capitalized bank to comply with certain 
mandatory or discretionary supervisory actions as if the bank were in 
the next lower prompt corrective action capital category (12 CFR 
208.43(c)).
    6. Asset-backed commercial paper programs. a. An asset-backed 
commercial paper (ABCP) program means a program that primarily issues 
externally rated commercial paper backed by assets or other exposures 
held in a bankruptcy-remote, special purpose entity.
    b. A bank that qualifies as a primary beneficiary and must 
consolidate an ABCP program that is defined as a variable interest 
entity under GAAP may exclude the consolidated ABCP program assets from 
risk-weighted assets provided that the bank is the sponsor of the ABCP 
program. If a bank excludes such consolidated ABCP program assets, the 
bank must assess the appropriate risk-based capital charge against any 
exposures of the bank arising in connection with such ABCP programs, 
including direct credit substitutes, recourse obligations, residual 
interests, liquidity facilities, and loans, in accordance with sections 
III.B.3., III.C., and III.D. of this appendix.
    c. If a bank has multiple overlapping exposures (such as a program-
wide credit enhancement and multiple pool-specific liquidity facilities) 
to an ABCP program that is not consolidated for risk-based capital 
purposes, the bank is not required to hold duplicative risk-based 
capital under this appendix against the overlapping position. Instead, 
the bank should apply to the overlapping position the applicable risk-
based capital treatment that results in the highest capital charge.

                             C. Risk Weights

    Attachment III contains a listing of the risk categories, a summary 
of the types of assets assigned to each category and the weight 
associated with each category, that is, 0 percent, 20 percent, 50 
percent, and 100 percent. A brief explanation of the components of each 
category follows.
    1. Category 1: zero percent. This category includes cash (domestic 
and foreign) owned and held in all offices of the bank or in transit and 
gold bullion held in the bank's own vaults or in another bank's vaults 
on an allocated basis, to the extent it is offset by gold bullion 
liabilities.\29\ The category also includes all direct claims (including 
securities, loans, and leases) on, and the portions of claims that are 
directly and unconditionally guaranteed by, the central governments \30\ 
of the OECD countries and U.S. Government agencies,\31\ as well as all 
direct local currency claims on, and the portions of local currency 
claims that are directly and unconditionally guaranteed by, the central 
governments of non-OECD countries, to the extent that the bank has 
liabilities booked in that currency. A claim is not considered to be 
unconditionally guaranteed by a central government if the validity of 
the guarantee is dependent upon some affirmative action by the holder or 
a third party. Generally, securities guaranteed by the U.S. Government 
or its agencies that are actively traded in financial markets, such as 
GNMA securities,

[[Page 248]]

are considered to be unconditionally guaranteed.
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    \29\ All other holdings of bullion are assigned to the 100 percent 
risk category.
    \30\ A central government is defined to include departments and 
ministries, including the central bank, of the central government. The 
U.S. central bank includes the 12 Federal Reserve Banks, and the stock 
held in these banks as a condition of membership is assigned to the zero 
percent risk category. The definition of central government does not 
include state, provincial, or local governments; or commercial 
enterprises owned by the central government. In addition, it does not 
include local government entities or commercial enterprises whose 
obligations are guaranteed by the central government, although any 
claims on such entities guaranteed by central governments are placed in 
the same general risk category as other claims guaranteed by central 
governments. OECD central governments are defined as central governments 
of the OECD-based group of countries; non-OECD central governments are 
defined as central governments that do not belong to the OECD-based 
group countries.
    \31\ A U.S. Government agency is defined as an instrumentality of 
the U.S. Government whose obligations are fully and explicitly 
guaranteed as to the timely payment of principal and interest by the 
full faith and credit of the U.S. Government. Such agencies include the 
Government National Mortgage Association (GNMA), the Veterans 
Administration (VA), the Federal Housing Administration (FHA), the 
Export-Import Bank (Exim Bank), the Overseas Private Investment 
Corporation (OPIC), the Commodity Credit Corporation (CCC), and the 
Small Business Administration (SBA).
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    This category also includes claims collateralized by cash on deposit 
in the bank or by securities issued or guaranteed by OECD central 
governments or U.S. government agencies for which a positive margin of 
collateral is maintained on a daily basis, fully taking into account any 
change in the bank's exposure to the obligor or counterparty under a 
claim in relation to the market value of the collateral held in support 
of that claim.
    2. Category 2: 20 percent. a. This category includes cash items in 
the process of collection, both foreign and domestic; short-term claims 
(including demand deposits) on, and the portions of short-term claims 
that are guaranteed \32\ by, U.S. depository institutions \33\ and 
foreign banks; \34\ and long-term claims on, and the portions of long-
term claims that are guaranteed by, U.S. depository institutions and 
OECD banks.\35\
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    \32\ Claims guaranteed by U.S. depository institutions and foreign 
banks include risk participations in both bankers acceptances and 
standby letters of credit, as well as participations in commitments, 
that are conveyed to other U.S. depository institutions or foreign 
banks.
    \33\ U.S. depository institutions are defined to include branches 
(foreign and domestic) of federally-insured banks and depository 
institutions chartered and headquartered in the 50 states of the United 
States, the District of Columbia, Puerto Rico, and U.S. territories and 
possessions. The definition encompasses banks, mutual or stock savings 
banks, savings or building and loan associations, cooperative banks, 
credit unions, and international banking facilities of domestic banks. 
U.S.-chartered depository institutions owned by foreigners are also 
included in the definition. However, branches and agencies of foreign 
banks located in the U.S., as well as all bank holding companies, are 
excluded.
    \34\ Foreign banks are distinguished as either OECD banks or non-
OECD banks. OECD banks include banks and their branches (foreign and 
domestic) organized under the laws of countries (other than the U.S.) 
that belong to the OECD-based group of countries. Non-OECD banks include 
banks and their branches (foreign and domestic) organized under the laws 
of countries that do not belong to the OECD-based group of countries. 
For this purpose, a bank is defined as an institution that engages in 
the business of banking; is recognized as a bank by the bank supervisory 
or monetary authorities of the country of its organization or principal 
banking operations; receives deposits to a substantial extent in the 
regular course of business; and has the power to accept demand deposits.
    \35\ Long-term claims on, or guaranteed by, non-OECD banks and all 
claims on bank holding companies are assigned to the 100 percent risk 
category, as are holdings of bank-issued securities that qualify as 
capital of the issuing banks.
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    b. This category also includes the portions of claims that are 
conditionally guaranteed by OECD central governments and U.S. Government 
agencies, as well as the portions of local currency claims that are 
conditionally guaranteed by non-OECD central governments, to the extent 
that the bank has liabilities booked in that currency. In addition, this 
category also includes claims on, and the portions of claims that are 
guaranteed by, U.S. government-sponsored \36\ agencies and claims on, 
and the portions of claims guaranteed by, the International Bank for 
Reconstruction and Development (World Bank), the International Finance 
Corporation, the Interamerican Development Bank, the Asian Development 
Bank, the African Development Bank, the European Investment Bank, the 
European Bank for Reconstruction and Development, the Nordic Investment 
Bank, and other multilateral lending institutions or regional 
development banks in which the U.S. government is a shareholder or 
contributing member. General obligation claims on, or portions of claims 
guaranteed by the full faith and credit of, states or other political 
subdivisions of the U.S. or other countries of the OECD-based group are 
also assigned to this category.\37\
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    \36\ For this purpose, U.S. government-sponsored agencies are 
defined as agencies originally established or chartered by the Federal 
government to serve public purposes specified by the U.S. Congress but 
whose obligations are not explicitly guaranteed by the full faith and 
credit of the U.S. government. These agencies include the Federal Home 
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage 
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank 
System, and the Student Loan Marketing Association (SLMA). Claims on 
U.S. government-sponsored agencies include capital stock in a Federal 
Home Loan Bank that is held as a condition of membership in that Bank.
    \37\ Claims on, or guaranteed by, states or other political 
subdivisions of countries that do not belong to the OECD-based group of 
countries are placed in the 100 percent risk category.
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    c. This category also includes the portions of claims (including 
repurchase transactions) collateralized by cash on deposit in the bank 
or by securities issued or guaranteed by

[[Page 249]]

OECD central governments or U.S. government agencies that do not qualify 
for the zero percent risk-weight category; collateralized by securities 
issued or guaranteed by U.S. government-sponsored agencies; or 
collateralized by securities issued by multilateral lending institutions 
or regional development banks in which the U.S. government is a 
shareholder or contributing member.
    d. This category also includes claims \38\ on, or guaranteed by, a 
qualifying securities firm incorporated in the United States or other 
member of the OECD-based group of countries \39\ provided that: The 
qualifying securities firm has a long-term issuer credit rating, or a 
rating on at least one issue of long-term debt, in one of the three 
highest investment grade rating categories from a nationally recognized 
statistical rating organization; or the claim is guaranteed by the 
firm's parent company and the parent company has such a rating. If 
ratings are available from more than one rating agency, the lowest 
rating will be used to determine whether the rating requirement has been 
met. This category also includes a collateralized claim on a qualifying 
securities firm in such a country, without regard to satisfaction of the 
rating standard, provided that the claim arises under a contract that:
    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed using standard industry 
documentation;
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    \38\ Claims on a qualifying securities firm that are instruments the 
firm, or its parent company, uses to satisfy its applicable capital 
requirements are not eligible for this risk weight.
    \39\ With regard to securities firms incorporated in the United 
States, qualifying securities firms are those securities firms that are 
broker-dealers registered with the Securities and Exchange Commission 
(SEC) and are in compliance with the SEC's net capital rule, 17 CFR 
240.15c3-1. With regard to securities firms incorporated in any other 
country in the OECD-based group of countries, qualifying securities 
firms are those securities firms that a bank is able to demonstrate are 
subject to consolidated supervision and regulation (covering their 
direct and indirect subsidiaries, but not necessarily their parent 
organizations) comparable to that imposed on banks in OECD countries. 
Such regulation must include risk-based capital requirements comparable 
to those applied to banks under the Accord on International Convergence 
of Capital Measurement and Capital Standards (1988, as amended in 1998) 
(Basel Accord).
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    (2) Is collateralized by debt or equity securities that are liquid 
and readily marketable;
    (3) Is marked-to-market daily;
    (4) Is subject to a daily margin maintenance requirement under the 
standard industry documentation; and
    (5) Can be liquidated, terminated, or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided, under applicable law of the 
relevant jurisdiction.\40\
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    \40\ For example, a claim is exempt from the automatic stay in 
bankruptcy in the United States if it arises under a securities contract 
or a repurchase agreement subject to section 555 or 559 of the 
Bankruptcy Code, respectively (11 U.S.C. 555 or 559), a qualified 
financial contract under section 11(e)(8) of the Federal Deposit 
Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between 
financial institutions under sections 401-407 of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or 
the Board's Regulation EE (12 CFR Part 231).
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    3. Category 3: 50 percent. This category includes loans fully 
secured by first liens \41\ on 1- to 4-family residential properties, 
either owner-occupied or rented, or on multifamily residential 
properties,\42\ that meet certain

[[Page 250]]

criteria.\43\ Loans included in this category must have been made in 
accordance with prudent underwriting standards;\44\ be performing in 
accordance with their original terms; and not be 90 days or more past 
due or carried in nonaccrual status. The following additional criteria 
must also be applied to a loan secured by a multifamily residential 
property that is included in this category: all principal and interest 
payments on the loan must have been made on time for at least the year 
preceding placement in this category, or in the case where the existing 
property owner is refinancing a loan on that property, all principal and 
interest payments on the loan being refinanced must have been made on 
time for at least the year preceding placement in this category; 
amortization of the principal and interest must occur over a period of 
not more than 30 years and the minimum original maturity for repayment 
of principal must not be less than 7 years; and the annual net operating 
income (before debt service) generated by the property during its most 
recent fiscal year must not be less than 120 percent of the loan's 
current annual debt service (115 percent if the loan is based on a 
floating interest rate) or, in the case of a cooperative or other not-
for-profit housing project, the property must generate sufficient cash 
flow to provide comparable protection to the institution. Also included 
in this category are privately-issued mortgage-backed securities 
provided that
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    \41\ If a bank holds the first and junior lien(s) on a residential 
property and no other party holds an intervening lien, the transaction 
is treated as a single loan secured by a first lien for the purposes of 
determining the loan-to-value ratio and assigning a risk weight.
    \42\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are listed 
in the instructions to the commercial bank Call Report. In addition, for 
risk-based capital purposes, loans secured by 1- to 4-family residential 
properties include loans to builders with substantial project equity for 
the construction of 1- to 4-family residences that have been presold 
under firm contracts to purchasers who have obtained firm commitments 
for permanent qualifying mortgage loans and have made substantial 
earnest money deposits. Such loans to builders will be considered 
prudently underwritten only if the bank has obtained sufficient 
documentation that the buyer of the home intends to purchase the home 
(i.e., has a legally binding written sales contract) and has the ability 
to obtain a mortgage loan sufficient to purchase the home (i.e., has a 
firm written commitment for permanent financing of the home upon 
completion).
    The instructions to the Call Report also discuss the treatment of 
loans, including multifamily housing loans, that are sold subject to a 
pro rata loss sharing arrangement. Such an arrangement should be treated 
by the selling bank as sold (and excluded from balance sheet assets) to 
the extent that the sales agreement provides for the purchaser of the 
loan to share in any loss incurred on the loan on a pro rata basis with 
the selling bank. In such a transaction, from the standpoint of the 
selling bank, the portion of the loan that is treated as sold is not 
subject to the risk-based capital standards. In connection with sales of 
multifamily housing loans in which the purchaser of a loan shares in any 
loss incurred on the loan with the selling institution on other than a 
pro rata basis, these other loss sharing arrangements are taken into 
account for purposes of determining the extent to which such loans are 
treated by the selling bank as sold (and excluded from balance sheet 
assets) under the risk-based capital framework in the same manner as 
prescribed for reporting purposes in the instructions to the Call 
Report.
    \43\ Residential property loans that do not meet all the specified 
criteria or that are made for the purpose of speculative property 
development are placed in the 100 percent risk category.
    \44\ Prudent underwriting standards include a conservative ratio of 
the current loan balance to the value of the property. In the case of a 
loan secured by multifamily residential property, the loan-to-value 
ratio is not conservative if it exceeds 80 percent (75 percent if the 
loan is based on a floating interest rate). Prudent underwriting 
standards also dictate that a loan-to-value ratio used in the case of 
originating a loan to acquire a property would not be deemed 
conservative unless the value is based on the lower of the acquisition 
cost of the property or appraised (or if appropriate, evaluated) value. 
Otherwise, the loan-to-value ratio generally would be based upon the 
value of the property as determined by the most current appraisal, or if 
appropriate, the most current evaluation. All appraisals must be made in 
a manner consistent with the Federal banking agencies' real estate 
appraisal regulations and guidelines and with the bank's own appraisal 
guidelines.
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    (1) The structure of the security meets the criteria described in 
section III(B)(3) above;
    (2) If the security is backed by a pool of conventional mortgages, 
on 1- to 4-family residential or multifamily residential properties each 
underlying mortgage meets the criteria described above in this section 
for eligibility for the 50 percent risk category at the time the pool is 
originated;
    (3) If the security is backed by privately-issued mortgage-backed 
securities, each underlying security qualifies for the 50 percent risk 
category; and
    (4) If the security is backed by a pool of multifamily residential 
mortgages, principal and interest payments on the security are not 30 
days or more past due.
    Privately-issued mortgage-backed securities that do not meet these 
criteria or that do not qualify for a lower risk weight are generally 
assigned to the 100 percent risk category.
    Also assigned to this category are revenue (non-general obligation) 
bonds or similar obligations, including loans and leases, that are 
obligations of states or other political subdivisions of the U.S. (for 
example, municipal revenue bonds) or other countries of the OECD-based 
group, but for which the government entity is committed to repay the 
debt with revenues from the specific projects financed, rather than from 
general tax funds.
    Credit equivalent amounts of derivative contracts involving standard 
risk obligors (that is, obligors whose loans or debt securities would be 
assigned to the 100 percent risk category) are included in the 50 
percent category, unless they are backed by collateral or guarantees 
that allow them to be placed in a lower risk category.
    4. Category 4: 100 percent. a. All assets not included in the 
categories above are assigned to this category, which comprises standard 
risk assets. The bulk of the assets typically found in a loan portfolio 
would be assigned to the 100 percent category.
    b. This category includes long-term claims on, and the portions of 
long-term claims that are guaranteed by, non-OECD banks, and all

[[Page 251]]

claims on non-OECD central governments that entail some degree of 
transfer risk.\45\ This category includes all claims on foreign and 
domestic private-sector obligors not included in the categories above 
(including loans to nondepository financial institutions and bank 
holding companies); claims on commercial firms owned by the public 
sector; customer liabilities to the bank on acceptances outstanding 
involving standard risk claims;\46\ investments in fixed assets, 
premises, and other real estate owned; common and preferred stock of 
corporations, including stock acquired for debts previously contracted; 
all stripped mortgage-backed securities and similar instruments; and 
commercial and consumer loans (except those assigned to lower risk 
categories due to recognized guarantees or collateral and loans secured 
by residential property that qualify for a lower risk weight). This 
category also includes claims representing capital of a qualifying 
securities firm.
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    \45\ Such assets include all nonlocal currency claims on, and the 
portions of claims that are guaranteed by, non-OECD central governments 
and those portions of local currency claims on, or guaranteed by, non-
OECD central governments that exceed the local currency liabilities held 
by the bank.
    \46\ Customer liabilities on acceptances outstanding involving 
nonstandard risk claims, such as claims on U.S. depository institutions, 
are assigned to the risk category appropriate to the identity of the 
obligor or, if relevant, the nature of the collateral or guarantees 
backing the claims. Portions of acceptances conveyed as risk 
participations to U.S. depository institutions or foreign banks are 
assigned to the 20 percent risk category appropriate to short-term 
claims guaranteed by U.S. depository institutions and foreign banks.
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    c. Also included in this category are industrial-development bonds 
and similar obligations issued under the auspices of states or political 
subdivisions of the OECD-based group of countries for the benefit of a 
private party or enterprise where that party or enterprise, not the 
government entity, is obligated to pay the principal and interest, and 
all obligations of states or political subdivisions of countries that do 
not belong to the OECD-based group.
    d. The following assets also are assigned a risk weight of 100 
percent if they have not been deducted from capital: investments in 
unconsolidated companies, joint ventures, or associated companies; 
instruments that qualify as capital issued by other banking 
organizations; and any intangibles, including those that may have been 
grandfathered into capital.

                       D. Off-Balance Sheet Items

    The face amount of an off-balance sheet item is generally 
incorporated into risk-weighted assets in two steps. The face amount is 
first multiplied by a credit conversion factor, except for direct credit 
substitutes and recourse obligations as discussed in section III.D.1. of 
this appendix. The resultant credit equivalent amount is assigned to the 
appropriate risk category according to the obligor or, if relevant, the 
guarantor, the nature of any collateral, or external credit ratings.\47\
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    \47\ The sufficiency of collateral and guarantees for off-balance-
sheet items is determined by the market value of the collateral or the 
amount of the guarantee in relation to the face amount of the item, 
except for derivative contracts, for which this determination is 
generally made in relation to the credit equivalent amount. Collateral 
and guarantees are subject to the same provisions noted under section 
III.B of this appendix A.
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    1. Items with a 100-percent conversion factor. a. Except as 
otherwise provided in section III.B.3. of this appendix, the full amount 
of an asset or transaction supported, in whole or in part, by a direct 
credit substitute or a recourse obligation. Direct credit substitutes 
and recourse obligations are defined in section III.B.3. of this 
appendix.
    b. Sale and repurchase agreements and forward agreements. Forward 
agreements are legally binding contractual obligations to purchase 
assets with certain drawdown at a specified future date. Such 
obligations include forward purchases, forward forward deposits 
placed,\48\ and partly-paid shares and securities; they do not include 
commitments to make residential mortgage loans or forward foreign 
exchange contracts.
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    \48\ Forward forward deposits accepted are treated as interest rate 
contracts.
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    c. Securities lent by a bank are treated in one of two ways, 
depending upon whether the lender is at risk of loss. If a bank, as 
agent for a customer, lends the customer's securities and does not 
indemnify the customer against loss, then the transaction is excluded 
from the risk-based capital calculation. If, alternatively, a bank lends 
its own securities or, acting as agent for a customer, lends the 
customer's securities and indemnifies the customer against loss, the 
transaction is converted at 100 percent and assigned to the risk weight 
category appropriate to the obligor, or, if applicable, to any 
collateral delivered to the lending bank, or the independent custodian 
acting on the lending bank's behalf. Where a bank is acting as agent for 
a customer in a transaction involving the lending or sale of securities 
that is collateralized by cash delivered to the bank, the transaction is 
deemed to be

[[Page 252]]

collateralized by cash on deposit in the bank for purposes of 
determining the appropriate risk-weight category, provided that any 
indemnification is limited to no more than the difference between the 
market value of the securities and the cash collateral received and any 
reinvestment risk associated with that cash collateral is borne by the 
customer.
    d. In the case of direct credit substitutes in which a risk 
participation \49\ has been conveyed, the full amount of the assets that 
are supported, in whole or in part, by the credit enhancement are 
converted to a credit equivalent amount at 100 percent. However, the pro 
rata share of the credit equivalent amount that has been conveyed 
through a risk participation is assigned to whichever risk category is 
lower: the risk category appropriate to the obligor, after considering 
any relevant guarantees or collateral, or the risk category appropriate 
to the institution acquiring the participation.\50\ Any remainder is 
assigned to the risk category appropriate to the obligor, guarantor, or 
collateral. For example, the pro rata share of the full amount of the 
assets supported, in whole or in part, by a direct credit substitute 
conveyed as a risk participation to a U.S. domestic depository 
institution or foreign bank is assigned to the 20 percent risk 
category.\51\
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    \49\ That is, a participation in which the originating bank remains 
liable to the beneficiary for the full amount of the direct credit 
substitute if the party that has acquired the participation fails to pay 
when the instrument is drawn.
    \50\ A risk participation in bankers acceptances conveyed to other 
institutions is also assigned to the risk category appropriate to the 
institution acquiring the participation or, if relevant, the guarantor 
or nature of the collateral.
    \51\ Risk participations with a remaining maturity of over one year 
that are conveyed to non-OECD banks are to be assigned to the 100 
percent risk category, unless a lower risk category is appropriate to 
the obligor, guarantor, or collateral.
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    e. In the case of direct credit substitutes in which a risk 
participation has been acquired, the acquiring bank's percentage share 
of the direct credit substitute is multiplied by the full amount of the 
assets that are supported, in whole or in part, by the credit 
enhancement and converted to a credit equivalent amount at 100 percent. 
The credit equivalent amount of an acquisition of a risk participation 
in a direct credit substitute is assigned to the risk category 
appropriate to the account party obligor or, if relevant, the nature of 
the collateral or guarantees.
    f. In the case of direct credit substitutes that take the form of a 
syndication where each bank is obligated only for its pro rata share of 
the risk and there is no recourse to the originating bank, each bank 
will only include its pro rata share of the assets supported, in whole 
or in part, by the direct credit substitute in its risk-based capital 
calculation.\52\

                                * * * * *
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    \52\ For example, if a bank has a 10 percent share of a $10 
syndicated direct credit substitute that provides credit support to a 
$100 loan, then the bank's $1 pro rata share in the enhancement means 
that a $10 pro rata share of the loan is included in risk weighted 
assets.
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    2. Items with a 50 percent conversion factor. a. Transaction-related 
contingencies are converted at 50 percent. Such contingencies include 
bid bonds, performance bonds, warranties, standby letters of credit 
related to particular transactions, and performance standby letters of 
credit, as well as acquisitions of risk participations in performance 
standby letters of credit. Performance standby letters of credit 
represent obligations backing the performance of nonfinancial or 
commercial contracts or undertakings. To the extent permitted by law or 
regulation, performance standby letters of credit include arrangements 
backing, among other things, subcontractors' and suppliers' performance, 
labor and materials contracts, and construction bids.
    b. The unused portion of commitments with an original maturity 
exceeding one year, including underwriting commitments, and commercial 
and consumer credit commitments also are converted at 50 percent. 
Original maturity is defined as the length of time between the date the 
commitment is issued and the earliest date on which: (1) The bank can, 
at its option, unconditionally (without cause) cancel the 
commitment,\53\ and (2) the bank is scheduled to (and as a normal 
practice actually does) review the facility to determine whether or not 
it should be extended. Such reviews must continue to be conducted at 
least annually for such a facility to qualify as a short-term 
commitment.
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    \53\ In the case of consumer home equity or mortgage lines of credit 
secured by liens on 1-4 family residential properties, the bank is 
deemed able to unconditionally cancel the commitment for the purpose of 
this criterion if, at its option, it can prohibit additional extensions 
of credit, reduce the credit line, and terminate the commitment to the 
full extent permitted by relevant Federal law.
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    c.i. Commitments are defined as any legally binding arrangements 
that obligate a bank to extend credit in the form of loans or leases; to 
purchase loans, securities, or other

[[Page 253]]

assets; or to participate in loans and leases. They also include 
overdraft facilities, revolving credit, home equity and mortgage lines 
of credit, eligible ABCP liquidity facilities, and similar transactions. 
Normally, commitments involve a written contract or agreement and a 
commitment fee, or some other form of consideration. Commitments are 
included in weighted-risk assets regardless of whether they contain 
``material adverse change'' clauses or other provisions that are 
intended to relieve the issuer of its funding obligation under certain 
conditions. In the case of commitments structured as syndications, where 
the bank is obligated solely for its pro rata share, only the bank's 
proportional share of the syndicated commitment is taken into account in 
calculating the risk-based capital ratio.
    ii Banks that are subject to the market risk rules are required to 
convert the notional amount of eligible ABCP liquidity facilities, in 
form or in substance, with an original maturity of over one year that 
are carried in the trading account at 50 percent to determine the 
appropriate credit equivalent amount even though those facilities are 
structured or characterized as derivatives or other trading book assets. 
Liquidity facilities that support ABCP, in form or in substance, 
(including those positions to which the market risk rules may not be 
applied as set forth in section 2(a) of appendix E to part 208) that are 
not eligible ABCP liquidity facilities are to be considered recourse 
obligations or direct credit substitutes, and assessed the appropriate 
risk-based capital treatment in accordance with section III.B.3. of this 
appendix.
    d. Once a commitment has been converted at 50 percent, any portion 
that has been conveyed to other U.S. depository institutions or OECD 
banks as participations in which the originating bank retains the full 
obligation to the borrower if the participating bank fails to pay when 
the instrument is drawn, is assigned to the 20 percent risk category. 
This treatment is analogous to that accorded to conveyances of risk 
participations in standby letters of credit. The acquisition of a 
participation in a commitment by a bank is converted at 50 percent and 
assigned to the risk category appropriate to the account party obligor 
or, if relevant, the nature of the collateral or guarantees.
    e. Revolving underwriting facilities (RUFs), note issuance 
facilities (NIFs), and other similar arrangements also are converted at 
50 percent regardless of maturity. These are facilities under which a 
borrower can issue on a revolving basis short-term paper in its own 
name, but for which the underwriting banks have a legally binding 
commitment either to purchase any notes the borrower is unable to sell 
by the roll-over date or to advance funds to the borrower.
    3. Items with a 20 percent conversion factor. Short-term, self-
liquidating trade-related contingencies which arise from the movement of 
goods are converted at 20 percent. Such contingencies generally include 
commercial letters of credit and other documentary letters of credit 
collateralized by the underlying shipments.
    4. Items with a 10 percent conversion factor. a. Unused portions of 
eligible ABCP liquidity facilities with an original maturity of one year 
or less are converted at 10 percent.
    b. Banks that are subject to the market risk rules are required to 
convert the notional amount of eligible ABCP liquidity facilities, in 
form or in substance, with an original maturity of one year or less that 
are carried in the trading account at 10 percent to determine the 
appropriate credit equivalent amount even though those facilities are 
structured or characterized as derivatives or other trading book assets. 
Liquidity facilities that support ABCP, in form or in substance, 
(including those positions to which the market risk rules may not be 
applied as set forth in section 2(a) of appendix E of this part) that 
are not eligible ABCP liquidity facilities are to be considered recourse 
obligations or direct credit substitutes and assessed the appropriate 
risk-based capital requirement in accordance with section III.B.3. of 
this appendix.
    5. Items with a zero percent conversion factor. These include unused 
portions of commitments (with the exception of eligible ABCP liquidity 
facilities) with an original maturity of one year or less,\54\ or which 
are unconditionally cancelable at any time, provided a separate credit 
decision is made before each drawing under the facility. Unused portions 
of lines of credit on retail credit cards and related plans are deemed 
to be short-term commitments if the bank has the unconditional right to 
cancel the line of credit at any time, in accordance with applicable 
law.
---------------------------------------------------------------------------

    \54\ [Reserved]
---------------------------------------------------------------------------

    E. Derivative Contracts (Interest Rate, Exchange Rate, Commodity--
(including precious metals) and Equity-Linked Contracts)
    1. Scope. Credit equivalent amounts are computed for each of the 
following off-balance-sheet derivative contracts:
    a. Interest Rate Contracts. These include single currency interest 
rate swaps, basis swaps, forward rate agreements, interest rate options 
purchased (including caps, collars, and floors purchased), and any other 
instrument linked to interest rates that gives rise to similar credit 
risks (including when-issued securities and forward forward deposits 
accepted).
    b. Exchange Rate Contracts. These include cross-currency interest 
rate swaps, forward foreign exchange contracts, currency options 
purchased, and any other instrument linked

[[Page 254]]

to exchange rates that gives rise to similar credit risks.
    c. Equity Derivative Contracts. These include equity-linked swaps, 
equity-linked options purchased, forward equity-linked contracts, and 
any other instrument linked to equities that gives rise to similar 
credit risks.
    d. Commodity (including precious metal) Derivative Contracts. These 
include commodity-linked swaps, commodity-linked options purchased, 
forward commodity-linked contracts, and any other instrument linked to 
commodities that gives rise to similar credit risks.
    e. Exceptions. Exchange rate contracts with an original maturity of 
fourteen or fewer calendar days and derivative contracts traded on 
exchanges that require daily receipt and payment of cash variation 
margin may be excluded from the risk-based ratio calculation. Gold 
contracts are accorded the same treatment as exchange rate contracts 
except that gold contracts with an original maturity of fourteen or 
fewer calendar days are included in the risk-based ratio calculation. 
Over-the-counter options purchased are included and treated in the same 
way as other derivative contracts.
    2. Calculation of credit equivalent amounts. a. The credit 
equivalent amount of a derivative contract that is not subject to a 
qualifying bilateral netting contract in accordance with section 
III.E.3. of this appendix A is equal to the sum of (i) the current 
exposure (sometimes referred to as the replacement cost) of the 
contract; and (ii) an estimate of the potential future credit exposure 
of the contract.
    b. The current exposure is determined by the mark-to-market value of 
the contract. If the mark-to-market value is positive, then the current 
exposure is equal to that mark-to-market value. If the mark-to-market 
value is zero or negative, then the current exposure is zero. Mark-to-
market values are measured in dollars, regardless of the currency or 
currencies specified in the contract, and should reflect changes in 
underlying rates, prices, and indices, as well as counterparty credit 
quality.
    c. The potential future credit exposure of a contract, including a 
contract with a negative mark-to-market value, is estimated by 
multiplying the notional principal amount of the contract by a credit 
conversion factor. Banks should use, subject to examiner review, the 
effective rather than the apparent or stated notional amount in this 
calculation. The credit conversion factors are:

                                               Conversion Factors
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                         Commodity,
                                                   Interest     Exchange                 excluding     Precious
               Remaining maturity                    rate       rate and      Equity      precious     metals,
                                                                  gold                     metals    except gold
----------------------------------------------------------------------------------------------------------------
One year or less...............................          0.0          1.0          6.0         10.0          7.0
Over one to five years.........................          0.5          5.0          8.0         12.0          7.0
Over five years................................          1.5          7.5         10.0         15.0          8.0
----------------------------------------------------------------------------------------------------------------

    d. For a contract that is structured such that on specified dates 
any outstanding exposure is settled and the terms are reset so that the 
market value of the contract is zero, the remaining maturity is equal to 
the time until the next reset date. For an interest rate contract with a 
remaining maturity of more than one year that meets these criteria, the 
minimum conversion factor is 0.5 percent.
    e. For a contract with multiple exchanges of principal, the 
conversion factor is multiplied by the number of remaining payments in 
the contract. A derivative contract not included in the definitions of 
interest rate, exchange rate, equity, or commodity contracts as set 
forth in section III.E.1. of this appendix A, is subject to the same 
conversion factors as a commodity, excluding precious metals.
    f. No potential future exposure is calculated for a single currency 
interest rate swap in which payments are made based upon two floating 
rate indices (a so called floating/floating or basis swap); the credit 
exposure on such a contract is evaluated solely on the basis of the 
mark-to-market value.
    g. The Board notes that the conversion factors set forth above, 
which are based on observed volatilities of the particular types of 
instruments, are subject to review and modification in light of changing 
volatilities or market conditions.
    3. Netting. a. For purposes of this appendix A, netting refers to 
the offsetting of positive and negative mark-to-market values when 
determining a current exposure to be used in the calculation of a credit 
equivalent amount. Any legally enforceable form of bilateral netting 
(that is, netting with a single counterparty) of derivative contracts is 
recognized for purposes of calculating the credit equivalent amount 
provided that:

[[Page 255]]

    i. The netting is accomplished under a written netting contract that 
creates a single legal obligation, covering all included individual 
contracts, with the effect that the bank would have a claim to receive, 
or obligation to pay, only the net amount of the sum of the positive and 
negative mark-to-market values on included individual contracts in the 
event that a counterparty, or a counterparty to whom the contract has 
been validly assigned, fails to perform due to any of the following 
events: default, insolvency, liquidation, or similar circumstances.
    ii. The bank obtains a written and reasoned legal opinion(s) 
representing that in the event of a legal challenge--including one 
resulting from default, insolvency, liquidation, or similar 
circumstances--the relevant court and administrative authorities would 
find the bank's exposure to be the net amount under:
    1. The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    2. The law that governs the individual contracts covered by the 
netting contract; and
    3. The law that governs the netting contract.
    iii. The bank establishes and maintains procedures to ensure that 
the legal characteristics of netting contracts are kept under review in 
the light of possible changes in relevant law.
    iv. The bank maintains in its files documentation adequate to 
support the netting of derivative contracts, including a copy of the 
bilateral netting contract and necessary legal opinions.
    b. A contract containing a walkaway clause is not eligible for 
netting for purposes of calculating the credit equivalent amount.\55\
---------------------------------------------------------------------------

    \55\ A walkaway clause is a provision in a netting contract that 
permits a non-defaulting counterparty to make lower payments than it 
would make otherwise under the contract, or no payment at all, to a 
defaulter or to the estate of a defaulter, even if the defaulter or the 
estate of the defaulter is a net creditor under the contract.
---------------------------------------------------------------------------

    c. A bank netting individual contracts for the purpose of 
calculating credit equivalent amounts of derivative contracts, 
represents that it has met the requirements of this appendix A and all 
the appropriate documents are in the bank's files and available for 
inspection by the Federal Reserve. The Federal Reserve may determine 
that a bank's files are inadequate or that a netting contract, or any of 
its underlying individual contracts, may not be legally enforceable 
under any one of the bodies of law described in section III.E.3.a.ii. of 
this appendix A. If such a determination is made, the netting contract 
may be disqualified from recognition for risk-based capital purposes or 
underlying individual contracts may be treated as though they are not 
subject to the netting contract.
    d. The credit equivalent amount of contracts that are subject to a 
qualifying bilateral netting contract is calculated by adding (i) the 
current exposure of the netting contract (net current exposure) and (ii) 
the sum of the estimates of potential future credit exposures on all 
individual contracts subject to the netting contract (gross potential 
future exposure) adjusted to reflect the effects of the netting 
contract.\56\
---------------------------------------------------------------------------

    \56\ For purposes of calculating potential future credit exposure to 
a netting counterparty for foreign exchange contracts and other similar 
contracts in which notional principal is equivalent to cash flows, total 
notional principal is defined as the net receipts falling due on each 
value date in each currency.
---------------------------------------------------------------------------

    e. The net current exposure is the sum of all positive and negative 
mark-to-market values of the individual contracts included in the 
netting contract. If the net sum of the mark-to-market values is 
positive, then the net current exposure is equal to that sum. If the net 
sum of the mark-to-market values is zero or negative, then the net 
current exposure is zero. The Federal Reserve may determine that a 
netting contract qualifies for risk-based capital netting treatment even 
though certain individual contracts included under the netting contract 
may not qualify. In such instances, the nonqualifying contracts should 
be treated as individual contracts that are not subject to the netting 
contract.
    f. Gross potential future exposure, or Agross is 
calculated by summing the estimates of potential future exposure 
(determined in accordance with section III.E.2 of this appendix A) for 
each individual contract subject to the qualifying bilateral netting 
contract.
    g. The effects of the bilateral netting contract on the gross 
potential future exposure are recognized through the application of a 
formula that results in an adjusted add-on amount (Anet). The 
formula, which employs the ratio of net current exposure to gross 
current exposure (NGR) is expressed as:

    Anet = (0.4xAgross) + 
0.6(NGRxAgross)

    h. The NGR may be calculated in accordance with either the 
counterparty-by-counterparty approach or the aggregate approach.
    i. Under the counterparty-by-counterparty approach, the NGR is the 
ratio of the net current exposure for a netting contract to the gross 
current exposure of the netting contract. The gross current exposure is 
the

[[Page 256]]

sum of the current exposures of all individual contracts subject to the 
netting contract calculated in accordance with section III.E.2. of this 
appendix A. Net negative mark-to-market values for individual netting 
contracts with the same counterparty may not be used to offset net 
positive mark-to-market values for other netting contracts with that 
counterparty.
    ii. Under the aggregate approach, the NGR is the ratio of the sum of 
all of the net current exposures for qualifying bilateral netting 
contracts to the sum of all of the gross current exposures for those 
netting contracts (each gross current exposure is calculated in the same 
manner as in section III.E.3.h.i. of this appendix A). Net negative 
mark-to-market values for individual counterparties may not be used to 
offset net positive mark-to-market values for other counterparties.
    iii. A bank must consistently use either the counterparty-by-
counterparty approach or the aggregate approach to calculate the NGR. 
Regardless of the approach used, the NGR should be applied individually 
to each qualifying bilateral netting contract to determine the adjusted 
add-on for that netting contract.
    i. In the event a netting contract covers contracts that are 
normally excluded from the risk-based ratio calculation--for example, 
exchange rate contracts with an original maturity of fourteen or fewer 
calendar days or instruments traded on exchanges that require daily 
payment and receipt of cash variation margin--a bank may elect to either 
include or exclude all mark-to-market values of such contracts when 
determining net current exposure, provided the method chosen is applied 
consistently.
    4. Risk Weights. Once the credit equivalent amount for a derivative 
contract, or a group of derivative contracts subject to a qualifying 
bilateral netting contract, has been determined, that amount is assigned 
to the risk category appropriate to the counterparty, or, if relevant, 
the guarantor or the nature of any collateral.\57\ However, the maximum 
risk weight applicable to the credit equivalent amount of such contracts 
is 50 percent.
---------------------------------------------------------------------------

    \57\ For derivative contracts, sufficiency of collateral or 
guarantees is generally determined by the market value of the collateral 
or the amount of the guarantee in relation to the credit equivalent 
amount. Collateral and guarantees are subject to the same provisions 
noted under section III.B. of this appendix A.
---------------------------------------------------------------------------

    5. Avoidance of double counting. a. In certain cases, credit 
exposures arising from the derivative contracts covered by section 
III.E. of this appendix A may already be reflected, in part, on the 
balance sheet. To avoid double counting such exposures in the assessment 
of capital adequacy and, perhaps, assigning inappropriate risk weights, 
counterparty credit exposures arising from the derivative instruments 
covered by these guidelines may need to be excluded from balance sheet 
assets in calculating a bank's risk-based capital ratios.
    b. Examples of the calculation of credit equivalent amounts for 
contracts covered under this section III.E. are contained in Attachment 
V of this appendix A.

              IV. Minimum Supervisory Ratios and Standards

    The interim and final supervisory standards set forth below specify 
minimum supervisory ratios based primarily on broad credit risk 
considerations. As noted above, the risk-based ratio does not take 
explicit account of the quality of individual asset portfolios or the 
range of other types of risks to which banks may be exposed, such as 
interest rate, liquidity, market or operational risks. For this reason, 
banks are generally expected to operate with capital positions above the 
minimum ratios.
    Institutions with high or inordinate levels of risk are expected to 
operate well above minimum capital standards. Banks experiencing or 
anticipating significant growth are also expected to maintain capital, 
including tangible capital positions, well above the minimum levels. For 
example, most such institutions generally have operated at capital 
levels ranging from 100 to 200 basis points above the stated minimums. 
Higher capital ratios could be required if warranted by the particular 
circumstances or risk profiles of individual banks. In all cases, banks 
should hold capital commensurate with the level and nature of all of the 
risks, including the volume and severity of problem loans, to which they 
are exposed.
    Upon adoption of the risk-based framework, any bank that does not 
meet the interim or final supervisory ratios, or whose capital is 
otherwise considered inadequate, is expected to develop and implement a 
plan acceptable to the Federal Reserve for achieving an adequate level 
of capital consistent with the provisions of these guidelines or with 
the special circumstances affecting the individual institution. In 
addition, such banks should avoid any actions, including increased risk-
taking or unwarranted expansion, that would lower or further erode their 
capital positions.

           A. Minimum Risk-Based Ratio After Transition Period

    As reflected in Attachment VI, by year-end 1992, all state member 
banks should meet a minimum ratio of qualifying total capital to 
weighted risk assets of 8 percent, of which at least 4.0 percentage 
points should be in the

[[Page 257]]

form of Tier 1 capital. For purposes of section IV.A., Tier 1 capital is 
defined as the sum of core capital elements less goodwill and other 
intangible assets required to be deducted in accordance with section 
II.B.1.b. of this appendix. The maximum amount of supplementary capital 
elements that qualifies as Tier 2 capital is limited to 100 percent of 
Tier 1 capital. In addition, the combined maximum amount of subordinated 
debt and intermediate-term preferred stock that qualifies as Tier 2 
capital is limited to 50 percent of Tier 1 capital. The maximum amount 
of the allowance for loan and lease losses that qualifies as Tier 2 
capital is limited to 1.25 percent of gross weighted risk assets. 
Allowances for loan and lease losses in excess of this limit may, of 
course, be maintained, but would not be included in a bank's total 
capital. The Federal Reserve will continue to require banks to maintain 
reserves at levels fully sufficient to cover losses inherent in their 
loan portfolios.
    Qualifying total capital is calculated by adding Tier 1 capital and 
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then 
deducting from this sum certain investments in banking or finance 
subsidiaries that are not consolidated for accounting or supervisory 
purposes, reciprocal holdings of banking organization capital 
securities, or other items at the direction of the Federal Reserve. 
These deductions are discussed above in section II(B).

                       B. Transition Arrangements

    The transition period for implementing the risk-based capital 
standard ends on December 31, 1992. Initially, the risk-based capital 
guidelines do not establish a minimum level of capital. However, by 
year-end 1990, banks are expected to meet a minimum interim target ratio 
for qualifying total capital to weighted risk assets of 7.25 percent, at 
least one-half of which should be in the form of Tier 1 capital. For 
purposes of meeting the 1990 interim target, the amount of loan loss 
reserves that may be included in capital is limited to 1.5 percent of 
weighted risk assets and up to 10 percent of a bank's Tier 1 capital may 
consist of supplementary capital elements. Thus, the 7.25 percent 
interim target ratio implies a minimum ratio of Tier 1 capital to 
weighted risk assets of 3.6 percent (one-half of 7.25) and a minimum 
ratio of core capital elements to weighted risk assets ratio of 3.25 
percent (nine-tenths of the Tier 1 capital ratio).
    Through year-end 1990, banks have the option of complying with the 
minimum 7.25 percent year-end 1990 risk-based capital standard, in lieu 
of the minimum 5.5 percent primary and 6 percent total capital to total 
assets capital ratios set forth in appendix B to part 225 of the Federal 
Reserve's Regulation Y. In addition, as more fully set forth in appendix 
B to this part, banks are expected to maintain a minimum ratio of Tier 1 
capital total assets during this transition period.

[[Page 258]]



               Attachment I--Sample Calculation of Risk-Based Capital Ratio for State Member Banks
Example of a bank with $6,000 in total capital and the following assets and off-balance sheet items:
Balance Sheet Assets:
    Cash...........................................................................................       $5,000
    U.S. Treasuries................................................................................       20,000
    Balances at domestic banks.....................................................................        5,000
    Loans secured by first liens on 1-4 family residential properties..............................        5,000
    Loans to private corporations..................................................................       65,000
                                                                                                    ------------
      Total Balance Sheet Assets...................................................................     $100,000
Off-Balance Sheet Items:
    Standby letters of credit (``SLCs'') backing general obligation debt issues of U.S.                  $10,000
     municipalities (``GOs'')......................................................................
    Long-term legally binding commitments to private corporations..................................       20,000
                                                                                                    ------------
      Total Off-Balance Sheet Items................................................................       30,000
This bank's total capital to total assets (leverage) ratio would be: ($6,000/$100,000)=6.00%
 
To compute the bank's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance sheet (``OBS'') item


----------------------------------------------------------------------------------------------------------------
                                                                                                        Credit
                              OBS item                                Face value      Conversion      equivalent
                                                                                        factor          amount
----------------------------------------------------------------------------------------------------------------
 


SLCS backing municipal GOs........................................      $10,000  x         1.00   =      $10,000
Long-term commitments to private corporations.....................       20,000  x         0.50   =       10,000
 
2. Multiply each balance sheet asset and the credit equivalent amount of each
 OBS item by the appropriate risk weight.
0% Category:
    Cash..........................................................      $ 5,000
    U.S. Treasuries...............................................       20,000
                                                                   -------------
                                                                         25,000  x            0   =            0
20% Category:
    Balances at domestic banks....................................        5,000
    Credit equivalent amounts of SLCs backing GOs of U.S.                10,000
     municipalities...............................................
                                                                   -------------
                                                                         15,000  x          .20   =       $3,000
50% Category:
    Loans secured by first liens on 1-4 family residential                5,000  x          .50   =        2,500
     properties...................................................
100% Category:
    Loans to private corporations.................................       65,000
    Credit equivalent amounts of long-term commitments to private        10,000
     corporations.................................................
                                                                   -------------
                                                                         75,000  x         1.00   =       75,000
                                                                                                    ------------
      Total risk-weighted assets..................................  ...........  .  ...........  ..       80,500
 
This bank's ratio of total capital to weighted risk assets (risk-based capital ratio) would be: ($6,000/
 $80,500)=7.45%


[[Page 259]]


  Attachment II--Summary of Definition of Qualifying Capital for State
                            Member Banks \*\
                   [Using the Year-End 1992 Standard]
------------------------------------------------------------------------
               Components                      Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1)..................  Must equal or exceed 4% of
                                          weighted-risk assets.
Common stockholders' equity............  No limit.
Qualifying noncumulative perpetual       No limit; banks should avoid
 preferred stock.                         undue reliance on preferred
                                          stock in tier 1.
Minority interest in equity accounts of  Banks should avoid using
 consolidated.                            minority interests to
                                          subsidiaries introduce
                                          elements not otherwise
                                          qualifying for tier 1 capital.
Less: Goodwill, other intangible
 assets, credit-enhancing interest-only
 strips and nonfinancial equity
 investments required to be deducted
 from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2).........  Total of tier 2 is limited to
                                          100% of tier 1.\2\
    Allowance for loan and lease losses  Limited to 1.25% of weighted-
                                          risk assets.\2\
    Perpetual preferred stock..........  No limit within tier 2.
    Hybrid capital instruments and       No limit within tier 2.
     equity contract notes.
    Subordinated debt and intermediate-  Subordinated debt and
     term preferred stock (original       intermediate-term preferred
     weighted average maturity of 5       stock are limited to 50% of
     years or more).                      tier 1,2 amortized for capital
                                          purposes as they approach
                                          maturity.
    Revaluation reserves (equity and     Not included; banks encouraged
     building).                           to disclose; may be evaluated
                                          on a case-by-case basis for
                                          international comparisons; and
                                          taken into account in making
                                          an overall assessment of
                                          capital.
DEDUCTIONS (from sum of tier 1 and tier
 2)
    Investments in unconsolidated        As a general rule, one-half of
     subsidiaries.                        the aggregate investments will
                                          be deducted from tier 1
                                          capital and one-half from tier
                                          2 capital.\3\
Reciprocal holdings of banking
 organizations' capital securities
    Other deductions (such as other      On a case-by-case basis or as a
     subsidiaries or joint ventures) as   matter of policy.
     determined by supervisory
     authority after a formal
     rulemaking.
          TOTAL CAPITAL (tier 1 + tier   Must equal or exceed 8% of
           2--deductions).                weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets, residual
  interests and nonfinancial equity investments are set forth in section
  II.B. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
  capital.
\3\ A proportionately greater amount may be deducted from tier 1
  capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
  description of the requirements for, and the limitations on, the
  components of qualifying capital.

 Attachment III--Summary of Risk Weights and Risk Categories for State 
                              Member Banks

                        Category 1: Zero Percent

    1. Cash (domestic and foreign) held in the bank or in transit.
    2. Balances due from Federal Reserve Banks (including Federal 
Reserve Bank stock) and central banks in other OECD countries.
    3. Direct claims on, and the portions of claims that are 
unconditionally guaranteed by, the U.S. Treasury and U.S. Government 
agencies \1\ and the central governments of other OECD countries, and 
local currency claims on, and the portions of local currency claims that 
are unconditionally guaranteed by, the central governments of non-OECD 
countries including the central banks of non-OECD countries), to the 
extent that the bank has liabilities booked in that currency.
---------------------------------------------------------------------------

    \1\ For the purpose of calculating the risk-based capital ratio, a 
U.S. Government agency is defined as an instrumentality of the U.S. 
Government whose obligations are fully and explicitly guaranteed as to 
the timely payment of principal and interest by the full faith and 
credit of the U.S. Government.
---------------------------------------------------------------------------

    4. Gold bullion held in the bank's vaults or in another's vaults on 
an allocated basis, to the extent offset by gold bullion liabilities.
    5. Claims collateralized by cash on deposit in the bank or by 
securities issued or guaranteed by OECD central governments or U.S. 
government agencies for which a positive margin of collateral is 
maintained on a daily basis, fully taking into account any change in the 
bank's exposure to the obligor or counterparty under a claim in relation 
to the market value of the collateral held in support of that claim.

                         Category 2: 20 Percent

    1. Cash items in the process of collection.
    2. All claims (long- or short-term) on, and the portions of claims 
(long- or short-term) that are guaranteed by, U.S. depository 
institutions and OCED banks.
    3. Short-term claims (remaining maturity of one year or less) on, 
and the portions of short-term claims that are guaranteed by, non-OECD 
banks.

[[Page 260]]

    4. The portions of claims that are conditionally guaranteed by the 
central governments of OECD countries and U.S. Government agencies, and 
the portions of local currency claims that are conditionally guaranteed 
by the central governments of non-OECD countries, to the extent that the 
bank has liabilities booked in that currency.
    5. Claims on, and the portions of claims that are guaranteed by, 
U.S. Government-sponsored agencies.\2\
---------------------------------------------------------------------------

    \2\ For the purpose of calculating the risk-based capital ratio, a 
U.S. Government-sponsored agency is defined as an agency originally 
established or chartered to serve public purposes specified by the U.S. 
Congress but whose obligations are not explicitly guaranteed by the full 
faith and credit of the U.S. Government.
---------------------------------------------------------------------------

    6. General obligation claims on, and the portions of claims that are 
guaranteed by the full faith and credit of, local governments and 
political subdivisions of the U.S. and other OECD local governments.
    7. Claims on, and the portions of claims that are guaranteed by, 
official multilateral lending institutions or regional development 
banks.
    8. The portions of claims that are collateralized \3\ by cash on 
deposit in the bank or by securities issued or guaranteed by the U.S. 
Treasury, the central governments of other OECD countries, and U.S 
government agencies that do not qualify for the zero percent risk-weight 
category, or that are collateralized by securities issued or guaranteed 
by U.S. government-sponsored agencies.
---------------------------------------------------------------------------

    \3\ The extent of collateralization is determined by current market 
value.
---------------------------------------------------------------------------

    9. The portions of claims that are collateralized \3\ by securities 
issued by official multilateral lending institutions or regional 
development banks.
    10. Certain privately-issued securities representing indirect 
ownership of mortgage-backed U.S. Government agency or U.S. Government-
sponsored agency securities.
    11. Investment in shares of a fund whose portfolio is permitted to 
hold only securities that would qualify for the zero or 20 percent risk 
categories.
    12. Claims on, and claims guaranteed by, qualifying securities firms 
incorporated in the United States or other member of the OECD-based 
group of countries provided that:
    a. The qualifying securities firm has a rating in one of the top 
three investment grade rating categories from a nationally recognized 
statistical rating organization; or
    b. The claim is guaranteed by a qualifying securities firm's parent 
company with such a rating.
    13. Certain collateralized claims on qualifying securities firms in 
the United States or other member of the OECD-based group of countries, 
without regard to satisfaction of the rating standard, provided that the 
claim arises under a contract that:
    a. Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed using standard industry 
documentation;
    b. Is collateralized by liquid and readily marketable debt or equity 
securities;
    c. Is marked to market daily;
    d. Is subject to a daily margin maintenance requirement under the 
standard industry documentation; and
    e. Can be liquidated, terminated, or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided, under applicable law of the 
relevant jurisdiction.

                         Category 3: 50 Percent

    1. Loans fully secured by first liens on 1-to 4-family residential 
properties or on multifamily residential properties that have been made 
in accordance with prudent underwriting standards, that are performing 
in accordance with their original terms, that are not past due or in 
nonaccrual status, and that meet other qualifying criteria, and certain 
privately-issued mortgage-backed securities representing indirect 
ownership of such loans. (Loans made for speculative purposes are 
excluded.)
    2. Revenue bonds or similar claims that are obligations of U.S. 
state or local governments, or other OECD local governments, but for 
which the government entity is committed to repay the debt only out of 
revenues from the facilities financed.
    3. Credit equivalent amounts of interest rate and foreign exchange 
rate related contracts, except for those assigned to a lower risk 
category.

                         Category 4: 100 Percent

    1. All other claims on private obligors.
    2. Claims on, or guaranteed by, non-OECD foreign banks with a 
remaining maturity exceeding one year.
    3. Claims on, or guaranteed by, non-OECD central governments that 
are not included in item 3 of Category 1 or item 4 of Category 2; all 
claims on non-OECD state or local governments.
    4. Obligations issued by U.S. state or local governments, or other 
OECD local governments (including industrial development authorities and 
similar entities), repayable solely by a private party or enterprise.
    5. Premises, plant, and equipment; other fixed assets; and other 
real estate owned.
    6. Investments in any unconsolidated subsidiaries, joint ventures, 
or associated companies--if not deducted from capital.

[[Page 261]]

    7. Instruments issued by other banking organizations that qualify as 
capital--if not deducted from capital.
    8. Claims on commercial firms owned by a government.
    9. All other assets, including any intangible assets that are not 
deducted from capital.

[54 FR 4198, Jan. 27, 1989; 54 FR 12531, Mar. 27, 1989, as amended at 55 
FR 32831, Aug. 10, 1990; 56 FR 51156, Oct. 10, 1991; 57 FR 2012, Jan. 
17, 1992; 57 FR 60719, Dec. 22, 1992; 57 FR 62179, 62182, Dec. 30, 1992; 
58 FR 7979, Feb. 11, 1993; 58 FR 68738, Dec. 29, 1993; Reg. H, 59 FR 
62992, Dec. 7, 1994; 59 FR 63244, Dec. 8, 1994; 59 FR 64563, Dec. 15, 
1994; 59 FR 65924, 65925, Dec. 22, 1994; 60 FR 8180, Feb. 13, 1995; 60 
FR 39229, 39230, Aug. 1, 1995; 60 FR 39493, Aug. 2, 1995; 60 FR 45615, 
Aug. 31, 1995; 60 FR 46176, 46178, Sept. 5, 1995; 60 FR 66044, Dec. 20, 
1995; 61 FR 47370, Sept. 6, 1996; 63 FR 42675, Aug. 10, 1998; 63 FR 
46522, Sept. 1, 1998; 63 FR 58621, Nov. 2, 1998; 64 FR 10200, Mar. 2, 
1999; 66 FR 59636, Nov. 29, 2001; 66 FR 67074, Dec. 28, 2001; 67 FR 
3797, Jan. 25, 2002; 67 FR 16977, Apr. 9, 2002; 68 FR 56535, Oct. 1, 
2003; 69 FR 22385, Apr. 26, 2004; 69 FR 25672, May 7, 2004; 69 FR 44916, 
July 28, 2004]

  Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
                     Banks: Tier 1 Leverage Measure

                               I. Overview

    a. The Board of Governors of the Federal Reserve System has adopted 
a minimum ratio of tier 1 capital to total assets to assist in the 
assessment of the capital adequacy of state member banks.\1\ The 
principal objective of this measure is to place a constraint on the 
maximum degree to which a state member bank can leverage its equity 
capital base. It is intended to be used as a supplement to the risk-
based capital measure.
---------------------------------------------------------------------------

    \1\ Supervisory risk-based capital ratios that related capital to 
weighted-risk assets for state member banks are outlined in Appendix A 
to this part.
---------------------------------------------------------------------------

    b. The guidelines apply to all state member banks on a consolidated 
basis and are to be used in the examination and supervisory process as 
well as in the analysis of applications acted upon by the Federal 
Reserve. The Board will review the guidelines from time to time and will 
consider the need for possible adjustments in light of any significant 
changes in the economy, financial markets, and banking practices.

                      II. The Tier 1 Leverage Ratio

    a. The minimum ratio of Tier 1 capital to total assets for strong 
banking institutions (rated composite ``1'' under the UFIRS rating 
system of banks) is 3.0 percent. For all other institutions, the minimum 
ratio of Tier 1 capital to total assets is 4.0 percent. Banking 
institutions with supervisory, financial, operational, or managerial 
weaknesses, as well as institutions that are anticipating or 
experiencing significant growth, are expected to maintain capital ratios 
well above the minimum levels. Moreover, higher capital ratios may be 
required for any banking institution if warranted by its particular 
circumstances or risk profile. In all cases, institutions should hold 
capital commensurate with the level and nature of the risks, including 
the volume and severity of problem loans, to which they are exposed.
    b. A bank's tier 1 leverage ratio is calculated by dividing its tier 
1 capital (the numerator of the ratio) by its average total consolidated 
assets (the denominator of the ratio). The ratio will also be calculated 
using period-end assets whenever necessary, on a case-by-case basis. For 
the purpose of this leverage ratio, the definition of tier 1 capital as 
set forth in the risk-based capital guidelines contained in appendix A 
of this part will be used.\2\ As a general matter, average total 
consolidated assets are defined as the quarterly average total assets 
(defined net of the allowance for loan and lease losses) reported on the 
bank's Reports of Condition and Income (Call Reports), less goodwill; 
amounts of mortgage servicing assets, nonmortgage servicing assets, and 
purchased credit card relationships that, in the aggregate, are in 
excess of 100 percent of Tier 1 capital; amounts of nonmortgage 
servicing assets and purchased credit card relationships that, in the 
aggregate, are in excess of 25 percent of Tier 1 capital; amounts of 
credit-enhancing interest-only strips that are in

[[Page 262]]

excess of 25 percent of Tier 1 capital; all other identifiable 
intangible assets; any investments in subsidiaries or associated 
companies that the Federal Reserve determines should be deducted Tier 1 
capital; deferred tax assets that are dependent upon future taxable 
income, net of their valuation allowance, in excess of the limitations 
set forth in section II.B.4 of appendix A of this part; and the amount 
of the total adjusted carrying value of nonfinancial equity investments 
that is subject to a deduction from Tier 1 capital.\3\
---------------------------------------------------------------------------

    \2\ Tier 1 capital for state member banks includes common equity, 
minority interest in the equity accounts of consolidated subsidiaries, 
and qualifying noncumulative perpetual preferred stock. In addition, as 
a general matter, Tier 1 capital excludes goodwill; amounts of mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships that, in the aggregate, exceed 100 percent of Tier 1 
capital; nonmortgage servicing assets and purchased credit card 
relationships that, in the aggregate, exceed 25 percent of Tier 1 
capital; amounts of credit enhancing interest-only strips in excess of 
25 percent of Tier 1 capital; other identifiable intangible assets; 
deferred tax assets that are dependent upon future taxable income, net 
of their valuation allowance, in excess of certain limitations; and a 
percentage of the bank's nonfinancial equity investments. The Federal 
Reserve may exclude certain other investments in subsidiaries or 
associated companies as appropriate.
    \3\ Deductions from Tier 1 capital and other adjustments are 
discussed more fully in section II.B in appendix A of this part.
---------------------------------------------------------------------------

    c. Notwithstanding other provisions of this appendix B, a qualifying 
bank that has transferred small business loans and leases on personal 
property (small business obligations) with recourse shall, for purposes 
of calculating its tier 1 leverage ratio, exclude from its average total 
consolidated assets the outstanding principal amount of the small 
business loans and leases transferred with recourse, provided two 
conditions are met. First, the transaction must be treated as a sale 
under generally accepted accounting principles (GAAP) and, second, the 
bank must establish pursuant to GAAP a non-capital reserve sufficient to 
meet the bank's reasonably estimated liability under the recourse 
arrangement. Only loans and leases to businesses that meet the criteria 
for a small business concern established by the Small Business 
Administration under section 3(a) of the Small Business Act are eligible 
for this capital treatment.
    d. For purposes of this appendix B, a bank is qualifying if it meets 
the criteria set forth in the Board's prompt corrective action 
regulation (12 CFR 208.40) for well capitalized or, by order of the 
Board, adequately capitalized. For purposes of determining whether a 
bank meets these criteria, its capital ratios must be calculated without 
regard to the preferential capital treatment for transfers of small 
business obligations with recourse specified in section II.c. of this 
appendix B. The total outstanding amount of recourse retained by a 
qualifying bank on transfers of small business obligations receiving the 
preferential capital treatment cannot exceed 15 percent of the bank's 
total risk-based capital. By order, the Board may approve a higher 
limit.
    e. If a bank ceases to be qualifying or exceeds the 15 percent 
capital limitation, the preferential capital treatment will continue to 
apply to any transfers of small business obligations with recourse that 
were consummated during the time that the bank was qualifying and did 
not exceed the capital limit.
    f. The leverage capital ratio of the bank shall be calculated 
without regard to the preferential capital treatment for transfers of 
small business obligations with recourse specified in section II of this 
appendix B for purposes of:
    (i) Determining whether a bank is adequately capitalized, 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under prompt corrective action (12 CFR 208.43(b)(1)); 
and
    (ii) Reclassifying a well capitalized bank to adequately capitalized 
and requiring an adequately capitalized bank to comply with certain 
mandatory or discretionary supervisory actions as if the bank were in 
the next lower prompt corrective action capital category (12 CFR 
208.43(c)).
    g. Whenever appropriate, including when a bank is undertaking 
expansion, seeking to engage in new activities or otherwise facing 
unusual or abnormal risks, the Board will continue to consider the level 
of an individual bank's tangible tier 1 leverage ratio (after deducting 
all intangibles) in making an overall assessment of capital adequacy. 
This is consistent with the Federal Reserve's risk-based capital 
guidelines an long-standing Board policy and practice with regard to 
leverage guidelines. Banks experiencing growth, whether internally or by 
acquisition, are expected to maintain strong capital position 
substantially above minimum supervisory levels, without significant 
reliance on intangible assets.

[Reg. H, 59 FR 65925, Dec. 22, 1994, as amended at 60 FR 39230, Aug. 1, 
1995; 60 FR 45615, Aug. 31, 1995; 63 FR 42675, Aug. 10, 1998; 63 FR 
58621, Nov. 2, 1998; 64 FR 10200, Mar. 2, 1999; 66 FR 59643, Nov. 29, 
2001; 67 FR 3800, Jan. 25, 2002]

 Appendix C to Part 208--Interagency Guidelines for Real Estate Lending 
                                Policies

    The agencies' regulations require that each insured depository 
institution adopt and maintain a written policy that establishes 
appropriate limits and standards for all extensions of credit that are 
secured by liens on or interests in real estate or made for the purpose 
of financing the construction of a building or other improvements.\1\ 
These guidelines are intended to assist institutions in the formulation 
and maintenance of a real estate lending policy that is appropriate to 
the size of the institution and the nature and

[[Page 263]]

scope of its individual operations, as well as satisfies the 
requirements of the regulation.
---------------------------------------------------------------------------

    \1\ The agencies have adopted a uniform rule on real estate lending. 
See 12 CFR part 365 (FDIC); 12 CFR part 208, subpart E (FRB); 12 CFR 
part 34, subpart D (OCC); and 12 CFR 563.100-101 (OTS).
---------------------------------------------------------------------------

    Each institution's policies must be comprehensive, and consistent 
with safe and sound lending practices, and must ensure that the 
institution operates within limits and according to standards that are 
reviewed and approved at least annually by the board of directors. Real 
estate lending is an integral part of many institutions' business plans 
and, when undertaken in a prudent manner, will not be subject to 
examiner criticism.

                Loan Portfolio Management Considerations

    The lending policy should contain a general outline of the scope and 
distribution of the institution's credit facilities and the manner in 
which real estate loans are made, serviced, and collected. In 
particular, the institution's policies on real estate lending should:

     Identify the geographic areas in which the 
institution will consider lending.
     Establish a loan portfolio diversification policy 
and set limits for real estate loans by type and geographic market 
(e.g., limits on higher risk loans).
     Identify appropriate terms and conditions by type 
of real estate loan.
     Establish loan origination and approval 
procedures, both generally and by size and type of loan.
     Establish prudent underwriting standards that are 
clear and measurable, including loan-to-value limits, that are 
consistent with these supervisory guidelines.
     Establish review and approval procedures for 
exception loans, including loans with loan-to-value percentages in 
excess of supervisory limits.
     Establish loan administration procedures, 
including documentation, disbursement, collateral inspection, 
collection, and loan review.
     Establish real estate appraisal and evaluation 
programs.
     Require that management monitor the loan 
portfolio and provide timely and adequate reports to the board of 
directors.

    The institution should consider both internal and external factors 
in the formulation of its loan policies and strategic plan. Factors that 
should be considered include:

     The size and financial condition of the 
institution.
     The expertise and size of the lending staff.
     The need to avoid undue concentrations of risk.
     Compliance with all real estate related laws and 
regulations, including the Community Reinvestment Act, anti-
discrimination laws, and for savings associations, the Qualified Thrift 
Lender test.
     Market conditions.

    The institution should monitor conditions in the real estate markets 
in its lending area so that it can react quickly to changes in market 
conditions that are relevant to its lending decisions. Market supply and 
demand factors that should be considered include:

     Demographic indicators, including population and 
employment trends.
     Zoning requirements.
     Current and projected vacancy, construction, and 
absorption rates.
     Current and projected lease terms, rental rates, 
and sales prices, including concessions.
     Current and projected operating expenses for 
different types of projects.
     Economic indicators, including trends and 
diversification of the lending area.
     Valuation trends, including discount and direct 
capitalization rates.

                         Underwriting Standards

    Prudently underwritten real estate loans should reflect all relevant 
credit factors, including:

     The capacity of the borrower, or income from the 
underlying property, to adequately service the debt.
     The value of the mortgaged property.
     The overall creditworthiness of the borrower.
     The level of equity invested in the property.
     Any secondary sources of repayment.
     Any additional collateral or credit enhancements 
(such as guarantees, mortgage insurance or takeout commitments).

    The lending policies should reflect the level of risk that is 
acceptable to the board of directors and provide clear and measurable 
underwriting standards that enable the institution's lending staff to 
evaluate these credit factors. The underwriting standards should 
address:

     The maximum loan amount by type of property.
     Maximum loan maturities by type of property.
     Amortization schedules.
     Pricing structure for different types of real 
estate loans.
     Loan-to-value limits by type of property.

    For development and construction projects, and completed commercial 
properties, the policy should also establish, commensurate with the size 
and type of the project or property:
     Requirements for feasibility studies and 
sensitivity and risk analyses (e.g., sensitivity of income projections 
to changes in

[[Page 264]]

economic variables such as interest rates, vacancy rates, or operating 
expenses).
     Minimum requirements for initial investment and 
maintenance of hard equity by the borrower (e.g., cash or unencumbered 
investment in the underlying property).
     Minimum standards for net worth, cash flow, and 
debt service coverage of the borrower or underlying property.

     Standards for the acceptability of and limits on 
non-amortizing loans.
     Standards for the acceptability of and limits on 
the use of interest reserves.
     Pre-leasing and pre-sale requirements for income-
producing property.
     Pre-sale and minimum unit release requirements 
for non-income-producing property loans.
     Limits on partial recourse or nonrecourse loans 
and requirements for guarantor support.
     Requirements for takeout commitments.
     Minimum covenants for loan agreements.

                           Loan Administration

    The institution should also establish loan administration procedures 
for its real estate portfolio that address:

     Documentation, including:

     Type and frequency of financial statements, including requirements 
for verification of information provided by the borrower;
     Type and frequency of collateral evaluations (appraisals and other 
estimates of value).
     Loan closing and disbursement.
     Payment processing.
     Escrow administration.
     Collateral administration.
     Loan payoffs.
     Collections and foreclosure, including:

     Delinquency follow-up procedures;
     Foreclosure timing;
     Extensions and other forms of forbearance;
     Acceptance of deeds in lieu of foreclosure.
     Claims processing (e.g., seeking recovery on a 
defaulted loan covered by a government guaranty or insurance program).
     Servicing and participation agreements.

                    Supervisory Loan-to-Value Limits

    Institutions should establish their own internal loan-to-value 
limits for real estate loans. These internal limits should not exceed 
the following supervisory limits:

------------------------------------------------------------------------
                                                               Loan-to-
                                                                 value
                        Loan category                            limit
                                                               (percent)
------------------------------------------------------------------------
Raw land....................................................          65
Land development............................................          75
Construction:
    Commercial, multifamily,\1\ and other nonresidential....          80
    1- to 4-family residential..............................          85
Improved property...........................................          85
Owner-occupied 1- to 4-family and home equity...............       (\2\)
------------------------------------------------------------------------
\1\ Multifamily construction includes condominiums and cooperatives.
\2\ A loan-to-value limit has not been established for permanent
  mortgage or home equity loans on owner-occupied, 1- to 4-family
  residential property. However, for any such loan with a loan-to-value
  ratio that equals or exceeds 90 percent at origination, an institution
  should require appropriate credit enhancement in the form of either
  mortgage insurance or readily marketable collateral.

    The supervisory loan-to-value limits should be applied to the 
underlying property that collateralizes the loan. For loans that fund 
multiple phases of the same real estate project (e.g., a loan for both 
land development and construction of an office building), the 
appropriate loan-to-value limit is the limit applicable to the final 
phase of the project funded by the loan; however, loan disbursements 
should not exceed actual development or construction outlays. In 
situations where a loan is fully cross-collateralized by two or more 
properties or is secured by a collateral pool of two or more properties, 
the appropriate maximum loan amount under supervisory loan-to-value 
limits is the sum of the value of each property, less senior liens, 
multiplied by the appropriate loan-to-value limit for each property. To 
ensure that collateral margins remain within the supervisory limits, 
lenders should redetermine conformity whenever collateral substitutions 
are made to the collateral pool.
    In establishing internal loan-to-value limits, each lender is 
expected to carefully consider the institution-specific and market 
factors listed under ``Loan Portfolio Management Considerations,'' as 
well as any other relevant factors, such as the particular subcategory 
or type of loan. For any subcategory of loans that exhibits greater 
credit risk than the overall category, a lender should consider the 
establishment of an internal loan-to-value limit for that subcategory 
that is lower than the limit for the overall category.
    The loan-to-value ratio is only one of several pertinent credit 
factors to be considered when underwriting a real estate loan. Other 
credit factors to be taken into account are highlighted in the 
``Underwriting Standards'' section above. Because of these other 
factors, the establishment of these supervisory limits should not be 
interpreted to mean that loans at these levels will automatically be 
considered sound.

[[Page 265]]

         Loans in Excess of the Supervisory Loan-to-Value Limits

    The agencies recognize that appropriate loan-to-value limits vary 
not only among categories of real estate loans but also among individual 
loans. Therefore, it may be appropriate in individual cases to originate 
or purchase loans with loan-to-value ratios in excess of the supervisory 
loan-to-value limits, based on the support provided by other credit 
factors. Such loans should be identified in the institutions's records, 
and their aggregate amount reported at least quarterly to the 
institution's board of directors. (See additional reporting requirements 
described under ``Exceptions to the General Policy.'')
    The aggregate amount of all loans in excess of the supervisory loan-
to-value limits should not exceed 100 percent of total capital.\2\ 
Moreover, within the aggregate limit, total loans for all commercial, 
agricultural, multifamily or other non-1-to-4 family residential 
properties should not exceed 30 percent of total capital. An institution 
will come under increased supervisory scrutiny as the total of such 
loans approaches these levels.
---------------------------------------------------------------------------

    \2\ For the state member banks, the term ``total capital'' means 
``total risk-based capital'' as defined in appendix A to 12 CFR part 
208. For insured state non-member banks, ``total capital'' refers to 
that term described in table I of appendix A to 12 CFR part 325. For 
national banks, the term ``total capital'' is defined at 12 CFR 3.2(e). 
For savings associations, the term ``total capital'' is defined at 12 
CFR 567.5(c).
---------------------------------------------------------------------------

    In determining the aggregate amount of such loans, institutions 
should: (a) Include all loans secured by the same property if any one of 
those loans exceeds the supervisory loan-to-value limits; and (b) 
include the recourse obligation of any such loan sold with recourse. 
Conversely, a loan should no longer be reported to the directors as part 
of aggregate totals when reduction in principal or senior liens, or 
additional contribution of collateral or equity (e.g., improvements to 
the real property securing the loan), bring the loan-to-value ratio into 
compliance with supervisory limits.

                          Excluded Transactions

    The agencies also recognize that there are a number of lending 
situations in which other factors significantly outweigh the need to 
apply the supervisory loan-to-value limits. These include:
     Loans guaranteed or insured by the U.S. 
government or its agencies, provided that the amount of the guaranty or 
insurance is at least equal to the portion of the loan that exceeds the 
supervisory loan-to-value limit.
     Loans backed by the full faith and credit of a 
state government, provided that the amount of the assurance is at least 
equal to the portion of the loan that exceeds the supervisory loan-to-
value limit.
     Loans guaranteed or insured by a state, municipal 
or local government, or an agency thereof, provided that the amount of 
the guaranty or insurance is at least equal to the portion of the loan 
that exceeds the supervisory loan-to-value limit, and provided that the 
lender has determined that the guarantor or insurer has the financial 
capacity and willingness to perform under the terms of the guaranty or 
insurance agreement.
     Loans that are to be sold promptly after 
origination, without recourse, to a financially responsible third party.
     Loans that are renewed, refinanced, or 
restructured without the advancement of new funds or an increase in the 
line of credit (except for reasonable closing costs), or loans that are 
renewed, refinanced, or restructured in connection with a workout 
situation, either with or without the advancement of new funds, where 
consistent with safe and sound banking practices and part of a clearly 
defined and well-documented program to achieve orderly liquidation of 
the debt, reduce risk of loss, or maximize recovery on the loan.
     Loans that facilitate the sale of real estate 
acquired by the lender in the ordinary course of collecting a debt 
previously contracted in good faith.
     Loans for which a lien on or interest in real 
property is taken as additional collateral through an abundance of 
caution by the lender (e.g., the institution takes a blanket lien on all 
or substantially all of the assets of the borrower, and the value of the 
real property is low relative to the aggregate value of all other 
collateral).
     Loans, such as working capital loans, where the 
lender does not rely principally on real estate as security and the 
extension of credit is not used to acquire, develop, or construct 
permanent improvements on real property.
     Loans for the purpose of financing permanent 
improvements to real property, but not secured by the property, if such 
security interest is not required by prudent underwriting practice.

                Exceptions to the General Lending Policy

    Some provision should be made for the consideration of loan requests 
from creditworthy borrowers whose credit needs do not fit within the 
institution's general lending policy. An institution may provide for 
prudently underwritten exceptions to its lending policies, including 
loan-to-value limits,

[[Page 266]]

on a loan-by-loan basis. However, any exceptions from the supervisory 
loan-to-value limits should conform to the aggregate limits on such 
loans discussed above.
    The board of directors is responsible for establishing standards for 
the review and approval of exception loans. Each institution should 
establish an appropriate internal process for the review and approval of 
loans that do not conform to its own internal policy standards. The 
approval of any such loan should be supported by a written justification 
that clearly sets forth all of the relevant credit factors that support 
the underwriting decision. The justification and approval documents for 
such loans should be maintained as a part of the permanent loan file. 
Each institution should monitor compliance with its real estate lending 
policy and individually report exception loans of a significant size to 
its board of directors.

    Supervisory Review of Real Estate Lending Policies and Practices

    The real estate lending policies of institutions will be evaluated 
by examiners during the course of their examinations to determine if the 
policies are consistent with safe and sound lending practices, these 
guidelines, and the requirements of the regulation. In evaluating the 
adequacy of the institution's real estate lending policies and 
practices, examiners will take into consideration the following factors:
     The nature and scope of the institution's real 
estate lending activities.
     The size and financial condition of the 
institution.
     The quality of the institution's management and 
internal controls.
     The expertise and size of the lending and loan 
administration staff.
     Market conditions.
    Lending policy exception reports will also be reviewed by examiners 
during the course of their examinations to determine whether the 
institutions' exceptions are adequately documented and appropriate in 
light of all of the relevant credit considerations. An excessive volume 
of exceptions to an institution's real estate lending policy may signal 
a weakening of its underwriting practices, or may suggest a need to 
revise the loan policy.

                               Definitions

    For the purposes of these Guidelines:
    Construction loan means an extension of credit for the purpose of 
erecting or rehabilitating buildings or other structures, including any 
infrastructure necessary for development.
    Extension of credit or loan means:
    (1) The total amount of any loan, line of credit, or other legally 
binding lending commitment with respect to real property; and
    (2) The total amount, based on the amount of consideration paid, of 
any loan, line of credit, or other legally binding lending commitment 
acquired by a lender by purchase, assignment, or otherwise.
    Improved property loan means an extension of credit secured by one 
of the following types of real property:
    (1) Farmland, ranchland or timberland committed to ongoing 
management and agricultural production;
    (2) 1- to 4-family residential property that is not owner-occupied;
    (3) Residential property containing five or more individual dwelling 
units;
    (4) Completed commercial property; or
    (5) Other income-producing property that has been completed and is 
available for occupancy and use, except income-producing owner-occupied 
1- to 4-family residential property.
    Land development loan means an extension of credit for the purpose 
of improving unimproved real property prior to the erection of 
structures. The improvement of unimproved real property may include the 
laying or placement of sewers, water pipes, utility cables, streets, and 
other infrastructure necessary for future development.
    Loan origination means the time of inception of the obligation to 
extend credit (i.e., when the last event or prerequisite, controllable 
by the lender, occurs causing the lender to become legally bound to fund 
an extension of credit).
    Loan-to-value or loan-to-value ratio means the percentage or ratio 
that is derived at the time of loan origination by dividing an extension 
of credit by the total value of the property(ies) securing or being 
improved by the extension of credit plus the amount of any readily 
marketable collateral and other acceptable collateral that secures the 
extension of credit. The total amount of all senior liens on or 
interests in such property(ies) should be included in determining the 
loan-to-value ratio. When mortgage insurance or collateral is used in 
the calculation of the loan-to-value ratio, and such credit enhancement 
is later released or replaced, the loan-to-value ratio should be 
recalculated.
    Other acceptable collateral means any collateral in which the lender 
has a perfected security interest, that has a quantifiable value, and is 
accepted by the lender in accordance with safe and sound lending 
practices. Other acceptable collateral should be appropriately 
discounted by the lender consistent with the lender's usual practices 
for making loans secured by such collateral. Other acceptable collateral 
includes, among other items, unconditional irrevocable standby letters 
of credit for the benefit of the lender.
    Owner-occupied, when used in conjunction with the term 1- to 4-
family residential property means that the owner of the underlying

[[Page 267]]

real property occupies at least one unit of the real property as a 
principal residence of the owner.
    Readily marketable collateral means insured deposits, financial 
instruments, and bullion in which the lender has a perfected interest. 
Financial instruments and bullion must be salable under ordinary 
circumstances with reasonable promptness at a fair market value 
determined by quotations based on actual transactions, on an auction or 
similarly available daily bid and ask price market. Readily marketable 
collateral should be appropriately discounted by the lender consistent 
with the lender's usual practices for making loans secured by such 
collateral.
    Value means an opinion or estimate, set forth in an appraisal or 
evaluation, whichever may be appropriate, of the market value of real 
property, prepared in accordance with the agency's appraisal regulations 
and guidance. For loans to purchase an existing property, the term 
``value'' means the lesser of the actual acquisition cost or the 
estimate of value.
    1- to 4-family residential property means property containing fewer 
than five individual dwelling units, including manufactured homes 
permanently affixed to the underlying property (when deemed to be real 
property under state law).

[57 FR 62896, 62900, Dec. 31, 1992; 58 FR 4460, Jan. 14, 1993; 63 FR 
58621, Nov. 2, 1998]

Appendix D-1 to Part 208--Interagency Guidelines Establishing Standards 
                        for Safety and Soundness

                            Table of Contents

                             I. Introduction

    A. Preservation of existing authority.
    B. Definitions.

                II. Operational and Managerial Standards

    A. Internal controls and information systems.
    B. Internal audit system.
    C. Loan documentation.
    D. Credit underwriting.
    E. Interest rate exposure.
    F. Asset growth.
    G. Asset quality.
    H. Earnings.
    I. Compensation, fees and benefits.

III. Prohibition on Compensation That Constitutes an Unsafe and Unsound 
                                Practice

    A. Excessive compensation.
    B. Compensation leading to material financial loss.

                             I. Introduction

    i. Section 39 of the Federal Deposit Insurance Act \1\ (FDI Act) 
requires each Federal banking agency (collectively, the agencies) to 
establish certain safety and soundness standards by regulation or by 
guideline for all insured depository institutions. Under section 39, the 
agencies must establish three types of standards: (1) Operational and 
managerial standards; (2) compensation standards; and (3) such standards 
relating to asset quality, earnings, and stock valuation as they 
determine to be appropriate.
---------------------------------------------------------------------------

    \1\ Section 39 of the Federal Deposit Insurance Act (12 U.S.C. 
1831p-1) was added by section 132 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), Pub. L. 102-242, 105 Stat. 
2236 (1991), and amended by section 956 of the Housing and Community 
Development Act of 1992, Pub. L. 102-550, 106 Stat. 3895 (1992) and 
section 318 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160 (1994).
---------------------------------------------------------------------------

    ii. Section 39(a) requires the agencies to establish operational and 
managerial standards relating to: (1) Internal controls, information 
systems and internal audit systems, in accordance with section 36 of the 
FDI Act (12 U.S.C. 1831m); (2) loan documentation; (3) credit 
underwriting; (4) interest rate exposure; (5) asset growth; and (6) 
compensation, fees, and benefits, in accordance with subsection (c) of 
section 39. Section 39(b) requires the agencies to establish standards 
relating to asset quality, earnings, and stock valuation that the 
agencies determine to be appropriate.
    iii. Section 39(c) requires the agencies to establish standards 
prohibiting as an unsafe and unsound practice any compensatory 
arrangement that would provide any executive officer, employee, 
director, or principal shareholder of the institution with excessive 
compensation, fees or benefits and any compensatory arrangement that 
could lead to material financial loss to an institution. Section 39(c) 
also requires that the agencies establish standards that specify when 
compensation is excessive.
    iv. If an agency determines that an institution fails to meet any 
standard established by guideline under subsection (a) or (b) of section 
39, the agency may require the institution to submit to the agency an 
acceptable plan to achieve compliance with the standard. In the event 
that an institution fails to submit an acceptable plan within the time 
allowed by the agency or fails in any material respect to implement an 
accepted plan, the agency must, by order, require the institution to 
correct the deficiency. The agency may, and in some cases must, take 
other supervisory actions until the deficiency has been corrected.

[[Page 268]]

    v. The agencies have adopted amendments to their rules and 
regulations to establish deadlines for submission and review of 
compliance plans.\2\
---------------------------------------------------------------------------

    \2\ For the Office of the Comptroller of the Currency, these 
regulations appear at 12 CFR Part 30; for the Board of Governors of the 
Federal Reserve System, these regulations appear at 12 CFR Part 263; for 
the Federal Deposit Insurance Corporation, these regulations appear at 
12 CFR Part 308, subpart R, and for the Office of Thrift Supervision, 
these regulations appear at 12 CFR Part 570.
---------------------------------------------------------------------------

    vi. The following Guidelines set out the safety and soundness 
standards that the agencies use to identify and address problems at 
insured depository institutions before capital becomes impaired. The 
agencies believe that the standards adopted in these Guidelines serve 
this end without dictating how institutions must be managed and 
operated. These standards are designed to identify potential safety and 
soundness concerns and ensure that action is taken to address those 
concerns before they pose a risk to the deposit insurance funds.

                  A. Preservation of Existing Authority

    Neither section 39 nor these Guidelines in any way limits the 
authority of the agencies to address unsafe or unsound practices, 
violations of law, unsafe or unsound conditions, or other practices. 
Action under section 39 and these Guidelines may be taken independently 
of, in conjunction with, or in addition to any other enforcement action 
available to the agencies. Nothing in these Guidelines limits the 
authority of the FDIC pursuant to section 38(i)(2)(F) of the FDI Act (12 
U.S.C. 1831(o)) and Part 325 of Title 12 of the Code of Federal 
Regulations.

                             B. Definitions

    1. In general. For purposes of these Guidelines, except as modified 
in the Guidelines or unless the context otherwise requires, the terms 
used have the same meanings as set forth in sections 3 and 39 of the FDI 
Act (12 U.S.C. 1813 and 1831p-1).
    2. Board of directors, in the case of a state-licensed insured 
branch of a foreign bank and in the case of a federal branch of a 
foreign bank, means the managing official in charge of the insured 
foreign branch.
    3. Compensation means all direct and indirect payments or benefits, 
both cash and non-cash, granted to or for the benefit of any executive 
officer, employee, director, or principal shareholder, including but not 
limited to payments or benefits derived from an employment contract, 
compensation or benefit agreement, fee arrangement, perquisite, stock 
option plan, postemployment benefit, or other compensatory arrangement.
    4. Director shall have the meaning described in 12 CFR 215.2(c).\3\
---------------------------------------------------------------------------

    \3\ In applying these definitions for savings associations, pursuant 
to 12 U.S.C. 1464, savings associations shall use the terms ``savings 
association'' and ``insured savings association'' in place of the terms 
``member bank'' and ``insured bank''.
---------------------------------------------------------------------------

    5. Executive officer shall have the meaning described in 12 CFR 
215.2(d).\4\
---------------------------------------------------------------------------

    \4\ See footnote 3 in section I.B.4. of this appendix.
---------------------------------------------------------------------------

    6. Principal shareholder shall have the meaning described in 12 CFR 
215.2(l).\5\
---------------------------------------------------------------------------

    \5\ See footnote 3 in section I.B.4. of this appendix.
---------------------------------------------------------------------------

                II. Operational and Managerial Standards

    A. Internal controls and information systems. An institution should 
have internal controls and information systems that are appropriate to 
the size of the institution and the nature, scope and risk of its 
activities and that provide for:
    1. An organizational structure that establishes clear lines of 
authority and responsibility for monitoring adherence to established 
policies;
    2. Effective risk assessment;
    3. Timely and accurate financial, operational and regulatory 
reports;
    4. Adequate procedures to safeguard and manage assets; and
    5. Compliance with applicable laws and regulations.
    B. Internal audit system. An institution should have an internal 
audit system that is appropriate to the size of the institution and the 
nature and scope of its activities and that provides for:
    1. Adequate monitoring of the system of internal controls through an 
internal audit function. For an institution whose size, complexity or 
scope of operations does not warrant a full scale internal audit 
function, a system of independent reviews of key internal controls may 
be used;
    2. Independence and objectivity;
    3. Qualified persons;
    4. Adequate testing and review of information systems;
    5. Adequate documentation of tests and findings and any corrective 
actions;
    6. Verification and review of management actions to address material 
weaknesses; and
    7. Review by the institution's audit committee or board of directors 
of the effectiveness of the internal audit systems.
    C. Loan documentation. An institution should establish and maintain 
loan documentation practices that:
    1. Enable the institution to make an informed lending decision and 
to assess risk, as necessary, on an ongoing basis;

[[Page 269]]

    2. Identify the purpose of a loan and the source of repayment, and 
assess the ability of the borrower to repay the indebtedness in a timely 
manner;
    3. Ensure that any claim against a borrower is legally enforceable;
    4. Demonstrate appropriate administration and monitoring of a loan; 
and
    5. Take account of the size and complexity of a loan.
    D. Credit underwriting. An institution should establish and maintain 
prudent credit underwriting practices that:
    1. Are commensurate with the types of loans the institution will 
make and consider the terms and conditions under which they will be 
made;
    2. Consider the nature of the markets in which loans will be made;
    3. Provide for consideration, prior to credit commitment, of the 
borrower's overall financial condition and resources, the financial 
responsibility of any guarantor, the nature and value of any underlying 
collateral, and the borrower's character and willingness to repay as 
agreed;
    4. Establish a system of independent, ongoing credit review and 
appropriate communication to management and to the board of directors;
    5. Take adequate account of concentration of credit risk; and
    6. Are appropriate to the size of the institution and the nature and 
scope of its activities.
    E. Interest rate exposure. An institution should:
    1. Manage interest rate risk in a manner that is appropriate to the 
size of the institution and the complexity of its assets and 
liabilities; and
    2. Provide for periodic reporting to management and the board of 
directors regarding interest rate risk with adequate information for 
management and the board of directors to assess the level of risk.
    F. Asset growth. An institution's asset growth should be prudent and 
consider:
    1. The source, volatility and use of the funds that support asset 
growth;
    2. Any increase in credit risk or interest rate risk as a result of 
growth; and
    3. The effect of growth on the institution's capital.
    G. Asset quality. An insured depository institution should establish 
and maintain a system that is commensurate with the institution's size 
and the nature and scope of its operations to identify problem assets 
and prevent deterioration in those assets. The institution should:
    1. Conduct periodic asset quality reviews to identify problem 
assets;
    2. Estimate the inherent losses in those assets and establish 
reserves that are sufficient to absorb estimated losses;
    3. Compare problem asset totals to capital;
    4. Take appropriate corrective action to resolve problem assets;
    5. Consider the size and potential risks of material asset 
concentrations; and
    6. Provide periodic asset reports with adequate information for 
management and the board of directors to assess the level of asset risk.
    H. Earnings. An insured depository institution should establish and 
maintain a system that is commensurate with the institution's size and 
the nature and scope of its operations to evaluate and monitor earnings 
and ensure that earnings are sufficient to maintain adequate capital and 
reserves. The institution should:
    1. Compare recent earnings trends relative to equity, assets, or 
other commonly used benchmarks to the institution's historical results 
and those of its peers;
    2. Evaluate the adequacy of earnings given the size, complexity, and 
risk profile of the institution's assets and operations;
    3. Assess the source, volatility, and sustainability of earnings, 
including the effect of nonrecurring or extraordinary income or expense;
    4. Take steps to ensure that earnings are sufficient to maintain 
adequate capital and reserves after considering the institution's asset 
quality and growth rate; and
    5. Provide periodic earnings reports with adequate information for 
management and the board of directors to assess earnings performance.
    I. Compensation, fees and benefits. An institution should maintain 
safeguards to prevent the payment of compensation, fees, and benefits 
that are excessive or that could lead to material financial loss to the 
institution.

III. Prohibition on Compensation That Constitutes an Unsafe and Unsound 
                                Practice

                        A. Excessive Compensation

    Excessive compensation is prohibited as an unsafe and unsound 
practice. Compensation shall be considered excessive when amounts paid 
are unreasonable or disproportionate to the services performed by an 
executive officer, employee, director, or principal shareholder, 
considering the following:
    1. The combined value of all cash and non-cash benefits provided to 
the individual;
    2. The compensation history of the individual and other individuals 
with comparable expertise at the institution;
    3. The financial condition of the institution;
    4. Comparable compensation practices at comparable institutions, 
based upon such factors as asset size, geographic location, and the 
complexity of the loan portfolio or other assets;

[[Page 270]]

    5. For postemployment benefits, the projected total cost and benefit 
to the institution;
    6. Any connection between the individual and any fraudulent act or 
omission, breach of trust or fiduciary duty, or insider abuse with 
regard to the institution; and
    7. Any other factors the agencies determines to be relevant.

           B. Compensation Leading to Material Financial Loss

    Compensation that could lead to material financial loss to an 
institution is prohibited as an unsafe and unsound practice.

[60 FR 35678, 35682, July 10, 1995, as amended by Reg. H, 61 FR 43951, 
Aug. 27, 1996]

Appendix D-2 to Part 208--Interagency Guidelines Establishing Standards 
                  For Safeguarding Customer Information

                            Table of Contents

I. Introduction
    A. Scope
    B. Preservation of Existing Authority
    C. Definitions
II. Standards for Safeguarding Customer Information
    A. Information Security Program
    B. Objectives
III. Development and Implementation of Customer Information Security 
Program
    A. Involve the Board of Directors
    B. Assess Risk
    C. Manage and Control Risk
    D. Oversee Service Provider Arrangements
    E. Adjust the Program
    F. Report to the Board
    G. Implement the Standards

                             I. Introduction

    These Interagency Guidelines Establishing Standards for Safeguarding 
Customer Information (Guidelines) set forth standards pursuant to 
sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 
6805), in the same manner, to the extent practicable, as standards 
prescribed pursuant to section 39 of the Federal Deposit Insurance Act 
(12 U.S.C. 1831p-1). These Guidelines address standards for developing 
and implementing administrative, technical, and physical safeguards to 
protect the security, confidentiality, and integrity of customer 
information.
    A. Scope. The Guidelines apply to customer information maintained by 
or on behalf of state member banks (banks) and their nonbank 
subsidiaries, except for brokers, dealers, persons providing insurance, 
investment companies, and investment advisors. Pursuant to Sec. Sec. 
211.9 and 211.24 of this chapter, these guidelines also apply to 
customer information maintained by or on behalf of Edge corporations, 
agreement corporations, and uninsured state-licensed branches or 
agencies of a foreign bank.
    B. Preservation of Existing Authority. Neither section 39 nor these 
Guidelines in any way limit the authority of the Board to address unsafe 
or unsound practices, violations of law, unsafe or unsound conditions, 
or other practices. The Board may take action under section 39 and these 
Guidelines independently of, in conjunction with, or in addition to, any 
other enforcement action available to the Board.
    C. Definitions.
    1. Except as modified in the Guidelines, or unless the context 
otherwise requires, the terms used in these Guidelines have the same 
meanings as set forth in sections 3 and 39 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813 and 1831p-1).
    2. For purposes of the Guidelines, the following definitions apply:
    a. Board of directors, in the case of a branch or agency of a 
foreign bank, means the managing official in charge of the branch or 
agency.
    b. Customer means any customer of the bank as defined in Sec. 
216.3(h) of this chapter.
    c. Customer information means any record containing nonpublic 
personal information, as defined in Sec. 216.3(n) of this chapter, 
about a customer, whether in paper, electronic, or other form, that is 
maintained by or on behalf of the bank.
    d. Customer information systems means any methods used to access, 
collect, store, use, transmit, protect, or dispose of customer 
information.
    e. Service provider means any person or entity that maintains, 
processes, or otherwise is permitted access to customer information 
through its provision of services directly to the bank.
    f. Subsidiary means any company controlled by a bank, except a 
broker, dealer, person providing insurance, investment company, 
investment advisor, insured depository institution, or subsidiary of an 
insured depository institution.

           II. Standards for Safeguarding Customer Information

    A. Information Security Program. Each bank shall implement a 
comprehensive written information security program that includes 
administrative, technical, and physical safeguards appropriate to the 
size and complexity of the bank and the nature and scope of its 
activities. While all parts of the bank are not required to implement a 
uniform set of policies, all elements of the information security 
program must be coordinated. A bank also shall ensure that each of its 
subsidiaries is subject to a comprehensive information security program. 
The bank may fulfill this requirement either by including a

[[Page 271]]

subsidiary within the scope of the bank's comprehensive information 
security program or by causing the subsidiary to implement a separate 
comprehensive information security program in accordance with the 
standards and procedures in sections II and III of this appendix that 
apply to banks.
    B. Objectives. A bank's information security program shall be 
designed to:
    1. Ensure the security and confidentiality of customer information;
    2. Protect against any anticipated threats or hazards to the 
security or integrity of such information; and
    3. Protect against unauthorized access to or use of such information 
that could result in substantial harm or inconvenience to any customer.

   III. Development and Implementation of Information Security Program

    A. Involve the Board of Directors. The board of directors or an 
appropriate committee of the board of each bank shall:
    1. Approve the bank's written information security program; and
    2. Oversee the development, implementation, and maintenance of the 
bank's information security program, including assigning specific 
responsibility for its implementation and reviewing reports from 
management.
    B. Assess Risk. Each bank shall:
    1. Identify reasonably foreseeable internal and external threats 
that could result in unauthorized disclosure, misuse, alteration, or 
destruction of customer information or customer information systems.
    2. Assess the likelihood and potential damage of these threats, 
taking into consideration the sensitivity of customer information.
    3. Assess the sufficiency of policies, procedures, customer 
information systems, and other arrangements in place to control risks.
    C. Manage and Control Risk. Each bank shall:
    1. Design its information security program to control the identified 
risks, commensurate with the sensitivity of the information as well as 
the complexity and scope of the bank's activities. Each bank must 
consider whether the following security measures are appropriate for the 
bank and, if so, adopt those measures the bank concludes are 
appropriate:
    a. Access controls on customer information systems, including 
controls to authenticate and permit access only to authorized 
individuals and controls to prevent employees from providing customer 
information to unauthorized individuals who may seek to obtain this 
information through fraudulent means.
    b. Access restrictions at physical locations containing customer 
information, such as buildings, computer facilities, and records storage 
facilities to permit access only to authorized individuals;
    c. Encryption of electronic customer information, including while in 
transit or in storage on networks or systems to which unauthorized 
individuals may have access;
    d. Procedures designed to ensure that customer information system 
modifications are consistent with the bank's information security 
program;
    e. Dual control procedures, segregation of duties, and employee 
background checks for employees with responsibilities for or access to 
customer information;
    f. Monitoring systems and procedures to detect actual and attempted 
attacks on or intrusions into customer information systems;
    g. Response programs that specify actions to be taken when the bank 
suspects or detects that unauthorized individuals have gained access to 
customer information systems, including appropriate reports to 
regulatory and law enforcement agencies; and
    h. Measures to protect against destruction, loss, or damage of 
customer information due to potential environmental hazards, such as 
fire and water damage or technological failures.
    2. Train staff to implement the bank's information security program.
    3. Regularly test the key controls, systems and procedures of the 
information security program. The frequency and nature of such tests 
should be determined by the bank's risk assessment. Tests should be 
conducted or reviewed by independent third parties or staff independent 
of those that develop or maintain the security programs.
    D. Oversee Service Provider Arrangements. Each bank shall:
    1. Exercise appropriate due diligence in selecting its service 
providers;
    2. Require its service providers by contract to implement 
appropriate measures designed to meet the objectives of these 
Guidelines; and
    3. Where indicated by the bank's risk assessment, monitor its 
service providers to confirm that they have satisfied their obligations 
as required by paragraph D.2. As part of this monitoring, a bank should 
review audits, summaries of test results, or other equivalent 
evaluations of its service providers.
    E. Adjust the Program. Each bank shall monitor, evaluate, and 
adjust, as appropriate, the information security program in light of any 
relevant changes in technology, the sensitivity of its customer 
information, internal or external threats to information, and the bank's 
own changing business arrangements, such as mergers and acquisitions, 
alliances and joint ventures, outsourcing arrangements, and changes to 
customer information systems.

[[Page 272]]

    F. Report to the Board. Each bank shall report to its board or an 
appropriate committee of the board at least annually. This report should 
describe the overall status of the information security program and the 
bank's compliance with these Guidelines. The reports should discuss 
material matters related to its program, addressing issues such as: risk 
assessment; risk management and control decisions; service provider 
arrangements; results of testing; security breaches or violations and 
management's responses; and recommendations for changes in the 
information security program.
    G. Implement the Standards.
    1. Effective date. Each bank must implement an information security 
program pursuant to these Guidelines by July 1, 2001.
    2. Two-year grandfathering of agreements with service providers. 
Until July 1, 2003, a contract that a bank has entered into with a 
service provider to perform services for it or functions on its behalf 
satisfies the provisions of section III.D., even if the contract does 
not include a requirement that the servicer maintain the security and 
confidentiality of customer information, as long as the bank entered 
into the contract on or before March 5, 2001.

[Reg. H, 66 FR 8634, Feb. 1, 2001]

    Effective Date Note: At 69 FR 77617, Dec. 28, 2004, Appendix D-2 was 
amended, effective July 1, 2005, as follows:
    a. The heading for Appendix D-2 to Part 208 entitled ``Interagency 
Guidelines Establishing Standards for Safeguarding Customer 
Information'' is revised to read ``Interagency Guidelines Establishing 
Information Security Standards'' wherever it appears in Title 12, 
chapter 2, part 208;
    b. In section I., Introduction, a new sentence is added at the end 
of the introductory paragraph.
    c. In section I.A., Scope, a new sentence is added at the end of the 
paragraph.
    d. In section I.C.2., paragraphs b. through f. are redesignated as 
paragraphs 2.d. through 2.h., respectively, new paragraphs 2.b. and 2.c. 
are added and redesignated paragraph g. is amended.
    e. In paragraph II. the heading entitled ``Standards for 
Safeguarding Customer Information'' is revised to read ``Standards for 
Information Security''.
    f. At the end of paragraph II.B.2. the word ``and'' is removed.
    g. At the end of paragraph II.B.3 the period is removed and replaced 
with ``; and''.
    h. In section II.B. a new paragraph 4. is added.
    i. In section III.C., Manage and Control Risk, a new paragraph 4. is 
added.
    j. In section III.G., Implement the Standards, new paragraphs 3. and 
4. are added. For the convenience of the user, the added and revised 
text is set forth as follows:

     Appendix D-2 to Part 208--Interagency Guidelines Establishing 
                     Information Security Standards

                                * * * * *

    I. * * *
    * * * These Guidelines also address standards with respect to the 
proper disposal of consumer information, pursuant to sections 621 and 
628 of the Fair Credit Reporting Act (15 U.S.C. 1681s and 1681w).
    A. Scope. * * * These Guidelines also apply to the proper disposal 
of consumer information by or on behalf of such entities.

                                * * * * *

    C. * * *
    2. * * *
    b. Consumer information means any record about an individual, 
whether in paper, electronic, or other form, that is a consumer report 
or is derived from a consumer report and that is maintained or otherwise 
possessed by or on behalf of the bank for a business purpose. Consumer 
information also means a compilation of such records. The term does not 
include any record that does not identify an individual.
    i. Examples. (1) Consumer information includes:
    (A) A consumer report that a bank obtains;
    (B) Information from a consumer report that the bank obtains from 
its affiliate after the consumer has been given a notice and has elected 
not to opt out of that sharing;
    (C) Information from a consumer report that the bank obtains about 
an individual who applies for but does not receive a loan, including any 
loan sought by an individual for a business purpose;
    (D) Information from a consumer report that the bank obtains about 
an individual who guarantees a loan (including a loan to a business 
entity); or
    (E) Information from a consumer report that the bank obtains about 
an employee or prospective employee.
    (2) Consumer information does not include:
    (A) Aggregate information, such as the mean credit score, derived 
from a group of consumer reports; or
    (B) Blind data, such as payment history on accounts that are not 
personally identifiable, that may be used for developing credit scoring 
models or for other purposes.
    c. Consumer report has the same meaning as set forth in the Fair 
Credit Reporting Act, 15 U.S.C. 1681a(d).

                                * * * * *

    g. Service provider means any person or entity that maintains, 
processes, or otherwise is permitted access to customer information

[[Page 273]]

or consumer information through its provision of services directly to 
the bank.

                                * * * * *

    II. * * *
    B. * * *
    4. Ensure the proper disposal of customer information and consumer 
information.

                                * * * * *

    III. * * *
    C. * * *
    4. Develop, implement, and maintain, as part of its information 
security program, appropriate measures to properly dispose of customer 
information and consumer information in accordance with each of the 
requirements in this paragraph III.

                                * * * * *

    G. * * *
    3. Effective date for measures relating to the disposal of consumer 
information. Each bank must satisfy these Guidelines with respect to the 
proper disposal of consumer information by July 1, 2005.
    4. Exception for existing agreements with service providers relating 
to the disposal of consumer information. Notwithstanding the requirement 
in paragraph III.G.3., a bank's contracts with its service providers 
that have access to consumer information and that may dispose of 
consumer information, entered into before July 1, 2005, must comply with 
the provisions of the Guidelines relating to the proper disposal of 
consumer information by July 1, 2006.

  Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
                       Banks; Market Risk Measure

      Section 1. Purpose, Applicability, Scope, and Effective Date

    (a) Purpose. The purpose of this appendix is to ensure that banks 
with significant exposure to market risk maintain adequate capital to 
support that exposure.\1\ This appendix supplements and adjusts the 
risk-based capital ratio calculations under appendix A of this part with 
respect to those banks.
---------------------------------------------------------------------------

    \1\ This appendix is based on a framework developed jointly by 
supervisory authorities from the countries represented on the Basle 
Committee on Banking Supervision and endorsed by the Group of Ten 
Central Bank Governors. The framework is described in a Basle Committee 
paper entitled ``Amendment to the Capital Accord to Incorporate Market 
Risks,'' January 1996. Also see modifications issued in September 1997.
---------------------------------------------------------------------------

    (b) Applicability. (1) This appendix applies to any insured state 
member bank whose trading activity \2\ (on a worldwide consolidated 
basis) equals:
---------------------------------------------------------------------------

    \2\ Trading activity means the gross sum of trading assets and 
liabilities as reported in the bank's most recent quarterly Consolidated 
Report of Condition and Income (Call Report).
---------------------------------------------------------------------------

    (i) 10 percent or more of total assets; \3\ or
---------------------------------------------------------------------------

    \3\ Total assets means quarter-end total assets as reported in the 
bank's most recent Call Report.
---------------------------------------------------------------------------

    (ii) $1 billion or more.
    (2) The Federal Reserve may additionally apply this appendix to any 
insured state member bank if the Federal Reserve deems it necessary or 
appropriate for safe and sound banking practices.
    (3) The Federal Reserve may exclude an insured state member bank 
otherwise meeting the criteria of paragraph (b)(1) of this section from 
coverage under this appendix if it determines the bank meets such 
criteria as a consequence of accounting, operational, or similar 
considerations, and the Federal Reserve deems it consistent with safe 
and sound banking practices.
    (c) Scope. The capital requirements of this appendix support market 
risk associated with a bank's covered positions.
    (d) Effective date. This appendix is effective as of January 1, 
1997. Compliance is not mandatory until January 1, 1998. Subject to 
supervisory approval, a bank may opt to comply with this appendix as 
early as January 1, 1997.\4\
---------------------------------------------------------------------------

    \4\ A bank that voluntarily complies with the final rule prior to 
January 1, 1998, must comply with all of its provisions.
---------------------------------------------------------------------------

                         Section 2. Definitions

    For purposes of this appendix, the following definitions apply:
    (a) Covered positions means all positions in a bank's trading 
account, and all foreign exchange \5\ and commodity positions, whether 
or not in the trading account.\6\ Positions include on-balance-sheet 
assets and liabilities and off-balance-sheet items. Securities subject 
to repurchase and lending agreements are included as if they are still 
owned by the lender. Covered positions exclude all positions in a bank's 
trading account that, in form or in substance, act as liquidity 
facilities that provide liquidity support to asset-backed commercial 
paper. Such excluded positions are subject to the risk-based capital

[[Page 274]]

requirements set forth in appendix A of this part.
---------------------------------------------------------------------------

    \5\ Subject to supervisory review, a bank may exclude structural 
positions in foreign currencies from its covered positions.
    \6\ The term trading account is defined in the instructions to the 
Call Report.
---------------------------------------------------------------------------

    (b) Market risk means the risk of loss resulting from movements in 
market prices. Market risk consists of general market risk and specific 
risk components.
    (1) General market risk means changes in the market value of covered 
positions resulting from broad market movements, such as changes in the 
general level of interest rates, equity prices, foreign exchange rates, 
or commodity prices.
    (2) Specific risk means changes in the market value of specific 
positions due to factors other than broad market movements and includes 
event and default risk as well as idiosyncratic variations.
    (c) Tier 1 and Tier 2 capital are defined in appendix A of this 
part.
    (d) Tier 3 capital is subordinated debt that is unsecured; is fully 
paid up; has an original maturity of at least two years; is not 
redeemable before maturity without prior approval by the Federal 
Reserve; includes a lock-in clause precluding payment of either interest 
or principal (even at maturity) if the payment would cause the issuing 
bank's risk-based capital ratio to fall or remain below the minimum 
required under appendix A of this part; and does not contain and is not 
covered by any covenants, terms, or restrictions that are inconsistent 
with safe and sound banking practices.
    (e) Value-at-risk (VAR) means the estimate of the maximum amount 
that the value of covered positions could decline during a fixed holding 
period within a stated confidence level, measured in accordance with 
section 4 of this appendix.

   Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) Risk-based capital ratio denominator. A bank subject to this 
appendix shall calculate its risk-based capital ratio denominator as 
follows:
    (1) Adjusted risk-weighted assets. Calcuate adjusted risk-weighted 
assets, which equals risk-weighted assets (as determined in accordance 
with appendix A of this part), excluding the risk-weighted amounts of 
all covered positions (except foreign exchange positions outside the 
trading account and over-the counter derivative positions) \7\ and 
receivables arising from the posting of cash collateral that is 
associated with securities borrowing transactions to the extent the 
receivables are collateralized by the market value of the borrowed 
securities, provided that the following conditions are met:
---------------------------------------------------------------------------

    \7\ Foreign exchange positions outside the trading account and all 
over-the-counter derivative positions, whether or not in the trading 
account, must be included in the adjusted risk weighted assets 
asdetermined in appendix A of this part.
---------------------------------------------------------------------------

    (i) The transaction is based on securities includable in the trading 
book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements,
    (iv) The transaction is a securities contract for the purposes of 
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified 
financial contract for the purposes of section 11(e)(8) of the Federal 
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract 
between or among financial institutions for the purposes of sections 
401-407 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR part 
231).
    (2) Measure for market risk. Calculate the measure for market risk, 
which equals the sum of the VAR-based capital charge, the specific risk 
add-on (if any), and the capital charge for de minimis exposures (if 
any).
    (i) VAR-based capital charge. The VAR-based capital charge equals 
the higher of:
    (A) The previous day's VAR measure; or
    (B) The average of the daily VAR measures for each of the preceding 
60 business days multiplied by three, except as provided in section 4(e) 
of this appendix;
    (ii) Specific risk add-on. The specific risk add-on is calculated in 
accordance with section 5 of this appendix; and
    (iii) Capital charge for de minimis exposure. The capital charge for 
de minimis exposure is calculated in accordance with section 4(a) of 
this appendix.
    (3) Market risk equivalent assets. Calculate market risk equivalent 
assets by multiplying the measure for market risk (as calculated in 
paragraph (a)(2) of this section) by 12.5.
    (4) Denominator calculation. Add market risk equivalent assets (as 
calculated in paragraph (a)(3) of this section) to adjusted risk-
weighted assets (as calculated in paragraph (a)(1) of this section). The 
resulting sum is the bank's risk-based capital ratio denominator.
    (b) Risk-based capital ratio numerator. A bank subject to this 
appendix shall calculate its risk-based capital ratio numerator by 
allocating capital as follows:
    (1) Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal 
to 8.0 percent of adjusted risk-weighted assets (as calculated in 
paragraph (a)(1) of this section).\8\
---------------------------------------------------------------------------

    \8\ A bank may not allocate Tier 3 capital to support credit risk 
(as calculated under appendix A of this part).
---------------------------------------------------------------------------

    (2) Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3 
capital equal to the measure for market risk as calculated in paragraph 
(a)(2) of this section. The sum of Tier

[[Page 275]]

2 and Tier 3 capital allocated for market risk must not exceed 250 
percent of Tier 1 capital allocated for market risk. (This requirement 
means that Tier 1 capital allocated in this paragraph (b)(2) must equal 
at least 28.6 percent of the measure for market risk.)
    (3) Restrictions. (i) The sum of Tier 2 capital (both allocated and 
excess) and Tier 3 capital (allocated in paragraph (b)(2) of this 
section) may not exceed 100 percent of Tier 1 capital (both allocated 
and excess).\9\
---------------------------------------------------------------------------

    \9\ Excess Tier 1 capital means Tier 1 capital that has not been 
allocated in paragraphs (b)(1) and (b)(2) of this section. Excess Tier 2 
capital means Tier 2 capital that has not been allocated in paragraph 
(b)(1) and (b)(2) of this section, subject to the restrictions in 
paragraph (b)(3) of this section.
---------------------------------------------------------------------------

    (ii) Term subordinated debt (and intermediate-term preferred stock 
and related surplus) included in Tier 2 capital (both allocated and 
excess) may not exceed 50 percent of Tier 1 capital (both allocated and 
excess).
    (4) Numerator calculation. Add Tier 1 capital (both allocated and 
excess), Tier 2 capital (both allocated and excess), and Tier 3 capital 
(allocated under paragraph (b)(2) of this section). The resulting sum is 
the bank's risk-based capital ratio numerator.

                       Section 4. Internal Models.

    (a) General. For risk-based capital purposes, a bank subject to this 
appendix must use its internal model to measure its daily VAR, in 
accordance with the requirements of this section.\10\ The Federal 
Reserve may permit a bank to use alternative techniques to measure the 
market risk of de minimis exposures so long as the techniques adequately 
measure associated market risk.
---------------------------------------------------------------------------

    \10\ A bank's internal model may use any generally accepted 
measurement techniques, such as variance-covariance models, historical 
simulations, or Monte Carlo simulations. However, the level of 
sophistication and accuracy of a bank's internal model must be 
commensurate with the nature and size of its covered positions. A bank 
that modifies its existing modeling procedures to comply with the 
requirements of this appendix for risk-based capital purposes should, 
nonetheless, continue to use the internal model it considers most 
appropriate in evaluating risks for other purposes.
---------------------------------------------------------------------------

    (b) Qualitative requirements. A bank subject to this appendix must 
have a risk management system that meets the following minimum 
qualitative requirements:
    (1) The bank must have a risk control unit that reports directly to 
senior management and is independent from business trading units.
    (2) The bank's internal risk measurement model must be integrated 
into the daily management process.
    (3) The bank's policies and procedures must identify, and the bank 
must conduct, appropriate stress tests and backtests.\11\ The bank's 
policies and procedures must identify the procedures to follow in 
response to the results of such tests.
---------------------------------------------------------------------------

    \11\ Stress tests provide information about the impact of adverse 
market events on a bank's covered positions. Backtests provide 
information about the accuracy of an internal model by comparing a 
bank's daily VAR measures to its corresponding daily trading profits and 
losses.
---------------------------------------------------------------------------

    (4) The bank must conduct independent reviews of its risk 
measurement and risk management systems at least annually.
    (c) Market risk factors. The bank's internal model must use risk 
factors sufficient to measure the market risk inherent in all covered 
positions. The risk factors must address interest rate risk,\12\ equity 
price risk, foreign exchange rate risk, and commodity price risk.
---------------------------------------------------------------------------

    \12\ For material exposures in the major currencies and markets, 
modeling techniques must capture spread risk and must incorporate enough 
segments of the yield curve--at least six--to capture differences in 
volatility and less than perfect correlation of rates along the yield 
curve.
---------------------------------------------------------------------------

    (d) Quantitative requirements. For regulatory capital purposes, VAR 
measures must meet the following quantitative requirements:
    (1) The VAR measures must be calculated on a daily basis using a 99 
percent, one-tailed confidence level with a price shock equivalent to a 
ten-business day movement in rates and prices. In order to calculate VAR 
measures based on a ten-day price shock, the bank may either calculate 
ten-day figures directly or convert VAR figures based on holding periods 
other than ten days to the equivalent of a ten-day holding period (for 
instance, by multiplying a one-day VAR measure by the square root of 
ten).
    (2) The VAR measures must be based on an historical observation 
period (or effective observation period for a bank using a weighting 
scheme or other similar method) of at least one year. The bank must 
update data sets at least once every three months or more frequently as 
market conditions warrant.
    (3) The VAR measures must include the risks arising from the non-
linear price characteristics of options positions and the sensitivity of 
the market value of the positions to changes in the volatility of the 
underlying rates or prices. A bank with a large or complex options 
portfolio must measure the volatility of options positions by different 
maturities.
    (4) The VAR measures may incorporate empirical correlations within 
and across risk

[[Page 276]]

categories, provided that the bank's process for measuring correlations 
is sound. In the event that the VAR measures do not incorporate 
empirical correlations across risk categories, then the bank must add 
the separate VAR measures for the four major risk categories to 
determine its aggregate VAR measure.
    (e) Backtesting. (1) Beginning one year after a bank starts to 
comply with this appendix, a bank must conduct backtesting by comparing 
each of its most recent 250 business days' actual net trading profit or 
loss \13\ with the corresponding daily VAR measures generated for 
internal risk measurement purposes and calibrated to a one-day holding 
period and a 99 percent, one-tailed confidence level.
---------------------------------------------------------------------------

    \13\ Actual net trading profits and losses typically include such 
things as realized and unrealized gains and losses on portfolio 
positions as well as fee income and commissions associated with trading 
activities.
---------------------------------------------------------------------------

    (2) Once each quarter, the bank must identify the number of 
exceptions, that is, the number of business days for which the magnitude 
of the actual daily net trading loss, if any, exceeds the corresponding 
daily VAR measure.
    (3) A bank must use the multiplication factor indicated in Table 1 
of this appendix in determining its capital charge for market risk under 
section 3(a)(2)(i)(B) of this appendix until it obtains the next 
quarter's backtesting results, unless the Federal Reserve determines 
that a different adjustment or other action is appropriate.

     Table 1--Multiplication Factor Based on Results of Backtesting
------------------------------------------------------------------------
                                                          Multiplication
                  Number of exceptions                        factor
------------------------------------------------------------------------
4 or fewer..............................................          3.00
5.......................................................          3.40
6.......................................................          3.50
7.......................................................          3.65
8.......................................................          3.75
9.......................................................          3.85
10 or more..............................................          4.00
------------------------------------------------------------------------

                        Section 5. Specific Risk

    (a) Modeled specific risk. A bank may use its internal model to 
measure specific risk. If the bank has demonstrated to the Federal 
Reserve that its internal model measures the specific risk, including 
event and default risk as well as idiosyncratic variation, of covered 
debt and equity positions and includes the specific risk measures in the 
VAR-based capital charge in section 3(a)(2)(i) of this appendix, then 
the bank has no specific risk add-on for purposes of section 3(a)(2)(ii) 
of this appendix. The model should explain the historical price 
variation in the trading portfolio and capture concentration, both 
magnitude and changes in composition. The model should also be robust to 
an adverse environment and have been validated through backtesting which 
assesses whether specific risk is being accurately captured.
    (b) Partially modeled specific risk. (1) A bank that incorporates 
specific risk in its internal model but fails to demonstrate to the 
Federal Reserve that its internal model adequately measures all aspects 
of specific risk for covered debt and equity positions, including event 
and default risk, as provided by section 5(a), of this appendix must 
calculate its specific risk add-on in accordance with one of the 
following methods:
    (i) If the model is susceptible to valid separation of the VAR 
measure into a specific risk portion and a general market risk portion, 
then the specific risk add-on is equal to the previous day's specific 
risk portion.
    (ii) If the model does not separate the VAR measure into a specific 
risk portion and a general market risk portion, then the specific risk 
add-on is the sum of the previous day's VAR measures for subportfolios 
of covered debt and equity positions that contain specific risk.
    (2) If a bank models the specific risk of covered debt positions but 
not covered equity positions (or vice versa), then the bank may 
determine its specific risk charge for the included positions under 
section 5(a) or 5(b)(1) of this appendix, as appropriate. The specific 
risk charge for the positions not included equals the standard specific 
risk capital charge under paragraph (c) of this section.
    (c) Specific risk not modeled. If a bank does not model specific 
risk in accordance with section 5(a) or 5(b) of this appendix, then the 
bank's specific risk capital charge shall equal the standard specific 
risk capital charge, calculated as follows:
    (1) Covered debt positions. (i) For purposes of this section 5, 
covered debt positions means fixed-rate or floating-rate debt 
instruments located in the trading account and instruments located in 
the trading account with values that react primarily to changes in 
interest rates, including certain non-convertible preferred stock, 
convertible bonds, and instruments subject to repurchase and lending 
agreements. Also included are derivatives (including written and 
purchased options) for which the underlying instrument is a covered debt 
instrument that is subject to a non-zero specific risk capital charge.
    (A) For covered debt positions that are derivatives, a bank must 
risk-weight (as described in paragraph (c)(1)(iii) of this section) the 
market value of the effective notional amount of the underlying debt 
instrument or index portfolio. Swaps must be included as the notional 
position in the underlying debt instrument or index portfolio,

[[Page 277]]

with a receiving side treated as a long position and a paying side 
treated as a short position; and
    (B) For covered debt positions that are options, whether long or 
short, a bank must risk-weight (as described in paragraph (c)(1)(iii) of 
this section) the market value of the effective notional amount of the 
underlying debt instrument or index multiplied by the option's delta.
    (ii) A bank may net long and short covered debt positions (including 
derivatives) in identical debt issues or indices.
    (iii) A bank must multiply the absolute value of the current market 
value of each net long or short covered debt position by the appropriate 
specific risk weighting factor indicated in Table 2 of this appendix. 
The specific risk capital charge component for covered debt positions is 
the sum of the weighted values.

   Table 2--Specific Risk Weighting Factors for Covered Debt Positions
------------------------------------------------------------------------
                                                               Weighting
                                         Remaining maturity      factor
              Category                     (contractual)          (in
                                                                percent)
------------------------------------------------------------------------
Government..........................  N/A....................       0.00
Qualifying..........................  6 months or less.......       0.25
                                      Over 6 months to 24           1.00
                                       months.
                                      Over 24 months.........       1.60
Other...............................  N/A....................       8.00
------------------------------------------------------------------------

    (A) The government category includes all debt instruments of central 
governments of OECD-based countries \14\ including bonds, Treasury 
bills, and other short-term instruments, as well as local currency 
instruments of non-OECD central governments to the extent the bank has 
liabilities booked in that currency.
---------------------------------------------------------------------------

    \14\ Organization for Economic Cooperation and Development (OECD)-
based countries is defined in appendix A of this part.
---------------------------------------------------------------------------

    (B) The qualifying category includes debt instruments of U.S. 
government-sponsored agencies, general obligation debt instruments 
issued by states and other political subdivisions of OECD-based 
countries, multilateral development banks, and debt instruments issued 
by U.S. depository institutions or OECD-banks that do not qualify as 
capital of the issuing institution.\15\ This category also includes 
other debt instruments, including corporate debt and revenue instruments 
issued by states and other political subdivisions of OECD countries, 
that are:
---------------------------------------------------------------------------

    \15\ U.S. government-sponsored agencies, multilateral development 
banks, and OECD banks are defined in appendix A of this part.
---------------------------------------------------------------------------

    (1) Rated investment-grade by at least two nationally recognized 
credit rating services;
    (2) Rated investment-grade by one nationally recognized credit 
rating agency and not rated less than investment-grade by any other 
credit rating agency; or
    (3) Unrated, but deemed to be of comparable investment quality by 
the reporting bank and the issuer has instruments listed on a recognized 
stock exchange, subject to review by the Federal Reserve.
    (C) The other category includes debt instruments that are not 
included in the government or qualifying categories.
    (2) Covered equity positions. (i) For purposes of this section 5, 
covered equity positions means equity instruments located in the trading 
account and instruments located in the trading account with values that 
react primarily to changes in equity prices, including voting or non-
voting common stock, certain convertible bonds, and commitments to buy 
or sell equity instruments. Also included are derivatives (including 
written and purchased options) for which the underlying is a covered 
equity position.
    (A) For covered equity positions that are derivatives, a bank must 
risk weight (as described in paragraph (c)(2)(iii) of this section) the 
market value of the effective notional amount of the underlying equity 
instrument or equity portfolio. Swaps must be included as the notional 
position in the underlying equity instrument or index portfolio, with a 
receiving side treated as a long position and a paying side treated as a 
short position; and
    (B) For covered equity positions that are options, whether long or 
short, a bank must risk weight (as described in paragraph (c)(2)(iii) of 
this section) the market value of the effective notional amount of the 
underlying equity instrument or index multiplied by the option's delta.
    (ii) A bank may net long and short covered equity positions 
(including derivatives) in identical equity issues or equity indices in 
the same market.\16\
---------------------------------------------------------------------------

    \16\ A bank may also net positions in depository receipts against an 
opposite position in the underlying equity or identical equity in 
different markets, provided that the bank includes the costs of 
conversion.
---------------------------------------------------------------------------

    (iii)(A) A bank must multiply the absolute value of the current 
market value of each net long or short covered equity position by a risk 
weighting factor of 8.0 percent, or by 4.0 percent if the equity is held 
in a portfolio that is both liquid and well-diversified.\17\ For

[[Page 278]]

covered equity positions that are index contracts comprising a well-
diversified portfolio of equity instruments, the net long or short 
position is multiplied by a risk weighting factor of 2.0 percent.
---------------------------------------------------------------------------

    \17\ A portfolio is liquid and well-diversified if: (1) It is 
characterized by a limited sensitivity to price changes of any single 
equity issue or closely related group of equity issues held in the 
portfolio; (2) the volatility of the portfolio's value is not dominated 
by the volatility of any individual equity issue or by equity issues 
from any single industry or economic sector; (3) it contains a large 
number of individual equity positions, with no single position 
representing a substantial portion of the portfolio's total market 
value; and (4) it consists mainly of issues traded on organized 
exchanges or in well-established over-the-counter markets.
---------------------------------------------------------------------------

    (B) For covered equity positions from the following futures-related 
arbitrage strategies, a bank may apply a 2.0 percent risk weighting 
factor to one side (long or short) of each position with the opposite 
side exempt from charge, subject to review by the Federal Reserve:
    (1) Long and short positions in exactly the same index at different 
dates or in different market centers; or
    (2) Long and short positions in index contracts at the same date in 
different but similar indices.
    (C) For futures contracts on broadly-based indices that are matched 
by offsetting positions in a basket of stocks comprising the index, a 
bank may apply a 2.0 percent risk weighting factor to the futures and 
stock basket positions (long and short), provided that such trades are 
deliberately entered into and separately controlled, and that the basket 
of stocks comprises at least 90 percent of the capitalization of the 
index.
    (iv) The specific risk capital charge component for covered equity 
positions is the sum of the weighted values.

[Reg. H, 61 FR 47370, Sept. 6, 1996, as amended at 62 FR 68067, Dec. 30, 
1997; 64 FR 19037, 19038, Apr. 19, 1999; 65 FR 75858, Dec. 5, 2000; 69 
FR 44918, July 28, 2004]



PART 209_ISSUE AND CANCELLATION OF FEDERAL RESERVE BANK CAPITAL STOCK 
(REGULATION I)--Table of Contents




Sec.
209.1 Authority, purpose, and scope.
209.2 Banks desiring to become member banks.
209.3 Cancellation of Reserve Bank stock.
209.4 Amounts and payments.
209.5 The share register.

    Authority: 12 U.S.C. 222, 248, 282, 286-288, 321, 323, 327-328, 333, 
466.

    Source: 63 FR 37663, July 13, 1998, unless otherwise noted.



Sec. 209.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 222, 248, 
282, 286-288, 321, 323, 327-328, and 466.
    (b) Purpose. The purpose of this part is to implement the provisions 
of the Federal Reserve Act relating to the issuance and cancellation of 
Federal Reserve Bank stock upon becoming or ceasing to be a member bank, 
or upon changes in the capital and surplus of a member bank, of the 
Federal Reserve System.
    (c) Scope. This part applies to member banks of the Federal Reserve 
System, to national banks in process of organization, and to state banks 
applying for membership. National banks and locally-incorporated banks 
located in United States dependencies and possessions are eligible (with 
the consent of the Board) but not required to apply for membership under 
section 19(h) of the Federal Reserve Act, 12 U.S.C. 466.\1\
---------------------------------------------------------------------------

    \1\ If such a bank desires to become a member bank under the 
provisions of Sec. 19(h) of the Federal Reserve Act, it should 
communicate with the Federal Reserve Bank with which it desires to do 
business.
---------------------------------------------------------------------------



Sec. 209.2  Banks desiring to become member banks.

    (a) Application for stock or deposit. Each national bank in process 
of organization,\2\ each nonmember state bank converting into a national 
bank, and each nonmember state bank applying for membership in the 
Federal Reserve System under Regulation H, 12 CFR part 208, shall file 
with the Federal Reserve Bank (Reserve Bank) in whose district it is 
located an application for stock (or deposit in the case of mutual 
savings banks not authorized to purchase Reserve Bank stock \3\) in the 
Reserve Bank. The bank shall pay for the

[[Page 279]]

stock (or deposit) in accordance with Sec. 209.4 of this regulation.
---------------------------------------------------------------------------

    \2\ A new national bank organized by the Federal Deposit Insurance 
Corporation under Sec. 11(n) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(n)) should not apply until in the process of issuing stock 
pursuant to Sec. 11(n)(15) of that act. Reserve Bank approval of such 
an application shall not be effective until the issuance of a 
certificate by the Comptroller of the Currency pursuant to Sec. 
11(n)(16) of that act.
    \3\ A mutual savings bank not authorized to purchase Federal Reserve 
Bank stock may apply for membership evidenced initially by a deposit. 
(See Sec. 208.3(a) of Regulation H, 12 CFR part 208.) The membership of 
the savings bank shall be terminated if the laws under which it is 
organized are not amended to authorize such purchase at the first 
session of the legislature after its admission, or if it fails to 
purchase such stock within six months after such an amendment.
---------------------------------------------------------------------------

    (b) Issuance of stock; acceptance of deposit. Upon authorization to 
commence business by the Comptroller of the Currency in the case of a 
national bank in organization or upon approval of conversion by the 
Comptroller of the Currency in the case of a state nonmember bank 
converting to a national bank, or when all applicable requirements have 
been complied with in the case of a state bank approved for membership, 
the Reserve Bank shall issue the appropriate number of shares by 
crediting the bank with the appropriate number of shares on its books. 
In the case of a national or state member bank in organization, such 
issuance shall be as of the date the bank opens for business. In the 
case of a mutual savings bank not authorized to purchase Reserve Bank 
shares, the Reserve Bank shall accept the deposit in place of issuing 
shares. The bank's membership shall become effective on the date of such 
issuance or acceptance.
    (c) Location of bank. (1) General rule. For purposes of this part, a 
national bank or a state bank is located in the Federal Reserve District 
that contains the location specified in the bank's charter or organizing 
certificate, or, if no such location is specified, the location of its 
head office, unless otherwise determined by the Board under paragraph 
(c)(2) of this section.
    (2) Board determination. If the location of a bank as specified in 
paragraph (c)(1) of this section, in the judgment of the Board of 
Governors of the Federal Reserve System (Board), is ambiguous, would 
impede the ability of the Board or the Reserve Banks to perform their 
functions under the Federal Reserve Act, or would impede the ability of 
the bank to operate efficiently, the Board will determine the Federal 
Reserve District in which the bank is located, after consultation with 
the bank and the relevant Reserve Banks. The relevant Reserve Banks are 
the Reserve Bank whose District contains the location specified in 
paragraph (c)(1) of this section and the Reserve Bank in whose District 
the bank is proposed to be located. In making this determination, the 
Board will consider any applicable laws, the business needs of the bank, 
the location of the bank's head office, the locations where the bank 
performs its business, and the locations that would allow the bank, the 
Board, and the Reserve Banks to perform their functions efficiently and 
effectively.



Sec. 209.3  Cancellation of Reserve Bank stock.

    (a) Application for cancellation. Any bank that desires to withdraw 
from membership in the Federal Reserve System, voluntarily liquidates or 
ceases business, is merged or consolidated into a nonmember bank, or is 
involuntarily liquidated by a receiver or conservator or otherwise, 
shall promptly file with its Reserve Bank an application for 
cancellation of all its Reserve Bank stock (or withdrawal of its 
deposit, as the case may be) and payment therefor in accordance with 
Sec. 209.4.
    (b) Involuntary termination of membership. If an application is not 
filed promptly after a cessation of business by a state member bank, a 
vote to place a member bank in voluntary liquidation, or the appointment 
of a receiver for (or a determination to liquidate the bank by a 
conservator of) a member bank, the Board may, after notice and an 
opportunity for hearing where required under Section 9(9) of the Federal 
Reserve Act (12 U.S.C. 327), order the membership of the bank terminated 
and all of its Reserve Bank stock canceled.
    (c) Effective date of cancellation. Cancellation in whole of a 
bank's Reserve Bank capital stock shall be effective, in the case of:
    (1) Voluntary withdrawal from membership by a state bank, as of the 
date of such withdrawal;
    (2) Merger into, consolidation with, or (for a national bank) 
conversion into, a State nonmember bank, as of the effective date of the 
merger, consolidation, or conversion; and
    (3) Involuntary termination of membership, as of the date the Board 
issues the order of termination.
    (d) Exchange of stock on merger or change in location. (1) Merger of 
member

[[Page 280]]

banks in the same Federal Reserve District. Upon a merger or 
consolidation of member banks located in the same Federal Reserve 
District, the Reserve Bank shall cancel the shares of the nonsurviving 
bank (or in the case of a mutual savings bank not authorized to purchase 
Reserve Bank stock, shall credit the deposit to the account of the 
surviving bank) and shall credit the appropriate number of shares on its 
books to (or in the case of a mutual savings bank not authorized to 
purchase Reserve Bank stock, shall accept an appropriate increase in the 
deposit of) the surviving bank, subject to paragraph (e)(2) of Sec. 
209.4.
    (2) Change of location or merger of member banks in different 
Federal Reserve Districts. Upon a determination under paragraph (c)(2) 
of Sec. 209.2 that a member bank is located in a Federal Reserve 
District other than the District of the Reserve Bank of which it is a 
member, or upon a merger or consolidation of member banks located in 
different Federal Reserve Districts,--
    (i) The Reserve Bank of the member bank's former District, or of the 
nonsurviving member bank, shall cancel the bank's shares and transfer 
the amount paid in for those shares, plus accrued dividends (at the rate 
specified in paragraph (d) of Sec. 209.4) and subject to paragraph 
(e)(2) of Sec. 209.4 (or, in the case of a mutual savings bank member 
not authorized to purchase Federal Reserve Bank stock, the amount of its 
deposit, adjusted in a like manner), to the Reserve Bank of the bank's 
new District or of the surviving bank; and
    (ii) The Reserve Bank of the member bank's new District or of the 
surviving bank shall issue the appropriate number of shares by crediting 
the bank with the appropriate number of shares on its books (or, in the 
case of a mutual savings bank, by accepting the deposit or an 
appropriate increase in the deposit).
    (e) Voluntary withdrawal. Any bank withdrawing voluntarily from 
membership shall give 6 months written notice, and shall not cause the 
withdrawal of more than 25 percent of any Reserve Bank's capital stock 
in any calendar year, unless the Board waives these requirements.



Sec. 209.4  Amounts and payments.

    (a) Amount of subscription. The total subscription of a member bank 
(other than a mutual savings bank) shall equal six percent of its 
capital and surplus. Whenever any member bank (other than a mutual 
savings bank) experiences a cumulative increase or decrease in capital 
and surplus requiring a change in excess of the lesser of 15 percent or 
100 shares of its Reserve Bank capital stock, it shall file with the 
appropriate Reserve Bank an application for issue or cancellation of 
Reserve Bank capital stock in order to adjust its Reserve Bank capital 
stock subscription to equal six percent of the member bank's capital and 
surplus. Such application shall be filed promptly after the first report 
of condition that reflects the increase or decrease occasioning the 
adjustment. In addition, every member bank shall file an application for 
issue or cancellation of Reserve Bank capital stock if needed in order 
to adjust its Reserve Bank capital stock subscription to equal six 
percent of the member bank's capital and surplus as shown on its report 
of condition as of December 31 of each year promptly after filing such 
report.
    (b) Capital Stock and Surplus defined. Capital stock and surplus of 
a member bank means the paid-in capital stock \4\ and paid-in surplus of 
the bank, less any deficit in the aggregate of its retained earnings, 
gains (losses) on available for sale securities, and foreign currency 
translation accounts, all as shown on the bank's most recent report of 
condition. Paid-in capital stock and paid-in surplus of a bank in 
organization means the amount which is to be paid in at the time the 
bank commences business.
---------------------------------------------------------------------------

    \4\ Capital stock includes common stock and preferred stock 
(including sinking fund preferred stock).
---------------------------------------------------------------------------

    (c) Mutual savings banks. The total subscription of a member bank 
that is a mutual savings bank shall equal six-tenths of 1 percent of its 
total deposit liabilities as shown on its most recent report of 
condition. Whenever any member bank that is a mutual savings bank 
experiences a cumulative increase or decrease in total deposit 
liabilities as shown on its most recent

[[Page 281]]

report of condition requiring a change in its holding of Reserve Bank 
stock in excess of the lesser of 15 percent or 100 shares, it shall file 
with the appropriate Reserve Bank an application for issue or 
cancellation of Reserve Bank capital stock in order to adjust its 
Reserve Bank capital stock subscription to equal six-tenths of 1 percent 
of the member bank's total deposit liabilities. Such application shall 
be filed promptly after the first report of condition that reflects the 
increase or decrease occasioning the adjustment. In addition, every 
member bank that is a mutual savings bank shall file an application for 
issue or cancellation of Reserve Bank capital stock if needed in order 
to adjust its Reserve Bank capital stock subscription to equal six-
tenths of 1 percent of its total deposit liabilities as shown on its 
report of condition as of December 31 of each year promptly after filing 
such report. A mutual savings bank that is applying for or has a deposit 
with the appropriate Reserve Bank in lieu of Reserve Bank capital stock 
shall file for acceptance or adjustment of its deposit in a like manner.
    (d) Payment for subscriptions. Upon approval by the Reserve Bank of 
an application for capital stock (or for a deposit in lieu thereof), the 
applying bank shall pay the Reserve Bank one-half of the subscription 
amount plus accrued dividends. For purposes of this part, dividends 
shall accrue at the rate of one half of one percent per month calculated 
on the basis of a 360-day year of twelve 30-day months. Upon payment 
(and in the case of a national banks in organization or state nonmember 
bank converting into a national bank, upon authorization or approval by 
the Comptroller of the Currency), the Reserve Bank shall issue the 
appropriate number of shares by crediting the bank with the appropriate 
number of shares on its books. In the case of a mutual savings bank not 
authorized to purchase Reserve Bank stock, the Reserve Bank will accept 
the deposit or addition to the deposit in place of issuing shares. The 
remaining half of the subscription or additional subscription (including 
subscriptions for deposits or additions to deposits) shall be subject to 
call by the Board.
    (e) Payment for cancellations. (1) Upon approval of an application 
for cancellation of Reserve Bank capital stock, or (in the case of 
involuntary termination of membership) upon the effective date of 
cancellation specified in Sec. 209.3(c)(3), the Reserve Bank shall 
reduce the bank's shareholding on the Reserve Bank's books by the number 
of shares required to be canceled and shall pay therefor a sum equal to 
the cash subscription paid on the canceled stock plus accrued dividends 
(at the rate specified in paragraph (d) of this section), such sum not 
to exceed the book value of the stock.\5\
---------------------------------------------------------------------------

    \5\ Under sections 6 and 9(10) of the Act, a Reserve Bank is under 
no obligation to pay unearned accrued dividends on redemption of its 
capital stock from an insolvent member bank for which a receiver has 
been appointed or from state member banks on voluntary withdrawal from 
or involuntary termination of membership.
---------------------------------------------------------------------------

    (2) In the case of any cancellation of Reserve Bank stock under this 
Part, the Reserve Bank may first apply such sum to any liability of the 
bank to the Reserve Bank and pay over the remainder to the bank (or 
receiver or conservator, as appropriate).



Sec. 209.5  The share register.

    (a) Electronic or written record. A member bank's holding of Reserve 
Bank capital stock shall be represented by one (or at the option of the 
Reserve Bank, more than one) notation on the Reserve Bank's books. Such 
books may be electronic or in writing. Upon any issue or cancellation of 
Reserve Bank capital stock, the Reserve Bank shall record the member 
bank's new share position in its books (or eliminate the bank's share 
position from its books, as the case may be).
    (b) Certification. A Reserve Bank may certify on request as to the 
number of shares held by a member bank and purchased before March 28, 
1942, or as to the purchase and cancellation dates and prices of shares 
cancelled, as the case may be.

[[Page 282]]



PART 210_COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS 
AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)--Table of Contents




 Subpart A_Collection of Checks and Other Items By Federal Reserve Banks

Sec.
210.1 Authority, purpose, and scope.
210.2 Definitions.
210.3 General provisions.
210.4 Sending items to Reserve Banks.
210.5 Sender's agreement; recovery by Reserve Bank.
210.6 Status, warranties, and liability of Reserve Bank.
210.7 Presenting items for payment.
210.8 Presenting noncash items for acceptance.
210.9 Settlement and payment.
210.10 Time schedule and availability of credits for cash items and 
          returned checks.
210.11 Availability of proceeds of noncash items; time schedule
210.12 Return of cash items and handling of returned checks.
210.13 Unpaid items.
210.14 Extension of time limits.
210.15 Direct presentment of certain warrants.

                Subpart B_Funds Transfers Through Fedwire

210.25 Authority, purpose, and scope.
210.26 Definitions.
210.27 Reliance on identifying number.
210.28 Agreement of sender.
210.29 Agreement of receiving bank.
210.30 Payment orders.
210.31 Payment by a Federal Reserve Bank to a receiving bank or 
          beneficiary.
210.32 Federal Reserve Bank liability; payment of interest.

Appendix A to Subpart B--Commentary
Appendix B to Subpart B--Article 4A, Funds Transfers

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, 4001-4010, 
and 5001-5018.

    Source: 45 FR 68634, Oct. 16, 1980, unless otherwise noted.



 Subpart A_Collection of Checks and Other Items By Federal Reserve Banks



Sec. 210.1  Authority, purpose, and scope.

    The Board of Governors of the Federal Reserve System (Board) has 
issued this subpart pursuant to the Federal Reserve Act, sections 11 (i) 
and (j) (12 U.S.C. 248 (i) and (j)), section 13 (12 U.S.C. 342), section 
16 (12 U.S.C. 248(o) and 360), and section 19(f) (12 U.S.C. 464); the 
Expedited Funds Availability Act (12 U.S.C. 4001 et seq.); the Check 
Clearing for the 21st Century Act (12 U.S.C. 5001-5018) and other laws. 
This subpart governs the collection of checks and other cash and noncash 
items and the handling of returned checks by Federal Reserve Banks. Its 
purpose is to provide rules for collecting and returning items and 
settling balances.

[53 FR 21984, June 13, 1988, as amended at Reg. J, 59 FR 22965, May 4, 
1994; Reg. J, 69 FR 62557, Oct. 27, 2004]



Sec. 210.2  Definitions.

    As used in this subpart, unless the context otherwise requires:
    (a) Account means an account with reserve or clearing balances on 
the books of a Federal Reserve Bank. A subaccount is an informational 
record of a subset of transactions that affect an account and is not a 
separate account.
    (b) Actually and finally collected funds means cash or any other 
form of payment that is, or has become, final and irrevocable.
    (c) Administrative Reserve Bank with respect to an entity means the 
Reserve Bank in whose District the entity is located, as determined 
under the procedure described in Sec. 204.3(b)(2) of this chapter 
(Regulation D), even if the entity is not otherwise subject to that 
section.
    (d) Bank means any person engaged in the business of banking. A 
branch or separate office of a bank is a separate bank to the extent 
provided in the Uniform Commercial Code.
    (e) Bank draft means a check drawn by one bank on another bank.
    (f) Banking day means the part of a day on which a bank is open to 
the public for carrying on substantially all of its banking functions.
    (g) Cash item means --
    (1) A check other than one classified as a noncash item under this 
section; or
    (2) Any other item payable on demand and collectible at par that the 
Reserve Bank that receives the item is

[[Page 283]]

willing to accept as a cash item. Cash item does not include a returned 
check.
    (h) Check means a draft, as defined in the Uniform Commercial Code, 
that is drawn on a bank and payable on demand. Check as defined in 12 
CFR 229.2(k) means an item defined as a check in 12 CFR 229.2(k) for 
purposes of subparts C and D of part 229.
    (i) Item and electronic item.
    (1) Item means--
    (i) An instrument or a promise or order to pay money, whether 
negotiable or not, that is--
    (A) Payable in a Federal Reserve District \1\ (District);
---------------------------------------------------------------------------

    \1\ For purposes of this subpart, the Virgin Islands and Puerto Rico 
are deemed to be in the Second District, and Guam, American Samoa, and 
the Northern Mariana Islands in the Twelfth District.
---------------------------------------------------------------------------

    (B) Sent by a sender to a Reserve Bank for handling under this 
subpart; and
    (C) Collectible in funds acceptable to the Reserve Bank of the 
District in which the instrument is payable; and
    (ii) An electronic image of an item described in paragraph (i)(1)(i) 
of this section, and information describing that item, that a Reserve 
Bank agrees to handle as an item pursuant to an operating circular.
    (2) Electronic item means an item described in paragraph (i)(1)(ii) 
of this section.
    Note: Unless otherwise indicated, item includes both a cash and a 
noncash item, and includes a returned check sent by a paying or 
returning bank. Item does not include a check that cannot be collected 
at par, or a payment order as defined in Sec. 210.26(i) and handled 
under subpart B of this part.
    (j) Nonbank payor means a payor of an item, other than a bank.
    (k) Noncash item means an item that a receiving Reserve Bank 
classifies in its operating circulars as requiring special handling. The 
term also means an item normally received as a cash item if a Reserve 
Bank decides that special conditions require that it handle the item as 
a noncash item.
    (l) Paying bank means--
    (1) The bank by which an item is payable unless the item is payable 
or collectible at or through another bank and is sent to the other bank 
for payment or collection;
    (2) The bank at or through which an item is payable or collectible 
and to which it sent for payment or collection; or
    (3) The bank whose routing number appears on a check in the MICR 
line or in fractional form (or in the MICR-line information that 
accompanies an electronic item) and to which the check is sent for 
payment or collection.
    (m) Returned check means a cash item or a check as defined in 12 CFR 
229.2(k) returned by a paying bank, including a notice of nonpayment in 
lieu of a returned check, whether or not a Reserve Bank handled the 
check for collection.
    (n) Sender means any of the following entities that sends an item to 
a Reserve Bank for forward collection--
    (1) A depository institution, as defined in section 19(b) of the 
Federal Reserve Act (12 U.S.C. 461(b));
    (2) A clearing institution, defined as--
    (i) An institution that is not a depository institution but that 
maintains with a Reserve Bank the balance referred to in the first 
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
    (ii) A corporation that maintains an account with a Reserve Bank in 
conformity with Sec. 211.4 of this chapter (Regulation K);
    (3) Another Reserve Bank;
    (4) An international organization for which a Reserve Bank is 
empowered to act as depositary or fiscal agent and maintains an account;
    (5) A foreign correspondent, defined as any of the following 
entities for which a Reserve Bank maintains an account: a foreign bank 
or banker, a foreign state as defined in section 25(b) of the Federal 
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency 
referred to in section 14(e) of that act (12 U.S.C. 358); or
    (6) A branch or agency of a foreign bank maintaining reserves under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 
3105).
    (o) State means a State of the United States, the District of 
Columbia, Puerto Rico, or a territory, possession, or dependency of the 
United States.
    (p) Clock hour means a time that is on the hour, such as 1:00, 2:00, 
etc.
    (q) Fedwire has the same meaning as that set forth in Sec. 
210.26(e).

[[Page 284]]

    (r) Uniform Commercial Code and U.C.C. mean the Uniform Commercial 
Code as adopted in a state.
    (s) Terms not defined in this section. Unless the context otherwise 
requires--
    (1) The terms not defined herein have the meanings set forth in 
Sec. 229.2 of this chapter applicable to subpart C or subpart D of part 
229 of this chapter, as appropriate; and
    (2) The terms not defined herein or in Sec. 229.2 of this chapter 
have the meanings set forth in the Uniform Commercial Code.

[45 FR 68634, Oct. 16, 1980, as amended at 46 FR 42059, Aug. 19, 1981; 
51 FR 21744, June 16, 1986; 53 FR 21984, June 13, 1988; 57 FR 46955, 
Oct. 14, 1992; Reg. J, 59 FR 22965, May 4, 1994; 62 FR 48171, Sept. 15, 
1997; Reg. J, 69 FR 62557, Oct. 27, 2004]



Sec. 210.3  General provisions.

    (a) General. Each Reserve Bank shall receive and handle items in 
accordance with this subpart, and shall issue operating circulars 
governing the details of its handling of items and other matters deemed 
appropriate by the Reserve Bank. The circulars may, among other things, 
classify cash items and noncash items, require separate sorts and 
letters, provide different closing times for the receipt of different 
classes or types of items, provide for instructions by an Administrative 
Reserve Bank to other Reserve Banks, set forth terms of services, and 
establish procedures for adjustments on a Reserve Bank's books, 
including amounts, waiver of expenses, and payment of interest by as-of 
adjustment.
    (b) Binding effect. This subpart, together with subparts C and D of 
part 229 and the operating circulars of the Reserve Banks, are binding 
on all parties interested in an item handled by any Reserve Bank.
    (c) Government items. As depositaries and fiscal agents of the 
United States, Reserve Banks handle certain items payable by the United 
States or certain Federal agencies as cash or noncash items. To the 
extent provided by regulations issued by, and arrangements made with, 
the United States Treasury Department and other Government departments 
and agencies, the handling of such items is governed by this subpart. 
The Reserve Banks shall include in their operating circulars such 
information regarding these regulations and arrangements as the Reserve 
Banks deem appropriate.
    (d) Government senders. Except as otherwise provided by statutes of 
the United States, or regulations issued or arrangements made 
thereunder, this subpart and the operating circulars of the Reserve 
Banks apply to the following when acting as a sender: a department, 
agency, instrumentality, independent establishment, or office of the 
United States, or a wholly owned or controlled Government corporation, 
that maintains or uses an account with a Reserve Bank.
    (e) Foreign items. A Reserve Bank also may receive and handle 
certain items payable outside a Federal Reserve District, as provided in 
its operating circulars. The handling of such items in a state is 
governed by this subpart, and the handling of such items outside a state 
is governed by the local law.
    (f) Relation to other law. The provisions of this subpart supersede 
any inconsistent provisions of the Uniform Commercial Code, of any other 
state law, or of part 229 of this title, but only to the extent of the 
inconsistency.

[45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21744, June 16, 1986; 
53 FR 21984, June 13, 1988; Reg. J, 59 FR 22965, May 4, 1994; 62 FR 
48171, Sept. 15, 1997; Reg. J, 69 FR 62558, Oct. 27, 2004]



Sec. 210.4  Sending items to Reserve Banks.

    (a) Sending of items. A sender, other than a Reserve Bank, may send 
any item to any Reserve Bank, whether or not the item is payable within 
the Reserve Bank's District, unless the sender's Administrative Reserve 
Bank directs the sender to send the item to a specific Reserve Bank.
    (b) Handling of items. (1) The following parties, in the following 
order, are deemed to have handled an item that is sent to a Reserve Bank 
for collection--
    (i) The initial sender
    (ii) The initial sender's Administrative Reserve Bank
    (iii) The Reserve Bank that receives the item from the initial 
sender (if different from the initial sender's Administrative Reserve 
Bank); and

[[Page 285]]

    (iv) Another Reserve Bank, if any, that receives the item from a 
Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of this 
section is not a person that handles an item and is not a collecting 
bank with respect to an item.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code. An initial sender's Administrative 
Reserve Bank that is deemed to handle an item is also deemed to be a 
sender with respect to that item. The Reserve Banks that are deemed to 
handle an item are deemed to be agents or subagents of the owner of the 
item, as provided in Sec. 210.6(a) of this subpart.
    (c) Checks received at par. The Reserve Banks shall receive cash 
items and other checks at par.

[Reg. J, 62 FR 48171, Sept. 15, 1997, as amended at Reg. J, 69 FR 62558, 
Oct. 27, 2004]



Sec. 210.5  Sender's agreement; recovery by Reserve Bank.

    (a) Sender's agreement. The warranties, authorizations, and 
agreements made pursuant to this paragraph may not be disclaimed and are 
made whether or not the item bears an indorsement of the sender. By 
sending an item to a Reserve Bank, the sender does all of the following.
    (1) Authorization to handle item. The sender authorizes the sender's 
administrative Reserve Bank and any other Reserve Bank or collecting 
bank to which the item is sent to handle the item (and authorizes any 
Reserve Bank that handles settlement for the item to make accounting 
entries), subject to this subpart and to the Reserve Banks' operating 
circulars, and warrants its authority to give this authorization.
    (2) Warranties for all items. The sender warrants to each Reserve 
Bank handling the item that--
    (i) The sender is a person entitled to enforce the item or 
authorized to obtain payment of the item on behalf of a person entitled 
to enforce the item;
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item, in paper or electronic form, for forward 
collection or return.
    (3) Warranties for all electronic items. The sender makes all the 
warranties set forth in and subject to the terms of 4-207 of the U.C.C. 
for an electronic item as if it were an item subject to the U.C.C. and 
makes the warranties set forth in and subject to the terms of Sec. 
229.34(c) of this chapter for an electronic item as if it were a check 
subject to that section.
    (4) Warranties for electronic items that are not representations of 
substitute checks. If an electronic item is not a representation of a 
substitute check, the sender of that item warrants to each Reserve Bank 
handling the item that--
    (i) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms to the technical standards for an electronic item set forth in 
an operating circular; and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (5) Sender's liability to Reserve Bank. (i) Except as provided in 
paragraph (a)(5)(ii) of this section, the sender agrees to indemnify 
each Reserve Bank for any loss or expense sustained (including 
attorneys' fees and expenses of litigation) resulting from--
    (A) The sender's lack of authority to make the warranty in paragraph 
(a)(1) of this section;
    (B) Any action taken by the Reserve Bank within the scope of its 
authority in handling the item; or
    (C) Any warranty or indemnity made by the Reserve Bank under Sec. 
210.6(b) of this subpart, part 229 of this chapter, or the U.C.C.

[[Page 286]]

    (ii) A sender's liability for warranties and indemnities that the 
Reserve Bank makes for a substitute check, a paper or electronic 
representation thereof, or any other electronic item is subject to the 
following conditions and limitations--
    (A) A sender of an original check shall not be liable under 
paragraph (a)(5)(i) of this section for any amount that the Reserve Bank 
pays under subpart D of part 229 of this chapter or under Sec. 
210.6(b)(3) of this subpart, absent the sender's agreement to the 
contrary;
    (B) Nothing in this subpart alters the liability of a sender of a 
substitute check or paper or electronic representation of a substitute 
check under subpart D of part 229 of this chapter; and
    (C) A sender of an electronic item that is not a representation of a 
substitute check shall not be liable for any amount that the Reserve 
Bank pays under subpart D of part 229 of this chapter or Sec. 
210.6(b)(3)(ii) of this subpart that is attributable to the Reserve 
Bank's own lack of good faith or failure to exercise ordinary care.
    (b) Sender's liability under other law. Nothing in paragraph (a) of 
this section limits any warranty or indemnity by a sender (or a person 
that handled an item prior to the sender) arising under state law or 
regulation (such as the U.C.C.), other federal law or regulation (such 
as part 229 of this chapter), or an agreement with a Reserve Bank.
    (c) Recovery by Reserve Bank. If an action or proceeding is brought 
against (or if defense is tendered to) a Reserve Bank that has handled 
an item, based on:
    (1) The alleged failure of the sender to have the authority to make 
the warranty and agreement in paragraph (a)(1) of this section;
    (2) Any action by the Reserve Bank within the scope of its authority 
in handling the item; or
    (3) Any warranty or indemnity made by the Reserve Bank under section 
210.6(b) of this subpart, part 229 of this chapter, or the U.C.C.,
    (d) Methods of recovery. (1) The Reserve Bank may recover the amount 
stated in paragraph (b) of this section by charging any account on its 
books that is maintained or used by the sender (or by charging a Reserve 
Bank sender), if--
    (i) The Reserve Bank made seasonable written demand on the sender to 
assume defense of the action or proceeding; and
    (ii) The sender has not made any other arrangement for payment that 
is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that has 
been charged under this paragraph (c) may recover from its sender in the 
manner and under the circumstances set forth in this paragraph (c). A 
Reserve Bank's failure to avail itself of the remedy provided in this 
paragraph (c) does not prejudice its enforcement in any other manner of 
the indemnity agreement referred to in paragraph (a)(3) of this section.
    (e) Security interest. When a sender sends an item to a Reserve 
Bank, the sender and any prior collecting bank grant to the sender's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank to secure their respective obligations due or to become due 
to the Administrative Reserve Bank under this subpart or subpart C of 
part 229 of this chapter (Regulation CC). The security interest attaches 
when a warranty is breached or any other obligation to the Reserve Bank 
is incurred. If the Reserve Bank, in its sole discretion, deems itself 
insecure and gives notice thereof to the sender or prior collecting 
bank, or if the sender or prior collecting bank suspends payments or is 
closed, the Reserve Bank may take any action authorized by law to 
recover the amount of an obligation, including, but not limited to, the 
exercise of rights of set off, the realization on any available 
collateral, and any other rights it may have as a creditor under 
applicable law.

[45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21745, June 16, 1986; 
Reg. J, 59 FR 22965, May 4, 1994; 62 FR 48171, Sept. 15, 1997; Reg. J, 
69 FR 62558, Oct. 27, 2004]

[[Page 287]]



Sec. 210.6  Status, warranties, and liability of Reserve Bank.

    (a)(1) Status. A Reserve Bank that handles an item shall act as 
agent or subagent of the owner with respect to the item. This agency 
terminates when a Reserve Bank receives final payment for the item in 
actually and finally collected funds, a Reserve Bank makes the proceeds 
available for use by the sender, and the time for commencing all actions 
against the Reserve Bank has expired.
    (2) Limitations on Reserve Bank liability. A Reserve Bank shall not 
have or assume any liability with respect to an item or its proceeds 
except--
    (i) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care;
    (ii) As provided in paragraph (b) of this section; and
    (iii) As provided in subparts C and D of Regulation CC.
    (3) Reliance on routing designation appearing on item. A Reserve 
Bank may present or send an item based on the routing number or other 
designation of a paying bank or nonbank payor appearing in any form on 
the item when the Reserve Bank receives it. A Reserve Bank shall not be 
responsible for any delay resulting from its acting on any designation, 
whether inscribed by magnetic ink or by other means, and whether or not 
the designation acted on is consistent with any other designation 
appearing on the item.
    (b) Warranties and liability. The following provisions apply when a 
Reserve Bank presents or sends an item.
    (1) Warranties for all items. The Reserve Bank warrants to a 
subsequent collecting bank and to the paying bank and any other payor 
that--
    (i) The Reserve Bank is a person entitled to enforce the item (or is 
authorized to obtain payment of the item on behalf of a person that is 
either entitled to enforce the item or authorized to obtain payment on 
behalf of a person entitled to enforce the item);
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item, in paper or electronic form, for forward 
collection or return.
    (2) Warranties for all electronic items. The Reserve Bank makes all 
the warranties set forth in and subject to the terms of 4-207 of the 
U.C.C. for an electronic item as if it were an item subject to the 
U.C.C. and makes the warranties set forth in and subject to the terms of 
Sec. 229.34(c) of this chapter for an electronic item as if it were a 
check subject to that section.
    (3) Warranties and indemnity for electronic items that are not 
representations of substitute checks. (i) If the electronic item is not 
a representation of a substitute check, the Reserve Bank warrants to the 
bank to which it transfers or presents that item that--
    (A) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms to the technical standards for an electronic item set forth in 
an operating circular; and
    (B) No person will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (ii) If the item is an electronic item that is not a representation 
of a substitute check--
    (A) Except as provided in paragraph (b)(3)(ii)(B) of this section, 
the Reserve Bank agrees to indemnify the bank to which it transfers or 
presents the electronic item (the recipient bank) for the amount of any 
losses that the recipient bank incurs under subpart D of part 229 of 
this chapter for an indemnity that the recipient bank was required to 
make under subpart D of part 229 of this chapter in connection with a 
substitute check later created from the electronic item.
    (B) The Reserve Bank shall not be liable under paragraph 
(b)(3)(ii)(A) of this section for any amount that the recipient bank 
pays under subpart D of

[[Page 288]]

part 229 of this chapter that is attributable to the lack of good faith 
or failure to exercise ordinary care of the recipient bank or a person 
that handled the item, in any form, after the recipient bank.
    (c) Limitation on liability. A Reserve Bank shall not have or assume 
any liability to the paying bank or other payor, except as provided in 
paragraph (b) of this section, Sec. 229.34(c) or subpart D of part 229 
of this chapter, or for the Reserve Bank's own lack of good faith or 
failure to exercise ordinary care.
    (d) Time for commencing action against Reserve Bank. (1) A claim 
against a Reserve Bank for lack of good faith or failure to exercise 
ordinary care shall be barred unless the action on the claim is 
commenced within two years after the claim accrues. Such a claim accrues 
on the date when a Reserve Bank's alleged failure to exercise ordinary 
care or to act in good faith first results in damages to the claimant.
    (2) A claim that arises under paragraph (b)(3) of this section shall 
be barred unless the action on the claim is commenced within one year 
after the claim accrues. Such a claim accrues as of the date on which 
the claimant first learns, or by which the claimant reasonably should 
have learned, of the facts and circumstances giving rise to the claim.
    (3) This paragraph (d) does not alter the time limit for claims 
under section 229.38(g) of this chapter (which include claims for breach 
of warranty under Sec. 229.34 of this chapter) or subpart D of part 229 
of this chapter.

[45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21745, June 16, 1986; 
53 FR 21984, June 13, 1988; Reg. J, 59 FR 22966, May 4, 1994; 62 FR 
48172, Sept. 15, 1997; Reg. J, 69 FR 62559, Oct. 27, 2004]



Sec. 210.7  Presenting items for payment.

    (a) Presenting or sending. As provided under State law or as 
otherwise permitted by this section: (1) a Reserve Bank or a subsequent 
collecting bank may present an item for payment or send the item for 
presentment and payment; and
    (2) A Reserve Bank may send an item to a subsequent collecting bank 
with authority to present it for payment or to send it for presentment 
and payment.
    (b) Place of presentment. A Reserve Bank or subsequent collecting 
bank may present an item--
    (1) At a place requested by the paying bank;
    (2) In the case of a check as defined in 12 CFR 229.2(k), in 
accordance with 12 CFR 229.36;
    (3) At a place requested by the nonbank payor, if the item is 
payable by a nonbank payor other than through or at a paying bank;
    (4) Under a special collection agreement consistent with this 
subpart; or
    (5) Through a clearinghouse and subject to its rules and practices.
    (c) Presenting or sending direct. A Reserve Bank or subsequent 
collecting bank may, with respect to an item that may be sent to the 
paying bank or nonbank payor in the Reserve Bank's District--
    (1) Present or send the item direct to the paying bank, or to a 
place requested by the paying bank; or
    (2) If the item is payable by a nonbank payor other than through a 
paying bank, present it direct to the nonbank payor. Documents, 
securities, or other papers accompanying a noncash item shall not be 
delivered to the nonbank payor before the item is paid unless the sender 
specifically authorizes delivery.
    (d) Item sent to another district. A Reserve Bank receiving an item 
that may be sent to a paying bank or nonbank payor in another District 
ordinarily sends the item to the Reserve Bank of the other District, but 
with the agreement of the other Reserve Bank, may present or send the 
item as if it were sent to a paying bank or nonbank payor in its own 
District.

[45 FR 68634, Oct. 16, 1980, as amended at 53 FR 21985, June 13, 1988; 
62 FR 48172, Sept. 15, 1997]



Sec. 210.8  Presenting noncash items for acceptance.

    (a) A Reserve Bank or a subsequent collecting bank may, if 
instructed by the sender, present a noncash item for acceptance in any 
manner authorized by law if--
    (1) The item provides that it must be presented for acceptance;

[[Page 289]]

    (2) The item may be presented elsewhere than at the residence or 
place of business of the payor; or
    (3) The date of payment of the item depends on presentment for 
acceptance.
    (b) Documents accompanying a noncash item shall not be delivered to 
the payor upon acceptance of the item unless the sender specifically 
authorizes delivery. A Reserve Bank shall not have or assume any other 
obligation to present or to send for presentment for acceptance any 
noncash item.

[62 FR 48172, Sept. 15, 1997]



Sec. 210.9  Settlement and payment.

    (a) Settlement through Administrative Reserve Bank. A paying bank 
shall settle for an item under this subpart with its Administrative 
Reserve Bank, whether or not the paying bank received the item from that 
Reserve Bank. A paying bank's settlement with its Administrative Reserve 
Bank is deemed to be settlement with the Reserve Bank from which the 
paying bank received the item. A paying bank may settle for an item 
using any account on a Reserve Bank's books by agreement with its 
Administrative Reserve Bank, any other Reserve Bank holding the 
settlement account, and the account-holder. The paying bank remains 
responsible for settlement if the Reserve Bank holding the settlement 
account does not, for any reason, obtain settlement in that account.
    (b) Cash items--(1) Settlement obligation. On the day a paying bank 
receives \2\ a cash item from a Reserve Bank, it shall settle for the 
item such that the proceeds of the settlement are available to its 
Administrative Reserve Bank by the close of Fedwire on that day, or it 
shall return the item by the later of the close of its banking day or 
the close of Fedwire. If the paying bank fails to settle for or return a 
cash item in accordance with this paragraph (b)(1), it is accountable 
for the amount of the item as of the close of its banking day or the 
close of Fedwire on the day it receives the item, whichever is earlier.
---------------------------------------------------------------------------

    \2\ A paying bank is deemed to receive a cash item on its next 
banking day if it receives the item--
    (1) On a day other than a banking day for it; or
    (2) On a banking day for it, but after a ``cut-off hour'' 
established by it in accordance with state law.
---------------------------------------------------------------------------

    (2) Time of settlement. (i) On the day a paying bank receives a cash 
item from a Reserve Bank, it shall settle for the item so that the 
proceeds of the settlement are available to its Administrative Reserve 
Bank, or return the item, by the latest of--
    (A) The next clock hour that is at least one hour after the paying 
bank receives the item;
    (B) 9:30 a.m. Eastern Time; or
    (C) Such later time as provided in the Reserve Banks' operating 
circulars.
    (ii) If the paying bank fails to settle for or return a cash item in 
accordance with paragraph (b)(2)(i) of this section, it shall be subject 
to any applicable overdraft charges. Settlement under paragraph 
(b)(2)(i) of this section satisfies the settlement requirements of 
paragraph (b)(1) of this section.
    (3) Paying bank closes voluntarily. (i) If a paying bank closes 
voluntarily so that it does not receive a cash item on a day that is a 
banking day for a Reserve Bank, and the Reserve Bank makes the cash item 
available to the paying bank on that day, the paying bank shall either--
    (A) On that day, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or return 
the item, by the latest of the next clock hour that is at least one hour 
after it ordinarily would have received the item, 9:30 a.m. Eastern 
Time, or such later time as provided in the Reserve Banks' operating 
circulars; or
    (B) On the next day that is a banking day for both the paying bank 
and the Reserve Bank, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank by 9:30 a.m. 
Eastern Time on that day or such later time as provided in the Reserve 
Banks' operating circulars and compensate the Reserve Bank for the value 
of the float associated with the item in accordance with procedures 
provided in the Reserve Bank's operating circular.
    (ii) If a paying bank closes voluntarily so that it does not receive 
a cash

[[Page 290]]

item on a day that is a banking day for a Reserve Bank, and the Reserve 
Bank makes the cash item available to the paying bank on that day, the 
paying bank is not considered to have received the item until its next 
banking day, but it shall be subject to any applicable overdraft charges 
if it fails to settle for or return the item in accordance with 
paragraph (b)(3)(i) of this section. The settlement requirements of 
paragraphs (b)(1) and (b)(2) of this section do not apply to a paying 
bank that settles in accordance with paragraph (b)(3)(i) of this 
section.
    (4) Reserve Bank closed. (i) If a paying bank receives a cash item 
from a Reserve Bank on a banking day that is not a banking day for the 
Reserve Bank, the paying bank shall--
    (A) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by the close of Fedwire on 
the Reserve Bank's next banking day, or return the item by midnight of 
the day it receives the item (if the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(4)(i)(A), it 
shall become accountable for the amount of the item as of the close of 
its banking day on the day it receives the item); and
    (B) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by 9:30 a.m. Eastern Time 
on the Reserve Bank's next banking day or such later time as provided in 
the Reserve Bank's operating circular, or return the item by midnight of 
the day it receives the item. If the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(4)(i)(B), it 
shall be subject to any applicable overdraft charges. Settlement under 
this paragraph (b)(4)(i)(B) satisfies the settlement requirements of 
paragraph (b)(4)(i)(A) of this section.
    (ii) The settlement requirements of paragraphs (b)(1) and (b)(2) of 
this section do not apply to a paying bank that settles in accordance 
with paragraph (b)(4)(i) of this section.
    (5) Manner of settlement. Settlement with a Reserve Bank under 
paragraphs (b) (1) through (4) of this section shall be made by debit to 
an account on the Reserve Bank's books, cash, or other form of 
settlement to which the Reserve Bank agrees, except that the Reserve 
Bank may, in its discretion, obtain settlement by charging the paying 
bank's account. A paying bank may not set off against the amount of a 
settlement under this section the amount of a claim with respect to 
another cash item, cash letter, or other claim under Sec. 229.34(c) of 
this chapter (Regulation CC) or other law.
    (6) Notice in lieu of return. If a cash item is unavailable for 
return, the paying bank may send a notice in lieu of return as provided 
in Sec. 229.30(f) of this chapter (Regulation CC).
    (c) Noncash items. A Reserve Bank may require the paying or 
collecting bank to which it has presented or sent a noncash item to pay 
for the item in cash, but the Reserve Bank may permit payment by a debit 
to an account maintained or used by the paying or collecting bank on a 
Reserve Bank's books or by any of the following that is in a form 
acceptable to the collecting Reserve Bank: bank draft, transfer of funds 
or bank credit, or any other form of payment authorized by State law.
    (d) Nonbank payor. A Reserve Bank may require a nonbank payor to 
which it has presented an item to pay for it in cash, but the Reserve 
Bank may permit payment in any of the following that is in a form 
acceptable to the Reserve Bank: cashier's check, certified check, or 
other bank draft or obligation.
    (e) Handling of payment. A Reserve Bank may handle a bank draft or 
other form of payment it receives in payment of a cash item as a cash 
item. A Reserve Bank may handle a bank draft or other form of payment it 
receives in payment of a noncash item as either a cash item or a noncash 
item.
    (f) Liability of Reserve Bank. Except as set forth in 12 CFR 
229.35(b), a Reserve Bank shall not be liable for the failure of a 
collecting bank, paying bank, or nonbank payor to pay for an item, or 
for any loss resulting from the Reserve Bank's acceptance of any form of 
payment other than cash authorized in paragraphs (b), (c), and (d) of 
this section. A Reserve Bank that acts in good faith and exercises 
ordinary care shall not be liable for the nonpayment of, or failure to 
realize upon, a bank draft or other form of payment that it accepts

[[Page 291]]

under paragraphs (b), (c), and (d) of this section.

[45 FR 68634, Oct. 16, 1980, as amended at 49 FR 4200, Feb. 3, 1984; 51 
FR 21745, June 16, 1986; 53 FR 21985, June 13, 1988; 57 FR 46955, Oct. 
14, 1992; Reg. J, 59 FR 22966, May 4, 1994; 62 FR 48172, Sept. 15, 1997]



Sec. 210.10  Time schedule and availability of credits for cash items 
and returned checks.

    (a) Each Reserve Bank shall include in its operating circulars a 
time schedule for each of its offices indicating when the amount of any 
cash item or returned check received by it is counted as reserves for 
purposes of part 204 of this chapter (Regulation D) and becomes 
available for use by the sender or paying or returning bank. The Reserve 
Bank that holds the settlement account shall give either immediate or 
deferred credit to a sender, a paying bank, or a returning bank (other 
than a foreign correspondent) in accordance with the time schedule of 
the receiving Reserve Bank. A Reserve Bank ordinarily gives credit to a 
foreign correspondent only when the Reserve Bank receives payment of the 
item in actually and finally collected funds, but, in its discretion, a 
Reserve Bank may give immediate or deferred credit in accordance with 
its time schedule.
    (b) Notwithstanding its time schedule, a Reserve Bank may refuse at 
any time to permit the use of credit given by it for any cash item or 
returned check, and may defer availability after credit is received by 
the Reserve Bank for a period of time that is reasonable under the 
circumstances.

[62 FR 48173, Sept. 15, 1997]



Sec. 210.11  Availability of proceeds of noncash items; time schedule.

    (a) Availability of credit. A Reserve Bank shall give credit to the 
sender for the proceeds of a noncash item when it receives payment in 
actually and finally collected funds (or advice from another Reserve 
Bank of such payment to it). The amount of the item is counted as 
reserve for purposes of part 204 of this chapter (Regulation D) and 
becomes available for use by the sender when the Reserve Bank receives 
the payment or advice, except as provided in paragraph (b) of this 
section.
    (b) Time schedule. A Reserve Bank may give credit for the proceeds 
of a noncash item subject to payment in actually and finally collected 
funds in accordance with a time schedule included in its operating 
circulars. The time schedule shall indicate when the proceeds of the 
noncash item will be counted as reserve for purposes of part 204 of this 
chapter (Regulation D) and become available for use by the sender. A 
Reserve Bank may, however, refuse at any time to permit the use of 
credit given by it for a noncash item for which the Reserve Bank has not 
yet received payment in actually and finally collected funds.
    (c) Handling of payment. If a Reserve Bank receives, in payment for 
a noncash item, a bank draft or other form of payment that it elects to 
handle as a noncash item, the Reserve Bank shall neither count the 
proceeds as reserve for purposes of part 204 of this chapter (Regulation 
D) nor make the proceeds available for use until it receives payment in 
actually and finally collected funds.

[45 FR 68634, Oct. 16, 1980, as amended at 62 FR 48173, Sept. 15, 1997]



Sec. 210.12  Return of cash items and handling of returned checks.

    (a) Return of items--(1) Return of cash items handled by Reserve 
Banks. A paying bank that receives a cash item from a Reserve Bank, 
other than for immediate payment over the counter, and that settles for 
the item as provided in Sec. 210.9(b) of this subpart, may, before it 
has finally paid the item, return the item to any Reserve Bank (unless 
its Administrative Reserve Bank directs it to return the item to a 
specific Reserve Bank) in accordance with subpart C of part 229 of this 
chapter (Regulation CC), the Uniform Commercial Code, and the Reserve 
Banks' operating circulars. A paying bank that receives a cash item from 
a Reserve Bank also may return the item prior to settlement, in 
accordance with Sec. 210.9(b) of this subpart and the Reserve Banks' 
operating circulars. The rules or practices of a clearinghouse through 
which the item was presented, or a special collection agreement under 
which the item was presented, may not extend

[[Page 292]]

these return times, but may provide for a shorter return time.
    (2) Return of checks not handled by Reserve Banks. A paying bank 
that receives a check as defined in Sec. 229.2(k) of this chapter 
(Regulation CC), other than from a Reserve Bank, and that determines not 
to pay the check, may send the returned check to any Reserve Bank 
(unless its Administrative Reserve Bank directs it to send the returned 
check to a specific Reserve Bank) in accordance with subpart C of part 
229 of this chapter (Regulation CC), the Uniform Commercial Code, and 
the Reserve Banks' operating circulars. A returning bank may send a 
returned check to any Reserve Bank (unless its Administrative Reserve 
Bank directs it to send the returned check to a specific Reserve Bank) 
in accordance with subpart C of part 229 of this chapter (Regulation 
CC), the Uniform Commercial Code, and the Reserve Banks' operating 
circulars.
    (b) Handling of returned checks. (1) The following parties, in the 
following order, are deemed to have handled a returned check sent to a 
Reserve Bank under paragraph (a) of this section--
    (i) The paying or returning bank;
    (ii) The paying bank's or returning bank's Administrative Reserve 
Bank;
    (iii) The Reserve Bank that receives the returned check from the 
paying or returning bank (if different from the paying bank's or 
returning bank's Administrative Reserve Bank); and
    (iv) Another Reserve Bank, if any, that receives the returned check 
from a Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of this 
section is not a person that handles a returned check and is not a 
returning bank with respect to a returned check.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code.
    (c) Paying bank's and returning bank's agreement. The warranties, 
authorizations, and agreements made pursuant to this paragraph may not 
be disclaimed and are made whether or not the returned check bears an 
indorsement of the paying bank or returning bank. By sending a returned 
check to a Reserve Bank, the paying bank or returning bank does all of 
the following.
    (1) Authorization to handled returned check. The paying bank or 
returning bank authorizes the paying bank's or returning bank's 
administrative Reserve Bank, and any other Reserve Bank or returning 
bank to which the returned check is sent, to handle the returned check 
(and authorizes any Reserve Bank that handles settlement for the 
returned check to make accounting entries) subject to this subpart and 
to the Reserve Banks' operating circulars.
    (2) Warranties for all returned checks. The paying bank or returning 
bank warrants to each Reserve Bank handling a returned check that the 
returned check bears all indorsements applied by parties that previously 
handled the returned check, in paper or electronic form, for forward 
collection or return.
    (3) Warranties for all returned checks that are electronic items. A 
paying bank or returning bank that sends a returned check that is an 
electronic item makes the returning bank warranties set forth in and 
subject to the terms of Sec. 229.34 of this chapter for the electronic 
item as if it were a check subject to that section.
    (4) Warranties for returned checks that are electronic items that 
are not representations of substitute checks. If the returned check is 
an electronic item that is not a representation of a substitute check, 
the paying bank or returning bank warrants to each Reserve Bank handling 
the returned check that--
    (i) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms to the technical standards for an electronic item set forth in 
an operating circular; and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic

[[Page 293]]

representation of the original item such that the person will be asked 
to make payment based on an item it already has paid.
    (5) Paying bank or returning bank's liability to Reserve Bank. (i) 
Except as provided in paragraph (c)(5)(ii) of this section, a paying 
bank or returning bank agrees to indemnify each Reserve Bank for any 
loss or expense (including attorneys' fees and expenses of litigation) 
resulting from--
    (A) The paying or returning bank's lack of authority to give the 
authorization in paragraph (c)(1) of this section;
    (B) Any action taken by a Reserve Bank within the scope of its 
authority in handling the returned check; or
    (C) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter.
    (ii) A paying bank's or returning bank's liability for warranties 
and indemnities that a Reserve Bank makes for a returned check that is a 
substitute check, a paper or electronic representation thereof, or any 
other electronic item is subject to the following conditions and 
limitations--
    (A) A paying bank or returning bank that sent an original check 
shall not be liable for any amount that a Reserve Bank pays under 
subpart D of part 229 of this chapter or under Sec. 210.12(e)(1)(iii) 
of this subpart, absent the paying bank's or returning bank's agreement 
to the contrary;
    (B) Nothing in this subpart alters the liability under subpart D of 
part 229 of this chapter of a paying bank or returning bank that sent a 
substitute check or a paper or electronic representation of a substitute 
check; and
    (C) A paying bank or returning bank that sent an electronic item 
that is not a representation of a substitute check shall not be liable 
under paragraph (c)(5)(i) of this section for any amount that the 
Reserve Bank pays under subpart D of part 229 of this chapter or 
paragraph (e)(1)(iii) of this section that is attributable to the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care.
    (d) Preservation of other warranties and indemnities. Nothing in 
paragraph (c) of this section limits any warranty or indemnity by a 
returning bank or paying bank (or a person that handled an item prior to 
that bank) arising under state law or regulation (such as the U.C.C.), 
other federal law or regulation (such as part 229 of this chapter), or 
an agreement with a Reserve Bank.
    (e) Warranties by and liability of Reserve Bank. (1) The following 
provisions apply when a Reserve Bank handles a returned check under this 
subpart.
    (i) Warranties for all items. The Reserve Bank warrants to the bank 
to which it sends the returned check that the returned check bears all 
indorsements applied by parties that previously handled the returned 
check, in paper or electronic form, for forward collection or return.
    (ii) Warranties for all returned checks that are electronic items. A 
Reserve Bank that sends a returned check that is an electronic item 
makes the returning bank warranties set forth in and subject to the 
terms of Sec. 229.34 of this chapter as if the electronic item were a 
check subject to that section.
    (iii) Warranties and indemnity for returned checks that are 
electronic items that are not representations of substitute checks.
    (A) If the returned check is an electronic item that is not a 
representation of a substitute check, the Reserve Bank warrants to the 
bank to which it sends the returned check that--
    (1) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms with the technical standards for an electronic item set forth 
in an operating circular; and
    (2) No person will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (B) If the returned check is an electronic item that is not a 
representation of a substitute check--

[[Page 294]]

    (1) Except as provided in paragraph (e)(1)(iii)(B)(2) of this 
section, the Reserve Bank agrees to indemnify the bank to which it sends 
the returned check (the recipient bank) for the amount of any losses 
that the bank incurs under subpart D of part 229 of this chapter for an 
indemnity that the bank was required to make under subpart D of part 229 
of this chapter in connection with a substitute check later created from 
the returned check.
    (2) A Reserve Bank shall not be liable under paragraph 
(e)(1)(iii)(B)(1) of this section for any amount that the recipient bank 
pays under subpart D of part 229 of this chapter that is attributable to 
the lack of good faith or failure to exercise ordinary care of the 
recipient bank or a person that handled the item, in any form, after the 
recipient bank.
    (2) A Reserve Bank shall not have or assume any other liability to 
any person except--
    (i) As provided in paragraph (e)(1) of this section;
    (ii) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care as provided in subpart C of part 229 of this 
chapter; or
    (iii) As provided in subpart D of part 229 of this chapter.
    (f) Recovery by Reserve Bank. If an action or proceeding is brought 
against (or if defense is tendered to) a Reserve Bank that has handled a 
returned Check based on--
    (1) The alleged failure of the paying or returning bank to have the 
authority to give the authorization in paragraph (c)(1) of this section;
    (2) Any action by the Reserve Bank within the scope of its authority 
in handling the returned check; or
    (3) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter,
    (g) Methods of recovery. (1) The Reserve Bank may recover the amount 
stated in paragraph (d) of this section by charging any account on its 
books that is maintained or used by the paying or returning bank (or by 
charging another returning Reserve Bank), if--
    (i) The Reserve Bank made seasonable written demand on the paying or 
returning bank to assume defense of the action or proceeding; and
    (ii) The paying or returning bank has not made any other arrangement 
for payment that is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that has 
been charged under this paragraph (f) may recover from the paying or 
returning bank in the manner and under the circumstances set forth in 
this paragraph (f). A Reserve Bank's failure to avail itself of the 
remedy provided in this paragraph (f) does not prejudice its enforcement 
in any other manner of the indemnity agreement referred to in paragraph 
(c)(3) of this section.
    (h) Reserve Bank's responsibility. A Reserve Bank shall handle a 
returned check, or a notice of nonpayment, in accordance with subpart C 
of part 229 and its operating circular.
    (i) Settlement. A subsequent returning bank or depositary bank shall 
settle with its Administrative Reserve Bank for returned checks in the 
same manner and by the same time as for cash items presented for payment 
under this subpart. Settlement with its Administrative Reserve Bank is 
deemed to be settlement with the Reserve Bank from which the returning 
bank or depositary bank received the item.
    (j) Security interest. When a paying or returning bank sends a 
returned check to a Reserve Bank, the paying bank, returning bank, and 
any prior returning bank grant to the paying bank's or returning bank's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank, to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). The security interest 
attaches when a warranty is breached or any other obligation to the 
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the paying bank, 
returning bank, or prior returning bank, or if the paying bank, 
returning bank,

[[Page 295]]

or prior returning bank suspends payments or is closed, the Reserve Bank 
may take any action authorized by law to recover the amount of an 
obligation, including, but not limited to, the exercise of rights of set 
off, the realization on any available collateral, and any other rights 
it may have as a creditor under applicable law.

[53 FR 21985, June 13, 1988, as amended at Reg. J, 59 FR 22966, May 4, 
1994; 62 FR 48173, Sept. 15, 1997; Reg, J, 69 62560, Oct. 27, 2004]



Sec. 210.13  Unpaid items.

    (a) Right of recovery. If a Reserve Bank does not receive payment in 
actually and finally collected funds for an item, the Reserve Bank shall 
recover by charge-back or otherwise the amount of the item from the 
sender, prior collecting bank, paying bank, or returning bank from or 
through which it was received, whether or not the item itself can be 
sent back. In the event of recovery from such a person, no person, 
including the owner or holder of the item, shall, for the purpose of 
obtaining payment of the amount of the item, have any interest in any 
reserve balance or other funds or property in the Reserve Bank's 
possession of the bank that failed to make payment in actually and 
finally collected funds.
    (b) Suspension or closing of bank. A Reserve Bank shall not pay or 
act on a draft, authorization to charge (including a charge authorized 
by Sec. 210.9(b)(5)), or other order on a reserve balance or other 
funds in its possession for the purpose of settling for items under 
Sec. 210.9 or Sec. 210.12 after it receives notice of suspension or 
closing of the bank making the settlement for that bank's own or 
another's account.

[Reg. J, 59 FR 22966, May 4, 1994, as amended at Reg. J, 69 FR 62561, 
Oct. 27, 2004]



Sec. 210.14  Extension of time limits.

    If a bank (including a Reserve Bank) or nonbank payor is delayed in 
acting on an item beyond applicable time limits because of interruption 
of communication or computer facilities, suspension of payments by a 
bank or nonbank payor, war, emergency conditions, failure of equipment, 
or other circumstances beyond its control, its time for acting is 
extended for the time necessary to complete the action, if it exercises 
such diligence as the circumstances require.

[Reg. J, 59 FR 22967, May 4, 1994]



Sec. 210.15  Direct presentment of certain warrants.

    If a Reserve Bank elects to present direct to the payor a bill, 
note, or warrant that is issued and payable by a State or a political 
subdivision and that is a cash item not payable or collectible through a 
bank: (a) Sections 210.9, 210.12, and 210.13 and the operating circulars 
of the Reserve Banks apply to the payor as if it were a paying bank; (b) 
Sec. 210.14 applies to the payor as if it were a bank; and (c) under 
Sec. 210.9 each day on which the payor is open for the regular conduct 
of its affairs or the accommodation of the public is considered a 
banking day.



                Subpart B_Funds Transfers Through Fedwire

    Source: 55 FR 40801, Oct. 5, 1990, unless otherwise noted.



Sec. 210.25  Authority, purpose, and scope.

    (a) Authority and purpose. This subpart provides rules to govern 
funds transfers through Fedwire, and has been issued pursuant to the 
Federal Reserve Act--section 13 (12 U.S.C. 342), paragraph (f) of 
section 19 (12 U.S.C. 464), paragraph 14 of section 16 (12 U.S.C. 
248(o)), and paragraphs (i) and (j) of section 11 (12 U.S.C. 248(i) and 
(j))--and other laws and has the force and effect of federal law. This 
subpart is not a funds-transfer system rule as defined in Section 4A-
501(b) of Article 4A.
    (b) Scope. (1) This subpart incorporates the provisions of Article 
4A set forth in appendix B to this subpart. In the event of an 
inconsistency between the provisions of the sections of this subpart and 
appendix B, to this subpart, the provisions of the sections of this 
subpart shall prevail.
    (2) Except as otherwise provided in paragraphs (b)(3) and (b)(4) of 
this section, this Subpart governs the rights and obligations of:
    (i) Federal Reserve Banks sending or receiving payment orders;

[[Page 296]]

    (ii) Senders that send payment orders directly to a Federal Reserve 
Bank;
    (iii) Receiving banks that receive payment orders directly from a 
Federal Reserve Bank;
    (iv) Beneficiaries that receive payment for payment orders sent to a 
Federal Reserve Bank by means of credit to an account maintained or used 
at a Federal Reserve Bank; and
    (v) Other parties to a funds transfer any part of which is carried 
out through Fedwire to the same extent as if this subpart were 
considered a funds-transfer system rule under Article 4A.
    (3) This subpart governs a funds transfer that is sent through 
Fedwire, as provided in paragraph (b)(2) of this section, even though a 
portion of the funds transfer is governed by the Electronic Fund 
Transfer Act, but the portion of such funds transfer that is governed by 
the Electronic Fund Transfer Act is not governed by this subpart.
    (4) In the event that any portion of this Subpart establishes rights 
or obligations with respect to the availability of funds that are also 
governed by the Expedited Funds Availability Act or the Board's 
Regulation CC, Availability of Funds and Collection of Checks, those 
provisions of the Expedited Funds Availability Act or Regulation CC 
shall apply and the portion of this Subpart, including Article 4A as 
incorporated herein, shall not apply.
    (c) Operating Circulars. Each Federal Reserve Bank shall issue an 
Operating Circular consistent with this Subpart that governs the details 
of its funds-transfer operations and other matters it deems appropriate. 
Among other things, the Operating Circular may: set cut-off hours and 
funds-transfer business days; address available security procedures; 
specify format and media requirements for payment orders; identify 
messages that are not payment orders; and impose charges for funds-
transfer services.
    (d) Govenment senders, receiving banks, and beneficiaries. Except as 
otherwise expressly provided by the statutes of the United States, the 
parties specified in paragraphs (b)(2)(ii) through (v) of this section 
include:
    (1) A department, agency, instrumentality, independent 
establishment, or office of the United States, or a wholly-owned or 
controlled Government corporation;
    (2) An international organization;
    (3) A foreign central bank; and
    (4) A department, agency, instrumentality, independent 
establishment, or office of a foreign government, or a wholly-owned or 
controlled corporation of a foreign government.

[55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990]



Sec. 210.26  Definitions.

    As used in this subpart, the following definitions apply:
    (a) Article 4A means article 4A of the Uniform Commercial Code as 
set forth in appendix B of this subpart.
    (b) As of adjustment means a debit or credit, for reserve or 
clearing balance maintenance purposes only, applied to the reserve or 
clearing balance of a bank that either sends a payment order to a 
Federal Reserve Bank, or that receives a payment order from a Federal 
Reserve Bank, in lieu of an interest charge or payment.
    (c) Automated clearing house transfer means any transfer designated 
as an automated clearing house transfer in a Federal Reserve Bank 
Operating Circular.
    (d) Beneficiary's bank has the same meaning as in Article 4A, except 
that:
    (1) A Federal Reserve Bank need not be identified in the payment 
order in order to be the beneficiary's bank; and
    (2) The term includes a Federal Reserve Bank when that Federal 
Reserve Bank is the beneficiary of a payment order.
    (e) Fedwire is the funds-transfer system owned and operated by the 
Federal Reserve Banks that is used primarily for the transmission and 
settlement of payment orders governed by this subpart. Fedwire does not 
include the system for making automated clearing house transfers.
    (f) Interdistrict transfer means a funds transfer involving entries 
to accounts maintained at two Federal Reserve Banks.
    (g) Intradistrict transfer means a funds transfer involving entries 
to accounts maintained at one Federal Reserve Bank.

[[Page 297]]

    (h) Off-line bank means a bank that transmits payment orders to and 
receives payment orders from a Federal Reserve Bank by telephone orally 
or by other means other than electronic data transmission.
    (i) Payment order has the same meaning as in Article 4A, except that 
the term does not include automated clearing house transfers or any 
communication designated in a Federal Reserve Bank Operating Circular 
issued under this Subpart as not being a payment order.
    (j) Sender's account, receiving bank's account, and beneficiary's 
account mean the reserve, clearing, or other funds deposit account at a 
Federal Reserve Bank maintained or used by the sender, receiving bank, 
or beneficiary, respectively.
    (k) Sender's Federal Reserve Bank and receiving bank's Federal 
Reserve Bank mean the Federal Reserve Bank at which the sender or 
receiving bank, respectively, maintains or uses an account.

[55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990]



Sec. 210.27  Reliance on identifying number.

    (a) Reliance by a Federal Reserve Bank on number to identify an 
intermediary bank or beneficiary's bank. A Federal Reserve Bank may rely 
on the number in a payment order that identifies the intermediary bank 
or beneficiary's bank, even if it identifies a bank different from the 
bank identified by name in the payment order, if the Federal Reserve 
Bank does not know of such an inconsistency in identification. A Federal 
Reserve Bank has no duty to detect any such inconsistency in 
identification.
    (b) Reliance by a Federal Reserve Bank on number to identify 
beneficiary. A Federal Reserve Bank, acting as a beneficiary's bank, may 
rely on the number in a payment order that identifies the beneficiary, 
even if it identifies a person different from the person identified by 
name in the payment order, if the Federal Reserve Bank does not know of 
such an inconsistency in identification. A Federal Reserve Bank has no 
duty to detect any such inconsistency in identification.



Sec. 210.28  Agreement of sender.

    (a) Payment of sender's obligation to a Federal Reserve Bank. A 
sender (other than a Federal Reserve Bank), by maintaining or using an 
account with a Federal Reserve Bank, authorizes the sender's Federal 
Reserve Bank to obtain payment for the sender's payment orders by 
debiting the amount of the payment order from the sender's account.
    (b) Overdrafts. (1) A sender does not have the right to an overdraft 
in the sender's account. In the event an overdraft is created, the 
overdraft shall be due and payable immediately without the need for a 
demand by the Federal Reserve Bank, at the earliest of the following 
times:
    (i) At the end of the funds-transfer business day;
    (ii) At the time the Federal Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the sender; or
    (iii) At the time the sender suspends payments or is closed.
    (2) The sender shall have in its account, at the time the overdraft 
is due and payable, a balance of actually and finally collected funds 
sufficient to cover the aggregate amount of all its obligations to the 
Federal Reserve Bank, whether the obligations result from the execution 
of a payment order or otherwise.
    (3) To secure any overdraft, as well as any other obligation due or 
to become due to its Federal Reserve Bank, each sender, by sending a 
payment order to a Federal Reserve Bank that is accepted by the Federal 
Reserve Bank, grants to the Federal Reserve Bank a security interest in 
all of the sender's assets in the possession of, or held for the account 
of, the Federal Reserve Bank. The security interest attaches when an 
overdraft, or any other obligation to the Federal Reserve Bank, becomes 
due and payable.
    (4) A Federal Reserve Bank may take any action authorized by law to 
recover the amount of an overdraft that is due and payable, including, 
but not limited to, the exercise of rights of set off, the realization 
on any available collateral, and any other rights it may have as a 
creditor under applicable law.

[[Page 298]]

    (5) If a sender, other than a government sender described in Sec. 
210.25(d), incurs an overdraft in its account as a result of a debit to 
the account by a Federal Reserve Bank under paragraph (a) of this 
section, the account will be subject to any applicable overdraft 
charges, regardless of whether the overdraft has become due and payable. 
A Federal Reserve Bank may debit a sender's account under paragraph (a) 
of this section immediately on acceptance of the payment order.
    (c) Review of payment orders. A sender, by sending a payment order 
to a Federal Reserve Bank, agrees that for the purposes of sections 4A-
204(a) and 4A-304 of Article 4A, a reasonable time to notify a Federal 
Reserve Bank of the relevant facts concerning an unauthorized or 
erroneously executed payment order is within 30 calendar days after the 
sender receives notice that the payment order was accepted or executed, 
or that the sender's account was debited with respect to the payment 
order.

[55 FR 40801, Oct. 5, 1990, as amended at 57 FR 46956, Oct. 14, 1992]



Sec. 210.29  Agreement of receiving bank.

    (a) Payment. A receiving bank (other than a Federal Reserve Bank) 
that receives a payment order from its Federal Reserve Bank authorizes 
that Federal Reserve Bank to pay for the payment order by crediting the 
amount of the payment order to the receiving bank's account.
    (b) Off-line banks. An off-line bank that does not expressly notify 
its Federal Reserve Bank in writing that it maintains an account for 
another bank warrants to that Federal Reserve Bank that the off-line 
bank does not act as an intermediary bank or a beneficiary's bank with 
respect to payment orders received through Fedwire for a beneficiary 
that is a bank.

[55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990]



Sec. 210.30  Payment orders.

    (a) Rejection. A sender shall not send a payment order to a Federal 
Reserve Bank unless authorized to do so by the Federal Reserve Bank. A 
Federal Reserve Bank may reject, or impose conditions that must be 
satisfied before it will accept, a payment order for any reason.
    (b) Selection of an intermediary bank. For an interdistrict 
transfer, a Federal Reserve Bank is authorized and directed to execute a 
payment order through another Federal Reserve Bank. A sender shall not 
send a payment order to a Federal Reserve Bank that requires the Federal 
Reserve Bank to issue a payment order to an intermediary bank (other 
than a Federal Reserve Bank) unless that intermediary bank is designated 
in the sender's payment order. A sender shall not send to a Federal 
Reserve Bank a payment order instructing use by a Federal Reserve Bank 
of a funds-transfer system or means of transmission other than Fedwire, 
unless the Federal Reserve Bank agrees with the sender in writing to 
follow such instructions.
    (c) Same-day execution. A sender shall not issue a payment order 
that instructs a Federal Reserve Bank to execute the payment order on a 
funds-transfer business day that is later than the funds-transfer 
business day on which the order is received by the Federal Reserve Bank, 
unless the Federal Reserve Bank agrees with the sender in writing to 
follow such instructions.



Sec. 210.31  Payment by a Federal Reserve Bank to a receiving bank or 
beneficiary.

    (a) Payment to a receiving bank. Payment of a Federal Reserve Bank's 
obligation to pay a receiving bank (other than a Federal Reserve Bank) 
occurs at the earlier of the time when the amount of the payment order 
is credited to the receiving bank's account or when the payment order is 
sent to the receiving bank.
    (b) Payment to a beneficiary. Payment by a Federal Reserve Bank to a 
beneficiary of a payment order, where the Federal Reserve Bank is the 
beneficiary's bank, occurs at the earlier of the time when the amount of 
the payment order is credited to the beneficiary's account or when 
notice of the credit is sent to the beneficiary.



Sec. 210.32  Federal Reserve Bank liability; payment of interest.

    (a) Damages. In connection with its handling of a payment order 
under this

[[Page 299]]

subpart, a Federal Reserve Bank shall not be liable to a sender, 
receiving bank, beneficiary, or other Federal Reserve Bank, governed by 
this subpart, for any damages other than those payable under Article 4A. 
A Federal Reserve Bank shall not agree to be liable to a sender, 
receiving bank, beneficiary, or other Federal Reserve Bank for 
consequential damages under section 4A-305(d) of Article 4A.
    (b) Payment of interest. (1) A Federal Reserve Bank, in its 
discretion, may satisfy its obligation, or that of another Federal 
Reserve Bank, to pay compensation in the form of interest under Article 
4A by--
    (i) Providing an as of adjustment to its sender, its receiving bank, 
or its beneficiary, as provided in the Federal Reserve Bank's Operating 
Circular, in an amount equal to the amount on which interest is to be 
calcuated multiplied by the number of days for which interest is to be 
calculated; or
    (ii) Paying compensation in the form of interest to its sender, its 
receiving bank, its beneficiary, or another party to the funds transfer 
that is entitled to such payment, in an amount that is calculated in 
accordance with section 4A-506 of Article 4A.
    (2) If the sender or receiving bank that is the recipient of an as 
of adjustment or an interest payment is not the party entitled to 
compensation under Article 4A, the sender or receiving bank shall pass 
through the benefit of the as of adjustment or interest payment by 
making an interest payment, as of the day the as of adjustment or 
interest payment is effected, to the party entitled to compensation. The 
interest payment that is made to the party entitled to compensation 
shall not be less than the value of the as of adjustment or interest 
payment that was provided by the Federal Reserve Bank to the sender or 
receiving bank. The party entitled to compensation may agree to accept 
compensation in a form other than a direct interest payment, provided 
that such an alternative form of compensation is not less than the value 
of the interest payment that otherwise would be made.
    (c) Nonwaiver of right of recovery. Nothing in this subpart or any 
Operating Circular issued hereunder shall constitute, or be construed as 
constituting, a waiver by a Federal Reserve Bank of a cause of action 
for recovery under any applicable law of mistake and restitution.

             Appendix A to Subpart B of Part 210--Commentary

    The Commentary provides background material to explain the intent of 
the Board of Governors of the Federal Reserve System (Board) in adopting 
a particular provision in the subpart and to help readers interpret that 
provision. In some comments, examples are offered. The Commentary 
constitutes an official Board interpretation of subpart B of this part. 
Commentary is not provided for every provision of subpart B of this 
part, as some provisions are self-explanatory.

              Section 210.25--Authority, Purpose, and Scope

    (a) Authority and purpose. Section 210.25(a) states that the purpose 
of subpart B of this part is to provide rules to govern funds transfers 
through Fedwire and recites the Board's rulemaking authority for this 
subpart. Subpart B of this part is federal law and is not a ``funds-
transfer system rule,'' as defined in section 4A-501(b) of Article 4A, 
Funds Transfers, of the Uniform Commercial Code (UCC), as set forth in 
appendix B of this subpart. Certain provisions of Article 4A may not be 
varied by a funds-transfer system rule, but under section 4A-107, 
regulations of the Board and Operating Circulars of the Federal Reserve 
Banks supersede inconsistent provisions of Article 4A to the extent of 
the inconsistency. In addition, regulations of the Board may preempt 
inconsistent provisions of state law. Accordingly, subpart B of this 
part supersedes or preempts inconsistent provisions of state law. It 
does not affect state law governing funds transfers that does not 
conflict with the provisions of subpart B of this part, such as Article 
4A, as enacted in any state, as it applies to parties to funds transfers 
through Fedwire whose rights are not governed by subpart B of this part.
    (b) Scope. (1) Subpart B of this part incorporates the provisions of 
Article 4A set forth in appendix B of this subpart. The provisions set 
forth expressly in the sections of subpart B of this part supersede or 
preempt any inconsistent provisions of Article 4A as set forth in 
appendix B of this subpart or as enacted in any state. The official 
comments to Article 4A are not incorporated in subpart B of this part or 
this Commentary to subpart B of this part, but the official comments may 
be useful in interpreting Article 4A. Because section 4A-105 refers to 
other provisions of the Uniform Commercial Code, e.g., definitions in 
Article 1 of the UCC, these other provisions of the UCC, as approved by 
the

[[Page 300]]

National Conference of Commissioners on Uniform State Laws and the 
American Law Institute, from time to time, are also incorporated in 
subpart B of this part. Subpart B of this part applies to any party to a 
Fedwire funds transfer that is in privity with a Federal Reserve Bank. 
These parties include a sender (bank or nonbank) that sends a payment 
order directly to a Federal Reserve Bank, a receiving bank that receives 
a payment order directly from a Federal Reserve Bank, and a beneficiary 
that receives credit to an account that it uses or maintains at a 
Federal Reserve Bank for a payment order sent to a Federal Reserve Bank. 
Other parties to a funds transfer are covered by this subpart to the 
same extent that this subpart would apply to them if this subpart were a 
``funds-transfer system rule'' under Article 4A that selected subpart B 
of this part as the governing law.
    (2) The scope of the applicability of a funds-transfer system rule 
under Article 4A is specified in section 4A-501(b), and the scope of the 
choice of law provision is specified in section 4A-507(c). Under section 
4A-507(c), a choice of law provision is binding on the participants in a 
funds-transfer system and certain other parties having notice that the 
funds-transfer system might be used for the funds transfer and of the 
choice of law provision. The Uniform Commercial Code provides that a 
person has notice when the person has actual knowledge, receives 
notification or has reason to know from all the facts and circumstances 
known to the person at the time in question. (See UCC section 1-
201(25).) However, under sections 4A-507(b) and 4A-507(d), a choice of 
law by agreement of the parties takes precedence over a choice of law 
made by funds-transfer system rule.
    (3) If originators, receiving banks, and beneficiaries that are not 
in privity with a Federal Reserve Bank have the notice contemplated by 
section 4A-507(c) or if those parties agree to be bound by subpart B of 
this part, subpart B of this part generally would apply to payment 
orders between those remote parties, including participants in other 
funds-transfer systems. For example, a funds transfer may be sent from 
an originator's bank through a funds-transfer system other than Fedwire 
to a receiving bank which, in turn, sends a payment order through 
Fedwire to execute the funds transfer. Similarly, a Federal Reserve Bank 
may execute a payment order through Fedwire to a receiving bank that 
sends it through a funds-transfer system other than Fedwire to a 
beneficiary's bank. In the first example, if the originator's bank has 
notice that Fedwire may be used to effect part of the funds transfer, 
the sending of the payment order through the other funds-transfer system 
to the receiving bank will be governed by subpart B of this part unless 
the parties to the payment order have agreed otherwise. In the second 
example, if the beneficiary's bank has notice that Fedwire may be used 
to effect part of the funds transfer, the sending of the payment order 
to the beneficiary's bank through the other funds-transfer system will 
be governed by subpart B of this part unless the parties have agreed 
otherwise. In both cases, the other funds-transfer system's rules would 
also apply to, at a minimum, the portion of these funds transfers going 
through that funds-transfer system. Because subpart B of this part is 
federal law, to the extent of any inconsistency, subpart B of this part 
will take precedence over any funds-transfer system rule applicable to 
the remote sender or receiving bank or to a Federal Reserve Bank. If 
remote parties to a funds transfer, a portion of which is sent through 
Fedwire, have expressly selected by agreement a law other than subpart B 
of this part under section 4A-507(b), subpart B of this part would not 
take precedence over the choice of law made by the agreement even though 
the remote parties had notice that Fedwire may be used and of the 
governing law. (See 4A-507(d)). In addition, subpart B of this part 
would not apply to a funds transfer sent through another funds-transfer 
system where no Federal Reserve Bank handles the funds transfer, even 
though settlement for the funds transfer is made by means of a separate 
net settlement or funds transfer through Fedwire.
    (4) Under section 4A-108, Article 4A does not apply to a funds 
transfer, any part of which is governed by the Electronic Fund Transfer 
Act (15 U.S.C. 1693 et seq.). Fedwire funds transfers to or from 
consumer accounts are exempt from the Electronic Fund Transfer Act and 
Regulation E (12 CFR part 205). A funds transfer from a consumer 
originator or a funds transfer to a consumer beneficiary could be 
carried out in part through Fedwire and in part through an automated 
clearing house or other means that is subject to the Electronic Fund 
Transfer Act or Regulation E. In these cases, subpart B of this part 
would not govern the portion of the funds transfer that is governed by 
the Electronic Fund Transfer Act or Regulation E. (See Commentary to 
Sec. 210.26(i) ``payment order''.)
    (5) Finally, section 4A-404(a) provides that a beneficiary's bank is 
obliged to pay the amount of a payment order to the beneficiary on the 
payment date unless acceptance of the payment order occurs on the 
payment date after the close of the funds-transfer business day of the 
bank. The Expedited Funds Availability Act provides that funds received 
by a bank by wire transfer shall be available for withdrawal not later 
than than the banking day after the business day on which such funds are 
received (12 U.S.C. 4002(a)). That Act also preempts any provision of 
state law that was not effective on September 1, 1989 that is 
inconsistent with

[[Page 301]]

that Act or its implementing Regulation CC (12 CFR part 229). 
Accordingly, the Expedited Funds Availability Act and Regulation CC may 
preempt section 4A-404(a) as enacted in any state. In order to ensure 
that section 4A-404(a), or other provisions of Article 4A, as 
incorporated in subpart B of this part, do not take precedence over 
provisions of the Expedited Funds Availability Act, this section 
provides that where subpart B of this part establishes rights or 
obligations that are also governed by the Expedited Funds Availability 
Act or Regulation CC, the Expedited Funds Availability Act or Regulation 
CC provision shall apply and subpart B of this part shall not apply.
    (c) Operating Circulars. The Federal Reserve Banks issue Operating 
Circulars consistent with this Subpart that contain additional 
provisions applicable to payment orders sent through Fedwire. Under 
section 4A-107, these Operating Circulars supersede inconsistent 
provisions of Article 4A, as set forth in appendix B and as enacted in 
any state. These Operating Circulars are not funds-transfer system 
rules, but, by their terms, they are binding on all parties covered by 
this Subpart.
    (d) Government senders, receiving banks, and beneficiaries. This 
section clarifies that unless a statute of the United States provides 
otherwise, subpart B of this part applies to governmental entities, 
domestic or foreign, including foreign central banks as specified in 
paragraph (b)(1) of this section.

                       Section 210.26--Definitions

    Article 4A defines many terms (e.g., beneficiary, intermediary bank, 
receiving bank, security procedure) used in this subpart. These terms 
are defined or listed in sections 4A-103 through 4A-105. These terms, 
such as the term bank (defined in section 4A-105(d)(2)), may differ from 
comparable terms in subpart A of this part. As subpart B of this part 
incorporates consistent provisions of Article 4A, it incorporates these 
definitions unless these terms are expressly defined otherwise in 
subpart B of this part. This subpart modifies the definitions of two 
Article 4A terms, beneficiary's bank and payment order. This subpart 
also defines terms not defined in Article 4A.
    (a) Article 4A. Article 4A means the version of that article of the 
Uniform Commercial Code set forth in appendix B of this subpart. It does 
not refer to the law of any particular state unless the context 
indicates otherwise. Subject to the express provisions of this Subpart, 
this version of Article 4A is incorporated into this Subpart and made 
federal law for transactions covered by this subpart.
    (b) As of adjustments. As of adjustments are memorandum items that 
affect a bank's reserve or clearing balance for the purpose of meeting 
the required balance, but do not represent funds that can be used for 
other purposes. As discussed in the Commentary to Sec. 210.32(b), the 
Federal Reserve Banks generally provide as of adjustments as a means of 
effecting interest payments or charges.
    (d) Beneficiary's bank. The definition of beneficiary's bank in 
subpart B of this part differs from the section 4A-103(a)(3) definition. 
The subpart B definition clarifies that where a Federal Reserve Bank 
functions as the beneficiary's bank, it need not be identified in the 
payment order as the beneficiary's bank and that a Federal Reserve Bank 
that receives a payment order as beneficiary is also the beneficiary's 
bank with respect to that payment order.
    (e) Fedwire. Fedwire refers to the funds-transfer system owned and 
operated by the Federal Reserve Banks that is governed by this Subpart. 
The term does not refer to any particular computer, telecommunications 
facility, or funds transfer, but to the system as a whole, which may 
include transfers by telephone or by written instrument in particular 
circumstances. Fedwire does not include the system used for automated 
clearing house transfers.
    (h) Off-line bank. Most Fedwire payment orders are transmitted 
electronically from a sender to a Federal Reserve Bank or from a Federal 
Reserve Bank to a receiving bank. Banks transmitting payment orders to 
Federal Reserve Banks electronically are often referred to as on-line 
banks. Some Fedwire participants, however, transmit payment orders to a 
Federal Reserve Bank or receive payment orders from a Federal Reserve 
Bank orally by telephone, or, in unusual circumstances, in writing. A 
bank that does not use either a terminal or a computer that links it 
electronically to a terminal or computer at its Federal Reserve Bank to 
send payment orders through Fedwire is an off-line bank.
    (i) Payment order. (1) The definition of payment order in subpart B 
of this part differs from the section 4A-103(a)(1) definition. The 
subpart B definition clarifies that, for the purposes of subpart B of 
this part, automated clearing house transfers and certain messages that 
are transmitted through Fedwire are not payment orders. Federal Reserve 
Banks and banks participating in Fedwire send various types of messages, 
relating to payment orders or to other matters, through Fedwire that are 
not intended to be payment orders. Under the subpart B definition, these 
messages, and messages involved with automated clearing house transfers, 
are not payment orders and therefore are not governed by this subpart. 
The Operating Circulars of the Federal Reserve Banks specify those 
messages that may be transmitted through Fedwire but that are not 
payment orders.
    (2) In some cases, messages sent through Fedwire, such as certain 
requests for credit

[[Page 302]]

transfer, may be payment orders under Article 4A, but are not treated as 
payment orders under subpart B because they are not an instruction to a 
Federal Reserve Bank to pay money.
    (3) This subpart and Article 4A govern a payment order even though 
the originator's or beneficiary's account may be a consumer account 
established primarily for personal, family, or household purposes. Under 
section 4A-108, Article 4A does not apply to a funds transfer any part 
of which is governed by the Electronic Fund Transfer Act. That Act, and 
Regulation E implementing it, do not apply to funds transfers through 
Fedwire (see 15 U.S.C. 1693a(6)(B) and 12 CFR 205.3(b)). Thus, this 
Subpart applies to all funds transfers through Fedwire even though some 
such transfers involve originators or beneficiaries that are consumers. 
(See also Sec. 210.25(b) and accompanying Commentary.)

             Section 210.27--Reliance on Identifying Number

    (a) Reliance by a Federal Reserve Bank on number to identify 
intermediary bank or beneficiary's bank. Section 4A-208 provides that a 
receiving bank, such as a Federal Reserve Bank, may rely on the routing 
number of an intermediary bank or the beneficiary's bank specified in a 
payment order as identifying the appropriate intermediary bank or 
beneficiary's bank, even if the payment order identifies another bank by 
name, provided that the receiving bank does not know of the 
inconsistency. Under section 4A-208(b)(2), if the sender of the payment 
order is not a bank, a receiving bank may rely on the number only if the 
sender had notice before the receiving bank accepted the sender's order 
that the receiving bank might rely on the number. This section provides 
this notice to entities that are not banks, such as the Department of 
the Treasury, that send payment orders directly to a Federal Reserve 
Bank.
    (b) Reliance by a Federal Reserve Bank on number to identify 
beneficiary. Section 4A-207 provides that a beneficiary's bank, such as 
a Federal Reserve Bank, may rely on the number identifying a 
beneficiary, such as the beneficiary's account number, specified in a 
payment order as identifying the appropriate beneficiary, even if the 
payment order identifies another beneficiary by name, provided that the 
beneficiary's bank does not know of the inconsistency. Under section 4A-
207(c)(2), if the originator is not a bank, an originator is not obliged 
to pay for a payment order if the originator did not have notice that 
the beneficiary's bank might rely on the identifying number and the 
person paid on the basis of the identifying number was not entitled to 
receive payment. This section of subpart B provides this notice to 
entities that are not banks, such as the Department of the Treasury, 
that are originators of payment orders sent directly by the originators 
to a Federal Reserve Bank, where that Federal Reserve Bank or another 
Federal Reserve Bank is the beneficiary's bank (see also section 4A-
402(b), providing that a sender must pay a beneficiary's bank for a 
payment order accepted by the beneficiary's bank).

                   Section 210.28--Agreement of Sender

    (a) Payment of sender's obligation to a Federal Reserve Bank. When a 
sender issues a payment order to a Federal Reserve Bank and the Federal 
Reserve Bank issues a conforming order implementing the sender's payment 
order, under section 4A-403, the sender is indebted to the Federal 
Reserve Bank for the amount of the payment order. A sender, other than a 
Federal Reserve Bank, that maintains or uses an account at a Federal 
Reserve Bank authorizes the Federal Reserve Bank to debit that account 
so that the Federal Reserve Bank can obtain payment for the payment 
order.
    (b) Overdrafts. (1) In some cases, debits to a sender's account will 
create an overdraft in the sender's account. The Board and the Federal 
Reserve Banks have established policies concerning when a Federal 
Reserve Bank will permit a bank to incur an overdraft in its account at 
a Federal Reserve Bank. These policies do not give a bank or other 
sender a right to an overdraft in its account. Subpart B clarifies that 
a sender does not have a right to such an overdraft. If an overdraft 
arises, it becomes immediately due and payable at the earliest of: The 
end of the funds-transfer business day of the Federal Reserve Bank; the 
time the Federal Reserve Bank in its sole discretion, deems itself 
insecure and gives notice to the sender; or the time that the sender 
suspends payments or is closed by governmental action, such as the 
appointment of a receiver. In some cases, a Federal Reserve Bank extends 
its Fedwire operations beyond its cut-off hour for that funds-transfer 
business day. For the purposes of this section, unless otherwise 
specified by the Federal Reserve Bank making such an extension, an 
overdraft becomes due and payable at the end of the extended operating 
hours. An overdraft becomes due and payable prior to a Federal Reserve 
Bank's cut-off hour if the Federal Reserve Bank deems itself insecure 
and gives notice to the sender. Notice that the Federal Reserve Bank 
deems itself insecure may be given in accordance with the provisions on 
notice in section 1-201(27) of the UCC, in accordance with any other 
applicable law or agreement, or by any other reasonable means. An 
overdraft also becomes due and payable at the time that a bank is closed 
or suspends payments. For example, an overdraft becomes due and payable 
if a receiver is appointed for the bank or the bank is prevented from 
making payments by governmental order. The Federal Reserve Bank

[[Page 303]]

need not make demand on the sender for the overdraft to become due and 
payable.
    (2) A sender must cover any overdraft and any other obligation of 
the sender to the Federal Reserve Bank by the time the overdraft becomes 
due and payable. By sending a payment order to a Federal Reserve Bank, 
the sender grants a security interest to the Federal Reserve Bank in any 
assets of the sender held by, or for the account of, the Federal Reserve 
Bank in order to secure all obligations due or to become due to the 
Federal Reserve Bank. The security interest attaches when the overdraft, 
or other obligation of the sender to the Federal Reserve Bank, becomes 
due and payable. The security interest does not apply to assets held by 
the sender as custodian or trustee for the sender's customers or third 
parties. Once an overdraft is due and payable, a Federal Reserve Bank 
may exercise its right of set off, liquidate collateral, or take other 
similar action to satisfy the overdrafting bank's obligation owed to the 
Federal Reserve Bank.
    (c) Review of payment orders. (1) Under section 4A-204, a receiving 
bank is required to refund the principal amount of an unauthorized 
payment order that the sender was not obliged to pay, together with 
interest on the refundable amount calculated from the date that the 
receiving bank received payment to the date of the refund. The sender is 
not entitled to compensation in the form of interest if the sender fails 
to exercise ordinary care to determine that the order was not authorized 
and to notify the receiving bank within a reasonable period of time 
after the sender receives a notice that the payment order was accepted 
or that the sender's account was debited with respect to the order. 
Similarly, under section 4A-304, if a sender of a payment order that was 
erroneously executed does not notify the bank receiving the payment 
order within a reasonable time, the bank is not liable to the sender for 
compensation in the form of interest on any amount refundable to the 
sender. Section 210.28(c) establishes 30 calendar days as the reasonable 
period of time for the purposes of these provisions of Article 4A.
    (2) Section 4A-505 provides that a customer must object to a debit 
to its account by a receiving bank within one year after the customer 
received notification reasonably identifying the payment order. Subpart 
B of this part does not vary this one-year period.

               Section 210.29--Agreement of Receiving Bank

    (b) Off-line banks. (1) Generally, an on-line bank receiving payment 
orders or advices of credit for payment orders from a Federal Reserve 
Bank receives the payment orders or advices electronically a short time 
after the corresponding payment orders are received by the on-line 
bank's Federal Reserve Bank. An off-line bank receiving payment orders 
or advices of credit from a Federal Reserve Bank does not have an 
electronic connection with the Federal Reserve Bank; therefore, payment 
orders or advices are transmitted either by telephone on the day the 
payment order is received by the receiving bank's Federal Reserve Bank, 
or sent by courier or mail along with the off-line bank's daily account 
statement, on the funds-transfer business day following the day the 
payment order is received by the off-line bank's Federal Reserve Bank.
    (2) Under section 4A-302(a)(2), a Federal Reserve Bank must transmit 
payment orders at a time and by means reasonably necessary to allow 
payment to the beneficiary on the payment date, or as soon thereafter as 
is feasible. Therefore, where an off-line receiving bank is an 
intermediary bank or beneficiary's bank in a payment order, its Federal 
Reserve Bank attempts to transmit the payment order to the off-line bank 
by telephone on the day the payment order is received by the Federal 
Reserve Bank. A Federal Reserve Bank can generally identify these 
payment orders from the type code designated in the payment order.
    (3) Under section 4A-404(b), if a payment order instructs payment to 
the account of the beneficiary, the beneficiary's bank must notify the 
beneficiary of the receipt of a payment order before midnight of the 
next funds-transfer business day following the payment date. Where an 
off-line bank is the beneficiary of a payment order, telephone notice by 
a Federal Reserve Bank to the off-line bank of the receipt of the order 
is not required by Article 4A because the Federal Reserve Bank sends 
notice to the off-line bank by courier or mail, along with its daily 
account statement, on the day after the payment order is received by its 
Federal Reserve Bank. Payment orders for which an off-line bank is the 
beneficiary of the order are generally designated as settlement 
transactions.
    (4) If an off-line receiving bank maintains an account for another 
bank, the off-line bank may receive payment orders designated as 
settlement transactions in its capacity as beneficiary's bank or 
intermediary bank. A Federal Reserve Bank cannot readily distinguish 
these payment orders from settlement transactions for which the off-line 
bank is the beneficiary of the order. If an off-line bank notifies its 
Federal Reserve Bank that it maintains an account for another bank, the 
Federal Reserve Bank will attempt to telephone the off-line bank with 
respect to all settlement transactions received by such bank, whether 
the off-line bank is the beneficiary, the beneficiary's bank, or an 
intermediary bank in the payment order. Under this section, an off-line 
bank that does not expressly notify its Federal Reserve Bank in writing 
that it maintains an account for another bank warrants to that Federal 
Reserve Bank that it does not act as an intermediary

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bank or a beneficiary's bank for a bank beneficiary with respect to 
payment orders received through Fedwire.

                     Section 210.30--Payment Orders

    (a) Rejection. (1) A sender must make arrangements with its Federal 
Reserve Bank before it can send payment orders to the Federal Reserve 
Bank. Federal Reserve Banks reserve the right to reject or impose 
conditions on the acceptance of payment orders for any reason. For 
example, a Federal Reserve Bank might reject or impose conditions on 
accepting a payment order where a sender does not have sufficient funds 
in its account with the Federal Reserve Bank to cover the amount of the 
sender's payment order and other obligations of the sender due or to 
become due to the Federal Reserve Bank. A Federal Reserve Bank may 
require a sender to execute a written agreement concerning security 
procedures or other matters before the sender may send payment orders to 
the Federal Reserve Bank.
    (b) Selection of an intermediary bank. (1) Under section 4A-302, if 
a receiving bank (other than a beneficiary's bank), such as a Federal 
Reserve Bank, accepts a payment order, it must issue a payment order 
that complies with the sender's order. The sender's order may include 
instructions concerning an intermediary bank to be used that must be 
followed by a receiving bank (see section 4A-302(a)(1)). If the sender 
does not designate any intermediary bank in its payment order, the 
receiving bank may select an intermediary bank through which the 
sender's payment order can be expeditiously issued to the beneficiary's 
bank so long as the receiving bank exercises ordinary care in selecting 
the intermediary bank (see section 4A-302(b)).
    (2) This section provides that in an interdistrict transfer, a 
Federal Reserve Bank is authorized and directed to select another 
Federal Reserve Bank as an intermediary bank. A sender may, however, 
instruct a Federal Reserve Bank to use a particular intermediary bank by 
designating that bank as the bank to be credited by that Federal Reserve 
Bank (or the second Federal Reserve Bank in the case of an interdistrict 
transfer) in its payment order, in which case the Federal Reserve Bank 
will send the payment order to that bank if that bank receives payment 
orders through Fedwire. A sender may not instruct a Federal Reserve Bank 
to use its discretion to select an intermediary bank other than a 
Federal Reserve Bank or an intermediary bank designated by the sender. 
In addition, a sender may not instruct a Federal Reserve Bank to use a 
funds-transfer system or means of transmission other than Fedwire unless 
the sender and the Federal Reserve Bank agree in writing to the use of 
the funds-transfer system or means of transmission.
    (c) Same-day execution. Generally, Fedwire is a same-day value 
transfer system through which funds may be transferred from the 
originator to the beneficiary on the same funds-transfer business day. A 
sender may not send a payment order to a Federal Reserve Bank that 
specifies an execution date or payment date later than the day on which 
the payment order is issued, unless the sender of the order and the 
Federal Reserve Bank agree in writing to the arrangement.

Section 210.31--Payment by a Federal Reserve Bank to a Receiving Bank or 
                               Beneficiary

    (a) Payment to a receiving bank. (1) Under section 4A-402, when a 
Federal Reserve Bank executes a sender's payment order by issuing a 
conforming order to a receiving bank that accepts the payment order, the 
Federal Reserve Bank must pay the receiving bank the amount of the 
payment order. Section 210.29(a) authorizes a Federal Reserve Bank to 
make the payment by crediting the account at the Federal Reserve Bank 
maintained or used by the receiving bank. Section 210.31(a) provides 
that the payment occurs when the receiving bank's account is credited or 
when the payment order is sent by the Federal Reserve Bank to the 
receiving bank, whichever is earlier. Ordinarily, payment will occur 
during the funds-transfer business day a short time after the payment 
order is received, even if the receiving bank is an off-line bank. This 
credit is final and irrevocable when made and constitutes final 
settlement under section 4A-403. Payment does not waive a Federal 
Reserve Bank's right of recovery under the applicable law of mistake and 
restitution (see Sec. 210.32(c)), affect a Federal Reserve Bank's right 
to apply the funds to any obligation due or to become due to the Federal 
Reserve Bank, or affect legal process or claims by third parties on the 
funds.
    (2) This section on final payment does not apply to settlement for 
payment orders between Federal Reserve Banks. These payment orders are 
settled by other means.
    (b) Payment to a beneficiary. Section 210.31(b) specifies when a 
Federal Reserve Bank makes payment to a beneficiary for which it is the 
beneficiary's bank. As in the case of payment to a receiving bank, this 
payment occurs at the earlier of the time that the Federal Reserve Bank 
credits the beneficiary's account or sends notice of the credit to the 
beneficiary, and is final and irrevocable when made.

   Section 210.32--Federal Reserve Bank Liability; Payment of Interest

    (a) Damages. (1) Under section 4A-305(d), damages for failure of a 
receiving bank to

[[Page 305]]

execute a payment order that it was obligated to execute by express 
agreement are limited to expenses in the transaction and incidental 
expenses and interest and do not include additional damages, including 
consequential damages, unless they are provided for in an express 
written agreement of the receiving bank. This section clarifies that in 
connection with the handling of payment orders, Federal Reserve Banks 
may not agree to be liable for consequential damages under this 
provision and shall not be liable for damages other than those that may 
be due under Article 4A to parties governed by this subpart. Any 
agreement in conflict with these provisions would not be effective, 
because it would be in violation of subpart B.
    (2) This section does not affect the ability of other parties to a 
funds transfer to agree to be liable for consequential damages, the 
liability of a Federal Reserve Bank under section 4A-404, or the 
liability to parties governed by subpart B for claims not based on the 
handling of a payment order under this subpart.
    (b) Payment of interest. (1) Under Article 4A, a Federal Reserve 
Bank may be required to pay compensation in the form of interest to 
another party in connection with its handling of a funds transfer. For 
example, payment of compensation in the form of interest is required in 
certain situations pursuant to sections 4A-204 (relating to refund of 
payment and duty of customer to report with respect to unauthorized 
payment order), 4A-209 (relating to acceptance of payment order), 4A-210 
(relating to rejection of payment order), 4A-304 (relating to duty of 
sender to report erroneously executed payment order), 4A-305 (relating 
to liability for late or improper execution or failure to execute a 
payment order), 4A-402 (relating to obligation of sender to pay 
receiving bank), and 4A-404 (relating to obligation of beneficiary's 
bank to pay and give notice to beneficiary). Under section 4A-506(a), 
the amount of such interest may be determined by agreement between the 
sender and receiving bank or by funds-transfer system rule. If there is 
no such agreement, under section 4A-506(b), the amount of interest is 
based on the Federal funds rate. Section 210.32(b) provides two means by 
which Federal Reserve Banks may provide compensation in the form of 
interest: through an as of adjustment or through an explicit interest 
payment.
    (2) An as of adjustment is a memorandum credit or debit that is 
applied to the reserve or clearing balance of the bank that sent the 
payment order to, or received the payment order from, a Federal Reserve 
Bank. Federal Reserve Banks generally provide as of adjustments to 
correct errors and recover float. An as of adjustment differs from a 
debit or credit to an account in that it does not affect the actual 
balance of the account; it only affects the balance for reserve or 
clearing balance computation purposes. These adjustments affect the 
level of reserve or clearing balances that the bank must fund by other 
means and are therefore an effective substitute for explicit interest 
payments.
    (3) A party that sent or received a payment order from a Federal 
Reserve Bank may be unable to make use of an as of adjustment as 
compensation in lieu of explicit interest. For example, if the sender or 
receiving bank is not subject to reserve requirements or satisfies its 
reserve requirements with vault cash, the as of adjustment could not be 
used to free other balances for investment. A Federal Reserve Bank may, 
in its discretion, provide compensation by an explicit interest payment 
rather than through an as of adjustment. Interest would be calculated in 
accordance with the procedures specified in section 4A-506(b). 
Similarly, compensation in the form of explicit interest will be paid to 
Government senders, receiving banks, or beneficiaries described in Sec. 
210.25(d) if they are entitled to interest under this subpart. A Federal 
Reserve Bank may also, in its discretion, pay explicit interest directly 
to a remote party to a Fedwire funds transfer that is entitled to 
interest, rather than providing compensation to its direct sender or 
receiving bank.
    (4) If a bank that received an as of adjustment or explicit interest 
payment is not the party entitled to interest compensation under Article 
4A, the bank must pass the benefit of the as of adjustment or explicit 
interest payment made to it to the party that is entitled to 
compensation in the form of interest from a Federal Reserve Bank. The 
benefit may be passed on either in the form of a direct payment of 
interest or in the form of a compensating balance, if the party entitled 
to interest agrees to accept the other form of compensation, and the 
value of the compensating balance is at least equivalent to the value of 
the explicit interest that otherwise would have been provided.
    (c) Nonwaiver of right of recovery. Several sections of Article 4A 
allow for a party to a funds transfer to make a claim pursuant to the 
applicable law of mistake and restitution. Nothing in subpart B of this 
part or any Operating Circular issued under subpart B of this part 
waives any such claim. A Federal Reserve Bank, however, may waive such a 
claim by express written agreement in order to settle litigation or for 
other purposes.

[55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990]

[[Page 306]]

    Appendix B to Subpart B of Part 210--Article 4A, Funds Transfers

                 Part 1--Subject Matter and Definitions

                       Section 4A-101. Short Title

    This Article may be cited as Uniform Commercial Code--Funds 
Transfers.

                     Section 4A-102. Subject Matter

    Except as otherwise provided in section 4A-108, this Article applies 
to funds transfers defined in section 4A-104.

               Section 4A-103. Payment Order--Definitions

    (a) In this Article:
    (1) Payment order means an instruction of a sender to a receiving 
bank, transmitted orally, electronically, or in writing, to pay, or to 
cause another bank to pay, a fixed or determinable amount of money to a 
beneficiary if:
    (i) The instruction does not state a condition to payment to the 
beneficiary other than time of payment,
    (ii) The receiving bank is to be reimbursed by debiting an account 
of, or otherwise receiving payment from, the sender, and
    (iii) The instruction is transmitted by the sender directly to the 
receiving bank or to an agent, funds-transfer system, or communication 
system for transmittal to the receiving bank.
    (2) Beneficiary means the person to be paid by the beneficiary's 
bank.
    (3) Beneficiary's bank means the bank identified in a payment order 
in which an account of the beneficiary is to be credited pursuant to the 
order or which otherwise is to make payment to the beneficiary if the 
order does not provide for payment to an account.
    (4) Receiving bank means the bank to which the sender's instruction 
is addressed.
    (5) Sender means the person giving the instruction to the receiving 
bank.
    (b) If an instruction complying with subsection (a)(1) is to make 
more than one payment to a beneficiary, the instruction is a separate 
payment order with respect to each payment.
    (c) A payment order is issued when it is sent to the receiving bank.

               Section 4A-104. Funds Transfer--Definitions

    In this Article:
    (a) Funds transfer means the series of transactions, beginning with 
the originator's payment order, made for the purpose of making payment 
to the beneficiary of the order. The term includes any payment order 
issued by the originator's bank or an intermediary bank intended to 
carry out the originator's payment order. A funds transfer is completed 
by acceptance by the beneficiary's bank of a payment order for the 
benefit of the beneficiary of the originator's payment order.
    (b) Intermediary bank means a receiving bank other than the 
originator's bank or the beneficiary's bank.
    (c) Originator means the sender of the first payment order in a 
funds transfer.
    (d) Originator's bank means (i) the receiving bank to which the 
payment order of the originator is issued if the originator is not a 
bank, or (ii) the originator if the originator is a bank.

                    Section 4A-105. Other Definitions

    (a) In this Article:
    (1) Authorized account means a deposit account of a customer in a 
bank designated by the customer as a source of payment of payment orders 
issued by the customer to the bank. If a customer does not so designate 
an account, any account of the customer is an authorized account if 
payment of a payment order from that account is not inconsistent with a 
restriction on the use of that account.
    (2) Bank means a person engaged in the business of banking and 
includes a savings bank, savings and loan association, credit union, and 
trust company. A branch or separate office of a bank is a separate bank 
for purposes of this Article.
    (3) Customer means a person, including a bank, having an account 
with a bank or from whom a bank has agreed to receive payment orders.
    (4) Funds-transfer business day of a receiving bank means the part 
of a day during which the receiving bank is open for the receipt, 
processing, and transmittal of payment orders and cancellations and 
amendments of payment orders.
    (5) Funds-transfer system means a wire transfer network, automated 
clearing house, or other communication system of a clearing house or 
other association of banks through which a payment order by a bank may 
be transmitted to the bank to which the order is addressed.
    (6) Good faith means honesty in fact and the observance of 
reasonable commercial standards of fair dealing.
    (7) Prove with respect to a fact means to meet the burden of 
establishing the fact (section 1-201(8)).
    (b) Other definitions applying to this Article and the sections in 
which they appear are:

Acceptance...................................................Sec. 4A-209
Beneficiary..................................................Sec. 4A-103
Beneficiary's bank...........................................Sec. 4A-103
Executed.....................................................Sec. 4A-301
Execution date...............................................Sec. 4A-301
Funds transfer...............................................Sec. 4A-104
Funds-transfer system rule...................................Sec. 4A-501
Intermediary bank............................................Sec. 4A-104
Originator...................................................Sec. 4A-104
Originator's bank............................................Sec. 4A-104
Payment by beneficiary's bank to beneficiary.................Sec. 4A-405

[[Page 307]]

Payment by originator to beneficiary.........................Sec. 4A-406
Payment by sender to receiving bank..........................Sec. 4A-403
Payment date.................................................Sec. 4A-401
Payment order................................................Sec. 4A-103
Receiving bank...............................................Sec. 4A-103
Security procedure...........................................Sec. 4A-201
Sender.......................................................Sec. 4A-103

    (c) The following definitions in Article 4 apply to this Article:

Clearing house................................................Sec. 4-104
Item..........................................................Sec. 4-104
Suspends payments.............................................Sec. 4-104

    (d) In addition Article 1 contains general definitions and 
principles of construction and interpretation applicable throughout this 
Article.

             Section 4A-106. Time Payment Order is Received

    (a) The time of receipt of a payment order or communication 
canceling or amending a payment order is determined by the rules 
applicable to receipt of a notice stated in section 1-201(27). A 
receiving bank may fix a cut-off time or times on a funds-transfer 
business day for the receipt and processing of payment orders and 
communications canceling or amending payment orders. Different cut-off 
times may apply to payment orders, cancellations, or amendments, or to 
different categories of payment orders, cancellations, or amendments. A 
cut-off time may apply to senders generally or different cut-off times 
may apply to different senders or categories of payment orders. If a 
payment order or communication canceling or amending a payment order is 
received after the close of a funds-transfer business day or after the 
appropriate cut-off time on a funds-transfer business day, the receiving 
bank may treat the payment order or communication as received at the 
opening of the next funds-transfer business day.
    (b) If this Article refers to an execution date or payment date or 
states a day on which a receiving bank is required to take action, and 
the date or day does not fall on a funds-transfer business day, the next 
day that is a funds-transfer business day is treated as the date or day 
stated, unless the contrary is stated in this Article.

   Section 4A-107. Federal Reserve Regulations and Operating Circulars

    Regulations of the Board of Governors of the Federal Reserve System 
and operating circulars of the Federal Reserve Banks supersede any 
inconsistent provision of this Article to the extent of the 
inconsistency.

 Section 4A-108. Exclusion of Consumer Transactions Governed by Federal 
                                   Law

    This Article does not apply to a funds transfer any part of which is 
governed by the Electronic Fund Transfer Act of 1978 (title XX, Pub. L. 
95-630, 92 Stat. 3728, 15 U.S.C. 1693 et seq.) as amended from time to 
time.

              Part 2--Issue and Acceptance of Payment Order

                   Section 4A-201. Security Procedure

    Security procedure means a procedure established by agreement of a 
customer and a receiving bank for the purpose of (i) verifying that a 
payment order or communication amending or canceling a payment order is 
that of the customer, or (ii) detecting error in the transmission or the 
content of the payment order or communication. A security procedure may 
require the use of algorithms or other codes, identifying words or 
numbers, encryption, callback procedures, or similar security devices. 
Comparison of a signature on a payment order or communication with an 
authorized specimen signature of the customer is not by itself a 
security procedure.

         Section 4A-202. Authorized and Verified Payment Orders

    (a) A payment order received by the receiving bank is the authorized 
order of the person identified as sender if that person authorized the 
order or is otherwise bound by it under the law of agency.
    (b) If a bank and its customer have agreed that the authenticity of 
payment orders issued to the bank in the name of the customer as sender 
will be verified pursuant to a security procedure, a payment order 
received by the receiving bank is effective as the order of the 
customer, whether or not authorized, if (i) the security procedure is a 
commercially reasonable method of providing security against 
unauthorized payment orders, and (ii) the bank proves that it accepted 
the payment order in good faith and in compliance with the security 
procedure and any written agreement or instruction of the customer 
restricting acceptance of payment orders issued in the name of the 
customer. The bank is not required to follow an instruction that 
violates a written agreement with the customer or notice of which is not 
received at a time and in a manner affording the bank a reasonable 
opportunity to act on it before the payment order is accepted.
    (c) Commercial reasonableness of a security procedure is a question 
of law to be determined by considering the wishes of the customer 
expressed to the bank, the circumstances of the customer known to the 
bank, including the size, type, and frequency of payment orders normally 
issued by the customer to the bank, alternative security

[[Page 308]]

procedures offered to the customer, and security procedures in general 
use by customers and receiving banks similarly situated. A security 
procedure is deemed to be commercially reasonable if (i) the security 
procedure was chosen by the customer after the bank offered, and the 
customer refused, a security procedure that was commercially reasonable 
for that customer, and (ii) the customer expressly agreed in writing to 
be bound by any payment order, whether or not authorized, issued in its 
name and accepted by the bank in compliance with the security procedure 
chosen by the customer.
    (d) The term sender in this Article includes the customer in whose 
name a payment order is issued if the order is the authorized order of 
the customer under subsection (a), or it is effective as the order of 
the customer under subsection (b).
    (e) This section applies to amendments and cancellations of payment 
orders to the same extent it applies to payment orders.
    (f) Except as provided in this section and in section 4A-203(a)(1), 
rights and obligations arising under this section or section 4A-203 may 
not be varied by agreement.

   Section 4A-203. Unenforceability of Certain Verified Payment Orders

    (a) If an accepted payment order is not, under section 4A-202(a), an 
authorized order of a customer identified as sender, but is effective as 
an order of the customer pursuant to section 4A-202(b), the following 
rules apply:
    (1) By express written agreement, the receiving bank may limit the 
extent to which it is entitled to enforce or retain payment of the 
payment order.
    (2) The receiving bank is not entitled to enforce or retain payment 
of the payment order if the customer proves that the order was not 
caused, directly or indirectly, by a person (i) entrusted at any time 
with duties to act for the customer with respect to payment orders or 
the security procedure, or (ii) who obtained access to transmitting 
facilities of the customer or who obtained, from a source controlled by 
the customer and without authority of the receiving bank, information 
facilitating breach of the security procedure, regardless of how the 
information was obtained or whether the customer was at fault. 
Information includes any access device, computer software, or the like.
    (b) This section applies to amendments of payment orders to the same 
extent it applies to payment orders.

 Section 4A-204. Refund of Payment and Duty of Customer To Report with 
                  Respect to Unauthorized Payment Order

    (a) If a receiving bank accepts a payment order issued in the name 
of its customer as sender which is (i) not authorized and not effective 
as the order of the customer under section 4A-202, or (ii) not 
enforceable, in whole or in part, against the customer under section 4A-
203, the bank shall refund any payment of the payment order received 
from the customer to the extent the bank is not entitled to enforce 
payment and shall pay interest on the refundable amount calculated from 
the date the bank received payment to the date of the refund. However, 
the customer is not entitled to interest from the bank on the amount to 
be refunded if the customer fails to exercise ordinary care to determine 
that the order was not authorized by the customer and to notify the bank 
of the relevant facts within a reasonable time not exceeding 90 days 
after the date the customer received notification from the bank that the 
order was accepted or that the customer's account was debited with 
respect to the order. The bank is not entitled to any recovery from the 
customer on account of a failure by the customer to give notification as 
stated in this section.
    (b) Reasonable time under subsection (a) may be fixed by agreement 
as stated in section 1-204(1), but the obligation of a receiving bank to 
refund payment as stated in subsection (a) may not otherwise be varied 
by agreement.

                Section 4A-205. Erroneous Payment Orders

    (a) If an accepted payment order was transmitted pursuant to a 
security procedure for the detection of error and the payment order (i) 
erroneously instructed payment to a beneficiary not intended by the 
sender, (ii) erroneously instructed payment in an amount greater than 
the amount intended by the sender, or (iii) was an erroneously 
transmitted duplicate of a payment order previously sent by the sender, 
the following rules apply:
    (1) If the sender proves that the sender or a person acting on 
behalf of the sender pursuant to section 4A-206 complied with the 
security procedure and that the error would have been detected if the 
receiving bank had also complied, the sender is not obliged to pay the 
order to the extent stated in paragraphs (2) and (3).
    (2) If the funds transfer is completed on the basis of an erroneous 
payment order described in clause (i) or (iii) of subsection (a), the 
sender is not obliged to pay the order and the receiving bank is 
entitled to recover from the beneficiary any amount paid to the 
beneficiary to the extent allowed by the law governing mistake and 
restitution.
    (3) If the funds transfer is completed on the basis of a payment 
order described in clause (ii) of subsection (a), the sender is not 
obliged to pay the order to the extent the amount received by the 
beneficiary is greater than the amount intended by the sender. In that 
case, the receiving bank is entitled to recover from the beneficiary the 
excess

[[Page 309]]

amount received to the extent allowed by the law governing mistake and 
restitution.
    (b) If (i) the sender of an erroneous payment order described in 
subsection (a) is not obliged to pay all or part of the order, and (ii) 
the sender receives notification from the receiving bank that the order 
was accepted by the bank or that the sender's account was debited with 
respect to the order, the sender has a duty to exercise ordinary care, 
on the basis of information available to the sender, to discover the 
error with respect to the order and to advise the bank of the relevant 
facts within a reasonable time, not exceeding 90 days, after the bank's 
notification was received by the sender. If the bank proves that the 
sender failed to perform that duty, the sender is liable to the bank for 
the loss the bank proves it incurred as a result of the failure, but the 
liability of the sender may not exceed the amount of the sender's order.
    (c) This section applies to amendments to payment orders to the same 
extent it applies to payment orders.

Section 4A-206. Transmission of Payment Order Through Funds-Transfer or 
                       Other Communication System

    (a) If a payment order addressed to a receiving bank is transmitted 
to a funds-transfer system or other third-party communication system for 
transmittal to the bank, the system is deemed to be an agent of the 
sender for the purpose of transmitting the payment order to the bank. If 
there is a discrepancy between the terms of the payment order 
transmitted to the system and the terms of the payment order transmitted 
by the system to the bank, the terms of the payment order of the sender 
are those transmitted by the system. This section does not apply to a 
funds-transfer system of the Federal Reserve Banks.
    (b) This section applies to cancellations and amendments of payment 
orders to the same extent it applies to payment orders.

              Section 4A-207. Misdescription of Beneficiary

    (a) Subject to subsection (b), if, in a payment order received by 
the beneficiary's bank, the name, bank account number, or other 
identification of the beneficiary refers to a nonexistent or 
unidentifiable person or account, no person has rights as a beneficiary 
of the order and acceptance of the order cannot occur.
    (b) If a payment order received by the beneficiary's bank identifies 
the beneficiary both by name and by an identifying or bank account 
number and the name and number identify different persons, the following 
rules apply:
    (1) Except as otherwise provided in subsection (c), if the 
beneficiary's bank does not know that the name and number refer to 
different persons, it may rely on the number as the proper 
identification of the beneficiary of the order. The beneficiary's bank 
need not determine whether the name and number refer to the same person.
    (2) If the beneficiary's bank pays the person identified by name or 
knows that the name and number identify different persons, no person has 
rights as beneficiary except the person paid by the beneficiary's bank 
if that person was entitled to receive payment from the originator of 
the funds transfer. If no person has rights as beneficiary, acceptance 
of the order cannot occur.
    (c) If (i) a payment order described in subsection (b) is accepted, 
(ii) the originator's payment order described the beneficiary 
inconsistently by name and number, and (iii) the beneficiary's bank pays 
the person identified by number as permitted by subsection (b)(1), the 
following rules apply:
    (1) If the originator is a bank, the originator is obliged to pay 
its order.
    (2) If the originator is not a bank and proves that the person 
identified by number was not entitled to receive payment from the 
originator, the originator is not obliged to pay its order unless the 
originator's bank proves that the originator, before acceptance of the 
originator's order, had notice that payment of a payment order issued by 
the originator might be made by the beneficiary's bank on the basis of 
an identifying or bank account number even if it identifies a person 
different from the named beneficiary. Proof of notice may be made by any 
admissible evidence. The originator's bank satisfies the burden of proof 
if it proves that the originator, before the payment order was accepted, 
signed a writing stating the information to which the notice relates.
    (d) In a case governed by subsection (b)(1), if the beneficiary's 
bank rightfully pays the person identified by number and that person was 
not entitled to receive payment from the originator, the amount paid may 
be recovered from that person to the extent allowed by the law governing 
mistake and restitution as follows:
    (1) If the originator is obliged to pay its payment order as stated 
in subsection (c), the originator has the right to recover.
    (2) If the originator is not a bank and is not obliged to pay its 
payment order, the originator's bank has the right to recover.

  Section 4A-208. Misdescription of Intermediary Bank or Beneficiary's 
                                  Bank

    (a) This subsection applies to a payment order identifying an 
intermediary bank or the beneficiary's bank only by an identifying 
number.
    (1) The receiving bank may rely on the number as the proper 
identification of the intermediary or beneficiary's bank and need not 
determine whether the number identifies a bank.

[[Page 310]]

    (2) The sender is obliged to compensate the receiving bank for any 
loss and expenses incurred by the receiving bank as a result of its 
reliance on the number in executing or attempting to execute the order.
    (b) This subsection applies to a payment order identifying an 
intermediary bank or the beneficiary's bank both by name and an 
identifying number if the name and number identify different persons.
    (1) If the sender is a bank, the receiving bank may rely on the 
number as the proper identification of the intermediary or beneficiary's 
bank if the receiving bank, when it executes the sender's order, does 
not know that the name and number identify different persons. The 
receiving bank need not determine whether the name and number refer to 
the same person or whether the number refers to a bank. The sender is 
obliged to compensate the receiving bank for any loss and expenses 
incurred by the receiving bank as a result of its reliance on the number 
in executing or attempting to execute the order.
    (2) If the sender is not a bank and the receiving bank proves that 
the sender, before the payment order was accepted, had notice that the 
receiving bank might rely on the number as the proper identification of 
the intermediary or beneficiary's bank even if it identifies a person 
different from the bank identified by name, the rights and obligations 
of the sender and the receiving bank are governed by subsection (b)(1), 
as though the sender were a bank. Proof of notice may be made by any 
admissible evidence. The receiving bank satisfies the burden of proof if 
it proves that the sender, before the payment order was accepted, signed 
a writing stating the information to which the notice relates.
    (3) Regardless of whether the sender is a bank, the receiving bank 
may rely on the name as the proper identification of the intermediary or 
beneficiary's bank if the receiving bank, at the time it executes the 
sender's order, does not know that the name and number identify 
different persons. The receiving bank need not determine whether the 
name and number refer to the same person.
    (4) If the receiving bank knows that the name and number identify 
different persons, reliance on either the name or the number in 
executing the sender's payment order is a breach of the obligation 
stated in section 4A-302(a)(1).

               Section 4A-209. Acceptance of Payment Order

    (a) Subject to subsection (d), a receiving bank other than the 
beneficiary's bank accepts a payment order when it executes the order.
    (b) Subject to subsections (c) and (d), a beneficiary's bank accepts 
a payment order at the earliest of the following times:
    (1) When the bank (i) pays the beneficiary as stated in section 4A-
405(a) or 4A-405(b), or (ii) notifies the beneficiary of receipt of the 
order or that the account of the beneficiary has been credited with 
respect to the order unless the notice indicates that the bank is 
rejecting the order or that funds with respect to the order may not be 
withdrawn or used until receipt of payment from the sender of the order;
    (2) When the bank receives payment of the entire amount of the 
sender's order pursuant to section 4A-403(a)(1) or 4A-403(a)(2); or
    (3) The opening of the next funds-transfer business day of the bank 
following the payment date of the order if, at that time, the amount of 
the sender's order is fully covered by a withdrawable credit balance in 
an authorized account of the sender or the bank has otherwise received 
full payment from the sender, unless the order was rejected before that 
time or is rejected within (i) one hour after that time, or (ii) one 
hour after the opening of the next business day of the sender following 
the payment date if that time is later. If notice of rejection is 
received by the sender after the payment date and the authorized account 
of the sender does not bear interest, the bank is obliged to pay 
interest to the sender on the amount of the order for the number of days 
elapsing after the payment date to the day the sender receives notice or 
learns that the order was not accepted, counting that day as an elapsed 
day. If the withdrawable credit balance during that period falls below 
the amount of the order, the amount of interest payable is reduced 
accordingly.
    (c) Acceptance of a payment order cannot occur before the order is 
received by the receiving bank. Acceptance does not occur under 
subsection (b)(2) or (b)(3) if the beneficiary of the payment order does 
not have an account with the receiving bank, the account has been 
closed, or the receiving bank is not permitted by law to receive credits 
for the beneficiary's account.
    (d) A payment order issued to the originator's bank cannot be 
accepted until the payment date if the bank is the beneficiary's bank, 
or the execution date if the bank is not the beneficiary's bank. If the 
originator's bank executes the originator's payment order before the 
execution date or pays the beneficiary of the originator's payment order 
before the payment date and the payment order is subsequently canceled 
pursuant to section 4A-211(b), the bank may recover from the beneficiary 
any payment received to the extent allowed by the law governing mistake 
and restitution.

               Section 4A-210. Rejection of Payment Order

    (a) A payment order is rejected by the receiving bank by a notice of 
rejection transmitted to the sender orally, electronically, or in 
writing. A notice of rejection need not

[[Page 311]]

use any particular words and is sufficient if it indicates that the 
receiving bank is rejecting the order or will not execute or pay the 
order. Rejection is effective when the notice is given if transmission 
is by a means that is reasonable in the circumstances. If notice of 
rejection is given by a means that is not reasonable, rejection is 
effective when the notice is received. If an agreement of the sender and 
receiving bank establishes the means to be used to reject a payment 
order, (i) any means complying with the agreement is reasonable and (ii) 
any means not complying is not reasonable unless no significant delay in 
receipt of the notice resulted from the use of the noncomplying means.
    (b) This subsection applies if a receiving bank other than the 
beneficiary's bank fails to execute a payment order despite the 
existence on the execution date of a withdrawable credit balance in an 
authorized account of the sender sufficient to cover the order. If the 
sender does not receive notice of rejection of the order on the 
execution date and the authorized account of the sender does not bear 
interest, the bank is obliged to pay interest to the sender on the 
amount of the order for the number of days elapsing after the execution 
date to the earlier of the day the order is canceled pursuant to section 
4A-211(d) or the day the sender receives notice or learns that the order 
was not executed, counting the final day of the period as an elapsed 
day. If the withdrawable credit balance during that period falls below 
the amount of the order, the amount of interest is reduced accordingly.
    (c) If a receiving bank suspends payments, all unaccepted payment 
orders issued to it are deemed rejected at the time the bank suspends 
payments.
    (d) Acceptance of a payment order precludes a later rejection of the 
order. Rejection of a payment order precludes a later acceptance of the 
order.

       Section 4A-211. Cancellation and Amendment of Payment Order

    (a) A communication of the sender of a payment order canceling or 
amending the order may be transmitted to the receiving bank orally, 
electronically, or in writing. If a security procedure is in effect 
between the sender and the receiving bank, the communication is not 
effective to cancel or amend the order unless the communication is 
verified pursuant to the security procedure or the bank agrees to the 
cancellation or amendment.
    (b) Subject to subsection (a), a communication by the sender 
canceling or amending a payment order is effective to cancel or amend 
the order if notice of the communication is received at a time and in a 
manner affording the receiving bank a reasonable opportunity to act on 
the communication before the bank accepts the payment order.
    (c) After a payment order has been accepted, cancellation or 
amendment of the order is not effective unless the receiving bank agrees 
or a funds-transfer system rule allows cancellation or amendment without 
agreement of the bank.
    (1) With respect to a payment order accepted by a receiving bank 
other than the beneficiary's bank, cancellation or amendment is not 
effective unless a conforming cancellation or amendment of the payment 
order issued by the receiving bank is also made.
    (2) With respect to a payment order accepted by the beneficiary's 
bank, cancellation or amendment is not effective unless the order was 
issued in execution of an unauthorized payment order, or because of a 
mistake by a sender in the funds transfer which resulted in the issuance 
of a payment order (i) that is a duplicate of a payment order previously 
issued by the sender, (ii) that orders payment to a beneficiary not 
entitled to receive payment from the originator, or (iii) that orders 
payment in an amount greater than the amount the beneficiary was 
entitled to receive from the originator. If the payment order is 
canceled or amended, the beneficiary's bank is entitled to recover from 
the beneficiary any amount paid to the beneficiary to the extent allowed 
by the law governing mistake and restitution.
    (d) An unaccepted payment order is canceled by operation of law at 
the close of the fifth funds-transfer business day of the receiving bank 
after the execution date or payment date of the order.
    (e) A canceled payment order cannot be accepted. If an accepted 
payment order is canceled, the acceptance is nullified and no person has 
any right or obligation based on the acceptance. Amendment of a payment 
order is deemed to be cancellation of the original order at the time of 
amendment and issue of a new payment order in the amended form at the 
same time.
    (f) Unless otherwise provided in an agreement of the parties or in a 
funds-transfer system rule, if the receiving bank, after accepting a 
payment order, agrees to cancellation or amendment of the order by the 
sender or is bound by a funds-transfer system rule allowing cancellation 
or amendment without the bank's agreement, the sender, whether or not 
cancellation or amendment is effective, is liable to the bank for any 
loss and expenses, including reasonable attorney's fees, incurred by the 
bank as a result of the cancellation or amendment or attempted 
cancellation or amendment.
    (g) A payment order is not revoked by the death or legal incapacity 
of the sender unless the receiving bank knows of the death or of an 
adjudication of incapacity by a court of competent jurisdiction and has 
reasonable opportunity to act before acceptance of the order.

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    (h) A funds-transfer system rule is not effective to the extent it 
conflicts with subsection (c)(2).

     Section 4A-212. Liability and Duty of Receiving Bank Regarding 
                        Unaccepted Payment Order

    If a receiving bank fails to accept a payment order that it is 
obliged by express agreement to accept, the bank is liable for breach of 
the agreement to the extent provided in the agreement or in this 
Article, but does not otherwise have any duty to accept a payment order 
or, before acceptance, to take any action, or refrain from taking 
action, with respect to the order except as provided in this Article or 
by express agreement. Liability based on acceptance arises only when 
acceptance occurs as stated in section 4A-209, and liability is limited 
to that provided in this Article. A receiving bank is not the agent of 
the sender or beneficiary of the payment order it accepts, or of any 
other party to the funds transfer, and the bank owes no duty to any 
party to the funds transfer except as provided in this Article or by 
express agreement.

      Part 3--Execution of Sender's Payment Order by Receiving Bank

              Section 4A-301. Execution and Execution Date

    (a) A payment order is executed by the receiving bank when it issues 
a payment order intended to carry out the payment order received by the 
bank. A payment order received by the beneficiary's bank can be accepted 
but cannot be executed.
    (b) Execution date of a payment order means the day on which the 
receiving bank may properly issue a payment order in execution of the 
sender's order. The execution date may be determined by instruction of 
the sender but cannot be earlier than the day the order is received and, 
unless otherwise determined, is the day the order is received. If the 
sender's instruction states a payment date, the execution date is the 
payment date or an earlier date on which execution is reasonably 
necessary to allow payment to the beneficiary on the payment date.

 Section 4A-302. Obligations of Receiving Bank in Execution of Payment 
                                  Order

    (a) Except as provided in subsections (b) through (d), if the 
receiving bank accepts a payment order pursuant to section 4A-209(a), 
the bank has the following obligations in executing the order:
    (1) The receiving bank is obliged to issue, on the execution date, a 
payment order complying with the sender's order and to follow the 
sender's instructions concerning (i) any intermediary bank or funds-
transfer system to be used in carrying out the funds transfer, or (ii) 
the means by which payment orders are to be transmitted in the funds 
transfer. If the originator's bank issues a payment order to an 
intermediary bank, the originator's bank is obliged to instruct the 
intermediary bank according to the instruction of the originator. An 
intermediary bank in the funds transfer is similarly bound by an 
instruction given to it by the sender of the payment order it accepts.
    (2) If the sender's instruction states that the funds transfer is to 
be carried out telephonically or by wire transfer or otherwise indicates 
that the funds transfer is to be carried out by the most expeditious 
means, the receiving bank is obliged to transmit its payment order by 
the most expeditious available means, and to instruct any intermediary 
bank accordingly. If a sender's instruction states a payment date, the 
receiving bank is obliged to transmit its payment order at a time and by 
means reasonably necessary to allow payment to the beneficiary on the 
payment date or as soon thereafter as is feasible.
    (b) Unless otherwise instructed, a receiving bank executing a 
payment order may (i) use any funds-transfer system if use of that 
system is reasonable in the circumstances, and (ii) issue a payment 
order to the beneficiary's bank or to an intermediary bank through which 
a payment order conforming to the sender's order can expeditiously be 
issued to the beneficiary's bank if the receiving bank exercises 
ordinary care in the selection of the intermediary bank. A receiving 
bank is not required to follow an instruction of the sender designating 
a funds-transfer system to be used in carrying out the funds transfer if 
the receiving bank, in good faith, determines that it is not feasible to 
follow the instruction or that following the instruction would unduly 
delay completion of the funds transfer.
    (c) Unless subsection (a)(2) applies or the receiving bank is 
otherwise instructed, the bank may execute a payment order by 
transmitting its payment order by first class mail or by any means 
reasonable in the circumstances. If the receiving bank is instructed to 
execute the sender's order by a particular means, the receiving bank may 
issue its payment order by transmitting its payment order by the means 
stated or by any means as expeditious as the means stated.
    (d) Unless instructed by the sender, (i) the receiving bank may not 
obtain payment of its charges for services and expenses in connection 
with the execution of the sender's order by issuing a payment order in 
an amount equal to the amount of the sender's order less the amount of 
the charges, and (ii) may not instruct a subsequent receiving bank to 
obtain payment of its charges in the same manner.

[[Page 313]]

          Section 4A-303. Erroneous Execution of Payment Order

    (a) A receiving bank that (i) executes the payment order of the 
sender by issuing a payment order in an amount greater than the amount 
of the sender's order, or (ii) issues a payment order in execution of 
the sender's order and then issues a duplicate order, is entitled to 
payment of the amount of the sender's order under section 4A-402(c) if 
that subsection is otherwise satisfied. The bank is entitled to recover 
from the beneficiary of the erroneous order the excess payment received 
to the extent allowed by the law governing mistake and restitution.
    (b) A receiving bank that executes the payment order of the sender 
by issuing a payment order in an amount less than the amount of the 
sender's order is entitled to payment of the amount of the sender's 
order under section 4A-402(c) if (i) that subsection is otherwise 
satisfied and (ii) the bank corrects its mistake by issuing an 
additional payment order for the benefit of the beneficiary of the 
sender's order. If the error is not corrected, the issuer of the 
erroneous order is entitled to receive or retain payment from the sender 
of the order it accepted only to the extent of the amount of the 
erroneous order. This subsection does not apply if the receiving bank 
executes the sender's payment order by issuing a payment order in an 
amount less than the amount of the sender's order for the purpose of 
obtaining payment of its charges for services and expenses pursuant to 
instruction of the sender.
    (c) If a receiving bank executes the payment order of the sender by 
issuing a payment order to a beneficiary different from the beneficiary 
of the sender's order and the funds transfer is completed on the basis 
of that error, the sender of the payment order that was erroneously 
executed and all previous senders in the funds transfer are not obliged 
to pay the payment orders they issued. The issuer of the erroneous order 
is entitled to recover from the beneficiary of the order the payment 
received to the extent allowed by the law governing mistake and 
restitution.

 Section 4A-304. Duty of Sender to Report Erroneously Executed Payment 
                                  Order

    If the sender of a payment order that is erroneously executed as 
stated in section 4A-303 receives notification from the receiving bank 
that the order was executed or that the sender's account was debited 
with respect to the order, the sender has a duty to exercise ordinary 
care to determine, on the basis of information available to the sender, 
that the order was erroneously executed and to notify the bank of the 
relevant facts within a reasonable time not exceeding 90 days after the 
notification from the bank was received by the sender. If the sender 
fails to perform that duty, the bank is not obliged to pay interest on 
any amount refundable to the sender under section 4A-402(d) for the 
period before the bank learns of the execution error. The bank is not 
entitled to any recovery from the sender on account of a failure by the 
sender to perform the duty stated in this section.

 Section 4A-305. Liability for Late or Improper Execution or Failure To 
                          Execute Payment Order

    (a) If a funds transfer is completed but execution of a payment 
order by the receiving bank in breach of section 4A-302 results in delay 
in payment to the beneficiary, the bank is obliged to pay interest to 
either the originator or the beneficiary of the funds transfer for the 
period of delay caused by the improper execution. Except as provided in 
subsection (c), additional damages are not recoverable.
    (b) If execution of a payment order by a receiving bank in breach of 
section 4A-302 results in (i) noncompletion of the funds transfer, (ii) 
failure to use an intermediary bank designated by the originator, or 
(iii) issuance of a payment order that does not comply with the terms of 
the payment order of the originator, the bank is liable to the 
originator for its expenses in the funds transfer and for incidental 
expenses and interest losses, to the extent not covered by subsection 
(a), resulting from the improper execution. Except as provided in 
subsection (c), additional damages are not recoverable.
    (c) In addition to the amounts payable under subsections (a) and 
(b), damages, including consequential damages, are recoverable to the 
extent provided in an express written agreement of the receiving bank.
    (d) If a receiving bank fails to execute a payment order it was 
obliged by express agreement to execute, the receiving bank is liable to 
the sender for its expenses in the transaction and for incidential 
expenses and interest losses resulting from the failure to execute. 
Additional damages, including consequential damages, are recoverable to 
the extent provided in an express written agreement of the receiving 
bank, but are not otherwise recoverable.
    (e) Reasonable attorney's fees are recoverable if demand for 
compensation under subsection (a) or (b) is made and refused before an 
action is brought on the claim. If a claim is made for breach of an 
agreement under subsection (d) and the agreement does not provide for 
damages, reasonable attorney's fees are recoverable if demand for 
compensation under subsection (d) is made and refused before an action 
is brought on the claim.
    (f) Except as stated in this section, the liability of a receiving 
bank under subsections (a) and (b) may not be varied by agreement.

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                             Part 4--Payment

                      Section 4A-401. Payment Date

    Payment date of a payment order means the day on which the amount of 
the order is payable to the beneficiary by the beneficiary's bank. The 
payment date may be determined by instruction of the sender but cannot 
be earlier than the day the order is received by the beneficiary's bank 
and, unless otherwise determined, is the day the order is received by 
the beneficiary's bank.

       Section 4A-402. Obligation of Sender To Pay Receiving Bank

    (a) This section is subject to sections 4A-205 and 4A-207.
    (b) With respect to a payment order issued to the beneficiary's 
bank, acceptance of the order by the bank obliges the sender to pay the 
bank the amount of the order, but payment is not due until the payment 
date of the order.
    (c) This subsection is subject to subsection (e) and to section 4A-
303. With respect to a payment order issued to a receiving bank other 
than the beneficiary's bank, acceptance of the order by the receiving 
bank obliges the sender to pay the bank the amount of the sender's 
order. Payment by the sender is not due until the execution date of the 
sender's order. The obligation of that sender to pay its payment order 
is excused if the funds transfer is not completed by acceptance by the 
beneficiary's bank of a payment order instructing payment to the 
beneficiary of that sender's payment order.
    (d) If the sender of a payment order pays the order and was not 
obliged to pay all or part of the amount paid, the bank receiving 
payment is obliged to refund payment to the extent the sender was not 
obliged to pay. Except as provided in sections 4A-204 and 4A-304, 
interest is payable on the refundable amount from the date of payment.
    (e) If a funds transfer is not completed as stated in subsection (c) 
and an intermediary bank is obliged to refund payment as stated in 
subsection (d) but is unable to do so because not permitted by 
applicable law or because the bank suspends payments, a sender in the 
funds transfer that executed a payment order in compliance with an 
instruction, as stated in section 4A-302(a)(1), to route the funds 
transfer through that intermediary bank is entitled to receive or retain 
payment from the sender of the payment order that it accepted. The first 
sender in the funds transfer that issued an instruction requiring 
routing through that intermediary bank is subrogated to the right of the 
bank that paid the intermediary bank to refund as stated in subsection 
(d).
    (f) The right of the sender of a payment order to be excused from 
the obligation to pay the order as stated in subsection (c) or to 
receive refund under subsection (d) may not be varied by agreement.

           Section 4A-403. Payment by Sender To Receiving Bank

    (a) Payment of the sender's obligation under section 4A-402 to pay 
the receiving bank occurs as follows:
    (1) If the sender is a bank, payment occurs when the receiving bank 
receives final settlement of the obligation through a Federal Reserve 
Bank or through a funds-transfer system.
    (2) If the sender is a bank and the sender (i) credited an account 
of the receiving bank with the sender, or (ii) caused an account of the 
receiving bank in another bank to be credited, payment occurs when the 
credit is withdrawn or, if not withdrawn, at midnight of the day on 
which the credit is withdrawable and the receiving bank learns of that 
fact.
    (3) If the receiving bank debits an account of the sender with the 
receiving bank, payment occurs when the debit is made to the extent the 
debit is covered by a withdrawable credit balance in the account.
    (b) If the sender and receiving bank are members of a funds-transfer 
system that nets obligations multilaterally among participants, the 
receiving bank receives final settlement when settlement is complete in 
accordance with the rules of the system. The obligation of the sender to 
pay the amount of a payment order transmitted through the funds-transfer 
system may be satisfied, to the extent permitted by the rules of the 
system, by setting off and applying against the sender's obligation the 
right of the sender to receive payment from the receiving bank of the 
amount of any other payment order transmitted to the sender by the 
receiving bank through the funds-transfer system. The aggregate balance 
of obligations owed by each sender to each receiving bank in the funds-
transfer system may be satisfied, to the extent permitted by the rules 
of the system, by setting off and applying against that balance the 
aggregate balance of obligations owed to the sender by other members of 
the system. The aggregate balance is determined after the right of 
setoff stated in the second sentence of this subsection has been 
exercised.
    (c) If two banks transmit payment orders to each other under an 
agreement that settlement of the obligations of each bank to the other 
under section 4A-402 will be made at the end of the day or other period, 
the total amount owed with respect to all orders transmitted by one bank 
shall be set off against the total amount owed with respect to all 
orders transmitted by the other bank. To the extent of the setoff, each 
bank has made payment to the other.

[[Page 315]]

    (d) In a case not covered by subsection (a), the time when payment 
of the sender's obligation under section 4A-402(b) or 4A-402(c) occurs 
is governed by applicable principles of law that determine when an 
obligation is satisfied.

Section 4A-404. Obligation of Beneficiary's Bank To Pay and Give Notice 
                             to Beneficiary

    (a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), if a 
beneficiary's bank accepts a payment order, the bank is obliged to pay 
the amount of the order to the beneficiary of the order. Payment is due 
on the payment date of the order, but if acceptance occurs on the 
payment date after the close of the funds-transfer business day of the 
bank, payment is due on the next funds-transfer business day. If the 
bank refuses to pay after demand by the beneficiary and receipt of 
notice of particular circumstances that will give rise to consequential 
damages as a result of nonpayment, the beneficiary may recover damages 
resulting from the refusal to pay to the extent the bank had notice of 
the damages, unless the bank proves that it did not pay because of a 
reasonable doubt concerning the right of the beneficiary to payment.
    (b) If a payment order accepted by the beneficiary's bank instructs 
payment to an account of the beneficiary, the bank is obliged to notify 
the beneficiary of receipt of the order before midnight of the next 
funds-transfer business day following the payment date. If the payment 
order does not instruct payment to an account of the beneficiary, the 
bank is required to notify the beneficiary only if notice is required by 
the order. Notice may be given by first class mail or any other means 
reasonable in the circumstances. If the bank fails to give the required 
notice, the bank is obliged to pay interest to the beneficiary on the 
amount of the payment order from the day notice should have been given 
until the day the beneficiary learned of receipt of the payment order by 
the bank. No other damages are recoverable. Reasonable attorney's fees 
are also recoverable if demand for interest is made and refused before 
an action is brought on the claim.
    (c) The right of a beneficiary to receive payment and damages as 
stated in subsection (a) may not be varied by agreement or a funds-
transfer system rule. The right of a beneficiary to be notified as 
stated in subsection (b) may be varied by agreement of the beneficiary 
or by a funds-transfer system rule if the beneficiary is notified of the 
rule before initiation of the funds transfer.

      Section 4A-405. Payment by Beneficiary's Bank To Beneficiary

    (a) If the beneficiary's bank credits an account of the beneficiary 
of a payment order, payment of the bank's obligation under section 4A-
404(a) occurs when and to the extent (i) the beneficiary is notified of 
the right to withdraw the credit, (ii) the bank lawfully applies the 
credit to a debt of the beneficiary, or (iii) funds with respect to the 
order are otherwise made available to the beneficiary by the bank.
    (b) If the beneficiary's bank does not credit an account of the 
beneficiary of a payment order, the time when payment of the bank's 
obligation under section 4A-404(a) occurs is governed by principles of 
law that determine when an obligation is satisfied.
    (c) Except as stated in subsections (d) and (e), if the 
beneficiary's bank pays the beneficiary of a payment order under a 
condition to payment or agreement of the beneficiary giving the bank the 
right to recover payment from the beneficiary if the bank does not 
receive payment of the order, the condition to payment or agreement is 
not enforceable.
    (d) A funds-transfer system rule may provide that payments made to 
beneficiaries of funds transfer made through the system are provisional 
until receipt of payment by the beneficiary's bank of the payment order 
it accepted. A beneficiary's bank that makes a payment that is 
provisional under the rule is entitled to refund from the beneficiary if 
(i) the rule requires that both the beneficiary and the originator be 
given notice of the provisional nature of the payment before the funds 
transfer is initiated, (ii) the beneficiary, the beneficiary's bank and 
the originator's bank agreed to be bound by the rule, and (iii) the 
beneficiary's bank did not receive payment of the payment order that it 
accepted. If the beneficiary is obliged to refund payment to the 
beneficiary's bank, acceptance of the payment order by the beneficiary's 
bank is nullified and no payment by the originator of the funds transfer 
to the beneficiary occurs under section 4A-406.
    (e) This subsection applies to a funds transfer that includes a 
payment order transmitted over a funds-transfer system that (i) nets 
obligations-multilaterally among participants, and (ii) has in effect a 
loss-sharing agreement among participants for the purpose of providing 
funds necessary to complete settlement of the obligations of one or more 
participants that do not meet their settlement obligations. If the 
beneficiary's bank in the funds transfer accepts a payment order and the 
system fails to complete settlement pursuant to its rules with respect 
to any payment order in the funds transfer, (i) the acceptance by the 
beneficiary's bank is nullified and no person has any right or 
obligation based on the acceptance, (ii) the beneficiary's bank is 
entitled to recover payment from the beneficiary, (iii) no payment by 
the originator to the beneficiary occurs under section 4A-406, and (iv) 
subject to section 4A-402(e), each sender in

[[Page 316]]

the funds transfer is excused from its obligation to pay its payment 
order under section 4A-402(c) because the funds transfer has not been 
completed.

   Section 4A-406. Payment by Originator to Beneficiary; Discharge of 
                          Underlying Obligation

    (a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), the 
originator of a funds transfer pays the beneficiary of the originator's 
payment order (i) at the time a payment order for the benefit of the 
beneficiary is accepted by the beneficiary's bank in the funds transfer 
and (ii) in an amount equal to the amount of the order accepted by the 
beneficiary's bank, but not more than the amount of the originator's 
order.
    (b) If payment under subsection (a) is made to satisfy an 
obligation, the obligation is discharged to the same extent discharge 
would result from payment to the beneficiary of the same amount in 
money, unless (i) the payment under subsection (a) was made by a means 
prohibited by the contract of the beneficiary with respect to the 
obligation, (ii) the beneficiary, within a reasonable time after 
receiving notice of receipt of the order by the beneficiary's bank, 
notified the originator of the beneficiary's refusal of the payment, 
(iii) funds with respect to the order were not withdrawn by the 
beneficiary or applied to a debt of the beneficiary, and (iv) the 
beneficiary would suffer a loss that could reasonably have been avoided 
if payment had been made by a means complying with the contract. If 
payment by the originator does not result in discharge under this 
section, the originator is subrogated to the rights of the beneficiary 
to receive payment from the beneficiary's bank under section 4A-404(a).
    (c) For the purpose of determining whether discharge of an 
obligation occurs under subsection (b), if the beneficiary's bank 
accepts a payment order in an amount equal to the amount of the 
originator's payment order less charges of one or more receiving banks 
in the funds transfer, payment to the beneficiary is deemed to be in the 
amount of the originator's order unless upon demand by the beneficiary 
the originator does not pay the beneficiary the amount of the deducted 
charges.
    (d) Rights of the originator or of the beneficiary of a funds 
transfer under this section may be varied only by agreement of the 
originator and the beneficiary.

                    Part 5--Miscellaneous Provisions

  Section 4A-501. Variation by Agreement and Effect of Funds-Transfer 
                               System Rule

    (a) Except as otherwise provided in this Article, the rights and 
obligations of a party to a funds transfer may be varied by agreement of 
the affected party.
    (b) Funds-transfer system rule means a rule of an association of 
banks (i) governing transmission of payment orders by means of a funds-
transfer system of the association or rights and obligations with 
respect to those orders, or (ii) to the extent the rule governs rights 
and obligations between banks that are parties to a funds transfer in 
which a Federal Reserve Bank, acting as an intermediary bank, sends a 
payment order to the beneficiary's bank. Except as otherwise provided in 
this Article, a funds-transfer system rule governing rights and 
obligations between participating banks using the system may be 
effective even if the rule conflicts with this Article and indirectly 
affects another party to the funds transfer who does not consent to the 
rule. A funds-transfer system rule may also govern rights and 
obligations of parties other than participating banks using the system 
to the extent stated in sections 4A-404(c), 4A-405(d), and 4A-507(c).

  Section 4A-502. Creditor Process Served on Receiving Bank; Setoff by 
                           Beneficiary's Bank

    (a) As used in this section, creditor process means levy, 
attachment, garnishment, notice of lien, sequestration, or similar 
process issued by or on behalf of a creditor or other claimant with 
respect to an account.
    (b) This subsection applies to creditor process with respect to an 
authorized account of the sender of a payment order if the creditor 
process is served on the receiving bank. For the purpose of determining 
rights with respect to the creditor process, if the receiving bank 
accepts the payment order the balance in the authorized account is 
deemed to be reduced by the amount of the payment order to the extent 
the bank did not otherwise receive payment of the order, unless the 
creditor process is served at a time and in a manner affording the bank 
a reasonable opportunity to act on it before the bank accepts the 
payment order.
    (c) If a beneficiary's bank has received a payment order for payment 
to the beneficiary's account in the bank, the following rules apply:
    (1) The bank may credit the beneficiary's account. The amount 
credited may be set off against an obligation owed by the beneficiary to 
the bank or may be applied to satisfy creditor process served on the 
bank with respect to the account.
    (2) The bank may credit the beneficiary's account and allow 
withdrawal of the amount credited unless creditor process with respect 
to the account is served at a time and in a manner affording the bank a 
reasonable opportunity to act to prevent withdrawal.
    (3) If creditor process with respect to the beneficiary's account 
has been served and the bank has had a reasonable opportunity to act on 
it, the bank may not reject the

[[Page 317]]

payment order except for a reason unrelated to the service of process.
    (d) Creditor process with respect to a payment by the originator to 
the beneficiary pursuant to a funds transfer may be served only on the 
beneficiary's bank with respect to the debt owned by that bank to the 
beneficiary. Any other bank served with the creditor process is not 
obliged to act with respect to the process.

 Section 4A-503. Injunction or Restraining Order with Respect to Funds 
                                Transfer

    For proper cause and in compliance with applicable law, a court may 
restrain (i) a person from issuing a payment order to initiate a funds 
transfer, (ii) an originator's bank from executing the payment order of 
the originator, or (iii) the beneficiary's bank from releasing funds to 
the beneficiary or the beneficiary from withdrawing the funds. A court 
may not otherwise restrain a person from issuing a payment order, paying 
or receiving payment of a payment order, or otherwise acting with 
respect to a funds transfer.

 Section 4A-504. Order In Which Items and Payment Orders May Be Charged 
              to Account; Order of Withdrawals from Account

    (a) If a receiving bank has received more than one payment order of 
the sender or one or more payment orders and other items that are 
payable from the sender's account, the bank may charge the sender's 
account with respect to the various orders and items in any sequence.
    (b) In determining whether a credit to an account has been withdrawn 
by the holder of the account or applied to a debt of the holder of the 
account, credits first made to the account are first withdrawn or 
applied.

 Section 4A-505. Preclusion of Objection to Debit of Customer's Account

    If a receiving bank has received payment from its customer with 
respect to a payment order issued in the name of the customer as sender 
and accepted by the bank, and the customer received notification 
reasonably identifying the order, the customer is precluded from 
asserting that the bank is not entitled to retain the payment unless the 
customer notifies the bank of the customer's objection to the payment 
within one year after the notification was received by the customer.

                    Section 4A-506. Rate of Interest

    (a) If, under this Article, a receiving bank is obliged to pay 
interest with respect to a payment order issued to the bank, the amount 
payable may be determined (i) by agreement of the sender and receiving 
bank, or (ii) by a funds-transfer system rule if the payment order is 
transmitted through a funds-transfer system.
    (b) If the amount of interest is not determined by an agreement or 
rule as stated in subsection (a), the amount is calculated by 
multiplying the applicable Federal Funds rate by the amount on which 
interest is payable, and then multiplying the product by the number of 
days for which interest is payable. The applicable Federal Funds rate is 
the average of the Federal Funds rates published by the Federal Reserve 
Bank of New York for each of the days for which interest is payable 
divided by 360. The Federal Funds rate for any day on which a published 
rate is not available is the same as the published rate for the next 
preceding day for which there is a published rate. If a receiving bank 
that accepted a payment order is required to refund payment to the 
sender of the order because the funds transfer was not completed, but 
the failure to complete was not due to any fault by the bank, the 
interest payable is reduced by a percentage equal to the reserve 
requirement on deposits of the receiving bank.

                      Section 4A-507. Choice of Law

    (a) The following rules apply unless the affected parties otherwise 
agree or subsection (c) applies:
    (1) The rights and obligations between the sender of a payment order 
and the receiving bank are governed by the law of the jurisdiction in 
which the receiving bank is located.
    (2) The rights and obligations between the beneficiary's bank and 
the beneficiary are governed by the law of the jurisdiction in which the 
beneficiary's bank is located.
    (3) The issue of when payment is made pursuant to a funds transfer 
by the originator to the beneficiary is governed by the law of the 
jurisdiction in which the beneficiary's bank is located.
    (b) If the parties described in each paragraph of subsection (a) 
have made an agreement selecting the law of a particular jurisdiction to 
govern rights and obligations between each other, the law of that 
jurisdiction governs those rights and obligations, whether or not the 
payment order or the funds transfer bears a reasonable relation to that 
jurisdiction.
    (c) A funds-transfer system rule may select the law of a particular 
jurisdiction to govern (i) rights and obligations between participating 
banks with respect to payment orders transmitted or processed through 
the system, or (ii) the rights and obligations of some or all parties to 
a funds transfer any part of which is carried out by means of the 
system. A choice of law made pursuant to clause (i) is binding on 
participating banks. A choice of law made pursuant to clause (ii) is 
binding on the originator, other sender, or a receiving bank having 
notice that the funds-transfer system might be used in the

[[Page 318]]

funds transfer and of the choice of law by the system when the 
originator, other sender, or receiving bank issued or accepted a payment 
order. The beneficiary of a funds transfer is bound by the choice of law 
if, when the funds transfer is initiated, the beneficiary has notice 
that the funds-transfer system might be used in the funds transfer and 
of the choice of law by the system. The law of a jurisdiction selected 
pursuant to this subsection may govern, whether or not that law bears a 
reasonable relation to the matter in issue.
    (d) In the event of inconsistency between an agreement under 
subsection (b) and a choice-of-law rule under subsection (c), the 
agreement under subsection (b) prevails.
    (e) If a funds transfer is made by use of more than one funds-
transfer system and there is inconsistency between choice-of-law rules 
of the systems, the matter in issue is governed by the law of the 
selected jurisdiction that has the most significant relationship to the 
matter in issue.

[55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990]



PART 211_INTERNATIONAL BANKING OPERATIONS (REGULATION K)--Table of Contents




    Subpart A_International Operations of U.S. Banking Organizations

Sec.
211.1 Authority, purpose, and scope.
211.2 Definitions.
211.3 Foreign branches of U.S. banking organizations.
211.4 Permissible investments and activities of foreign branches of 
          member banks.
211.5 Edge and agreement corporations.
211.6 Permissible activities of Edge and agreement corporations in the 
          United States.
211.7 Voluntary liquidation of Edge and agreement corporations.
211.8 Investments and activities abroad.
211.9 Investment procedures.
211.10 Permissible activities abroad.
211.11 Advisory opinions under Regulation K.
211.12 Lending limits and captital requirements.
211.13 Supervision and reporting.

                 Subpart B_Foreign Banking Organizations

211.20 Authority, purpose, and scope.
211.21 Definitions.
211.22 Interstate banking operations of foreign banking organizations.
211.23 Nonbanking activities of foreign banking organizations.
211.24 Approval of offices of foreign banks; procedures for 
          applications; standards for approval; representative office 
          activities and standards for approval; preservation of 
          existing authority.
211.25 Termination of offices of foreign banks.
211.26 Examination of offices and affiliates of foreign banks.
211.27 Disclosure of supervisory information to foreign supervisors.
211.28 Provisions applicable to branches and agencies: limitation on 
          loans to one borrower.
211.29 Applications by state branches and state agencies to conduct 
          activities not permissible for federal branches.
211.30 Criteria for evaluating the U.S. operations of foreign banks not 
          subject to consolidated supervision.

                   Subpart C_Export Trading Companies

211.31 Authority, purpose, and scope.
211.32 Definitions.
211.33 Investments and extensions of credit.
211.34 Procedures for filing and processing notices.

               Subpart D_International Lending Supervision

211.41 Authority, purpose, and scope.
211.42 Definitions.
211.43 Allocated transfer risk reserve.
211.44 Reporting and disclosure of international assets.
211.45 Accounting for fees on international loans.

                             Interpretations

211.601 Status of certain offices for purposes of the International 
          Banking Act restrictions on interstate banking operations.
211.602 Investments by United States banking organizations in foreign 
          companies that transact business in the United States.
211.603 Commodity swap transactions.
211.604 Data processing activities.
211.605 Permissible underwriting activities of foreign banks.

    Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 3101 et 
seq., and 3901 et seq.; 15 U.S.C. 6801 and 6805; 31 U.S.C. 5318.



    Subpart A_International Operations of U.S. Banking Organizations

    Source: 66 FR 54374, Oct. 26, 2001, unless otherwise noted.

[[Page 319]]



Sec. 211.1  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Federal 
Reserve Act (FRA) (12 U.S.C. 221 et seq.); the Bank Holding Company Act 
of 1956 (BHC Act) (12 U.S.C. 1841 et seq.); and the International 
Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose. This subpart sets out rules governing the international 
and foreign activities of U.S. banking organizations, including 
procedures for establishing foreign branches and Edge and agreement 
corporations to engage in international banking, and for investments in 
foreign organizations.
    (c) Scope. This subpart applies to:
    (1) Member banks with respect to their foreign branches and 
investments in foreign banks under section 25 of the FRA (12 U.S.C. 601-
604a);\1\ and
---------------------------------------------------------------------------

    \1\ Section 25 of the FRA (12 U.S.C. 601-604a), which refers to 
national banking associations, also applies to state member banks of the 
Federal Reserve System by virtue of section 9 of the FRA (12 U.S.C. 321)
---------------------------------------------------------------------------

    (2) Corporations organized under section 25A of the FRA (12 U.S.C. 
611-631) (Edge corporations);
    (3) Corporations having an agreement or undertaking with the Board 
under section 25 of the FRA (12 U.S.C. 601-604a) (agreement 
corporations); and
    (4) Bank holding companies with respect to the exemption from the 
nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of 
that act (12 U.S.C. 1843(c)(13)).



Sec. 211.2  Definitions.

    Unless otherwise specified, for purposes of this subpart:
    (a) An affiliate of an organization means:
    (1) Any entity of which the organization is a direct or indirect 
subsidiary; or
    (2) Any direct or indirect subsidiary of the organization or such 
entity.
    (b) Capital Adequacy Guidelines means the ``Capital Adequacy 
Guidelines for State Member Banks: Risk-Based Measure'' (12 CFR part 
208, app. A) or the ``Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure'' (12 CFR part 225, app. A).
    (c) Capital and surplus means, unless otherwise provided in this 
part:
    (1) For organizations subject to the Capital Adequacy Guidelines:
    (i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under the Capital Adequacy Guidelines); and
    (ii) The balance of allowance for loan and lease losses not included 
in an organization's tier 2 capital for calculation of risk-based 
capital, based on the organization's most recent consolidated Report of 
Condition and Income.
    (2) For all other organizations, paid-in and unimpaired capital and 
surplus, and includes undivided profits but does not include the 
proceeds of capital notes or debentures.
    (d) Directly or indirectly, when used in reference to activities or 
investments of an organization, means activities or investments of the 
organization or of any subsidiary of the organization.
    (e) Eligible country means any country:
    (1) For which an allocated transfer risk reserve is required 
pursuant to Sec. 211.43 of this part and that has restructured its 
sovereign debt held by foreign creditors; and
    (2) Any other country that the Board deems to be eligible.
    (f) An Edge corporation is engaged in banking if it is ordinarily 
engaged in the business of accepting deposits in the United States from 
nonaffiliated persons.
    (g) Engaged in business or engaged in activities in the United 
States means maintaining and operating an office (other than a 
representative office) or subsidiary in the United States.
    (h) Equity means an ownership interest in an organization, whether 
through:
    (1) Voting or nonvoting shares;
    (2) General or limited partnership interests;
    (3) Any other form of interest conferring ownership rights, 
including warrants, debt, or any other interests that are convertible 
into shares or other ownership rights in the organization; or
    (4) Loans that provide rights to participate in the profits of an 
organization, unless the investor receives a determination that such 
loans should not

[[Page 320]]

be considered equity in the circumstances of the particular investment.
    (i) Foreign or foreign country refers to one or more foreign 
nations, and includes the overseas territories, dependencies, and 
insular possessions of those nations and of the United States, and the 
Commonwealth of Puerto Rico.
    (j) Foreign bank means an organization that:
    (1) Is organized under the laws of a foreign country;
    (2) Engages in the business of banking;
    (3) Is recognized as a bank by the bank supervisory or monetary 
authority of the country of its organization or principal banking 
operations;
    (4) Receives deposits to a substantial extent in the regular course 
of its business; and
    (5) Has the power to accept demand deposits.
    (k) Foreign branch means an office of an organization (other than a 
representative office) that is located outside the country in which the 
organization is legally established and at which a banking or financing 
business is conducted.
    (l) Foreign person means an office or establishment located outside 
the United States, or an individual residing outside the United States.
    (m) Investment means:
    (1) The ownership or control of equity;
    (2) Binding commitments to acquire equity;
    (3) Contributions to the capital and surplus of an organization; or
    (4) The holding of an organization's subordinated debt when the 
investor and the investor's affiliates hold more than 5 percent of the 
equity of the organization.
    (n) Investment grade means a security that is rated in one of the 
four highest rating categories by:
    (1) Two or more NRSROs; or
    (2) One NRSRO if the security has been rated by only one NRSRO.
    (o) Investor means an Edge corporation, agreement corporation, bank 
holding company, or member bank.
    (p) Joint venture means an organization that has 20 percent or more 
of its voting shares held directly or indirectly by the investor or by 
an affiliate of the investor under any authority, but which is not a 
subsidiary of the investor or of an affiliate of the investor.
    (q) Loans and extensions of credit means all direct and indirect 
advances of funds to a person made on the basis of any obligation of 
that person to repay the funds.
    (r) NRSRO means a nationally recognized statistical rating 
organization as designated by the Securities and Exchange Commission.
    (s) Organization means a corporation, government, partnership, 
association, or any other entity.
    (t) Person means an individual or an organization.
    (u) Portfolio investment means an investment in an organization 
other than a subsidiary or joint venture.
    (v) Representative office means an office that:
    (1) Engages solely in representational and administrative functions 
(such as soliciting new business or acting as liaison between the 
organization's head office and customers in the United States); and
    (2) Does not have authority to make any business decision (other 
than decisions relating to its premises or personnel) for the account of 
the organization it represents, including contracting for any deposit or 
deposit-like liability on behalf of the organization.
    (w) Subsidiary means an organization that has more than 50 percent 
of its voting shares held directly or indirectly, or that otherwise is 
controlled or capable of being controlled, by the investor or an 
affiliate of the investor under any authority. Among other 
circumstances, an investor is considered to control an organization if:
    (1) The investor or an affiliate is a general partner of the 
organization; or
    (2) The investor and its affiliates directly or indirectly own or 
control more than 50 percent of the equity of the organization.
    (x) Tier 1 capital has the same meaning as provided under the 
Capital Adequacy Guidelines.
    (y) Well capitalized means:
    (1) In relation to a parent member or insured bank, that the 
standards set out in Sec. 208.43(b)(1) of Regulation H (12 CFR 
208.43(b)(1)) are satisfied;

[[Page 321]]

    (2) In relation to a bank holding company, that the standards set 
out in Sec. 225.2(r)(1) of Regulation Y (12 CFR 225.2(r)(1)) are 
satisfied; and
    (3) In relation to an Edge or agreement corporation, that it has 
tier 1 and total risk-based capital ratios of 6.0 and 10.0 percent, 
respectively, or greater.
    (z) Well managed means that the Edge or agreement corporation, any 
parent insured bank, and the bank holding company received a composite 
rating of 1 or 2, and at least a satisfactory rating for management if 
such a rating is given, at their most recent examination or review.



Sec. 211.3  Foreign branches of U.S. banking organizations.

    (a) General--(1) Definition of banking organization. For purposes of 
this section, a banking organization is defined as a member bank and its 
affiliates.
    (2) A banking organization is considered to be operating a branch in 
a foreign country if it has an affiliate that is a member bank, Edge or 
agreement corporation, or foreign bank that operates an office (other 
than a representative office) in that country.
    (3) For purposes of this subpart, a foreign office of an operating 
subsidiary of a member bank shall be treated as a foreign branch of the 
member bank and may engage only in activities permissible for a branch 
of a member bank.
    (4) At any time upon notice, the Board may modify or suspend 
branching authority conferred by this section with respect to any 
banking organization.
    (b) (1) Establishment of foreign branches. (i) Foreign branches may 
be established by any member bank having capital and surplus of 
$1,000,000 or more, an Edge corporation, an agreement corporation, any 
subsidiary the shares of which are held directly by the member bank, or 
any other subsidiary held pursuant to this subpart.
    (ii) The Board grants its general consent under section 25 of the 
FRA (12 U.S.C. 601-604a) for a member bank to establish a branch in the 
Commonwealth of Puerto Rico and the overseas territories, dependencies, 
and insular possessions of the United States.
    (2) Prior notice. Unless otherwise provided in this section, the 
establishment of a foreign branch requires 30 days' prior written notice 
to the Board.
    (3) Branching into additional foreign countries. After giving the 
Board 12 business days prior written notice, a banking organization that 
operates branches in two or more foreign countries may establish a 
branch in an additional foreign country.
    (4) Additional branches within a foreign country. No prior notice is 
required to establish additional branches in any foreign country where 
the banking organization operates one or more branches.
    (5) Branching by nonbanking affiliates. No prior notice is required 
for a nonbanking affiliate of a banking organization (i.e., an 
organization that is not a member bank, an Edge or agreement 
corporation, or foreign bank) to establish branches within a foreign 
country or in additional foreign countries.
    (6) Expiration of branching authority. Authority to establish 
branches, when granted following prior written notice to the Board, 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless extended by the Board.
    (c) Reporting. Any banking organization that opens, closes, or 
relocates a branch shall report such change in a manner prescribed by 
the Board.
    (d) Reserves of foreign branches of member banks. Member banks shall 
maintain reserves against foreign branch deposits when required by 
Regulation D (12 CFR part 204).
    (e) Conditional approval; access to information. The Board may 
impose such conditions on authority granted by it under this section as 
it deems necessary, and may require termination of any activities 
conducted under authority of this section if a member bank is unable to 
provide information on its activities or those of its affiliates that 
the Board deems necessary to determine and enforce compliance with U.S. 
banking laws.

[[Page 322]]



Sec. 211.4  Permissible activities and investments of foreign branches 
of member banks.

    (a) Permissible activities and investments. In addition to its 
general banking powers, and to the extent consistent with its charter, a 
foreign branch of a member bank may engage in the following activities 
and make the following investments, so far as is usual in connection 
with the business of banking in the country where it transacts business:
    (1) Guarantees. Guarantee debts, or otherwise agree to make payments 
on the occurrence of readily ascertainable events (including, but not 
limited to, nonpayment of taxes, rentals, customs duties, or costs of 
transport, and loss or nonconformance of shipping documents) if the 
guarantee or agreement specifies a maximum monetary liability; however, 
except to the extent that the member bank is fully secured, it may not 
have liabilities outstanding for any person on account of such 
guarantees or agreements which, when aggregated with other unsecured 
obligations of the same person, exceed the limit contained in section 
5200(a)(1) of the Revised Statutes (12 U.S.C. 84) for loans and 
extensions of credit;
    (2) Government obligations. (i) Underwrite, distribute, buy, sell, 
and hold obligations of:
    (A) The national government of the country where the branch is 
located and any political subdivision of that country;
    (B) An agency or instrumentality of the national government of the 
country where the branch is located where such obligations are supported 
by the taxing authority, guarantee, or full faith and credit of that 
government;
    (C) The national government or political subdivision of any country, 
where such obligations are rated investment grade; and
    (D) An agency or instrumentality of any national government where 
such obligations are rated investment grade and are supported by the 
taxing authority, guarantee or full faith and credit of that government.
    (ii) No member bank, under authority of this paragraph (a)(2), may 
hold, or be under commitment with respect to, such obligations for its 
own account in relation to any one country in an amount exceeding the 
greater of:
    (A) 10 percent of its tier 1 capital; or
    (B) 10 percent of the total deposits of the bank's branches in that 
country on the preceding year-end call report date (or the date of 
acquisition of the branch, in the case of a branch that has not been so 
reported);
    (3) Other investments. (i) Invest in:
    (A) The securities of the central bank, clearinghouses, governmental 
entities other than those authorized under paragraph (a)(2) of this 
section, and government-sponsored development banks of the country where 
the foreign branch is located;
    (B) Other debt securities eligible to meet local reserve or similar 
requirements; and
    (C) Shares of automated electronic-payments networks, professional 
societies, schools, and the like necessary to the business of the 
branch;
    (ii) The total investments of a bank's branches in a country under 
this paragraph (a)(3) (exclusive of securities held as required by the 
law of that country or as authorized under section 5136 of the Revised 
Statutes (12 U.S.C. 24, Seventh)) may not exceed 1 percent of the total 
deposits of the bank's branches in that country on the preceding year-
end call report date (or on the date of acquisition of the branch, in 
the case of a branch that has not been so reported);
    (4) Real estate loans. Take liens or other encumbrances on foreign 
real estate in connection with its extensions of credit, whether or not 
of first priority and whether or not the real estate has been improved;
    (5) Insurance. Act as insurance agent or broker;
    (6) Employee benefits program. Pay to an employee of the branch, as 
part of an employee benefits program, a greater rate of interest than 
that paid to other depositors of the branch;
    (7) Repurchase agreements. Engage in repurchase agreements involving 
securities and commodities that are the functional equivalents of 
extensions of credit;
    (8) Investment in subsidiaries. With the Board's prior approval, 
acquire all of the shares of a company (except where local law requires 
other investors to

[[Page 323]]

hold directors' qualifying shares or similar types of instruments) that 
engages solely in activities:
    (i) In which the member bank is permitted to engage; or
    (ii) That are incidental to the activities of the foreign branch.
    (b) Other activities. With the Board's prior approval, engage in 
other activities that the Board determines are usual in connection with 
the transaction of the business of banking in the places where the 
member bank's branches transact business.



Sec. 211.5  Edge and agreement corporations.

    (a) Board Authority. The Board shall have the authority to approve:
    (1) The establishment of Edge corporations;
    (2) Investments in agreement corporations; and
    (3) A member bank's proposal to invest more than 10 percent of its 
capital and surplus in the aggregate amount of stock held in all Edge 
and agreement corporations.
    (b) Organization of an Edge corporation--(1) Permit. A proposed Edge 
corporation shall become a body corporate when the Board issues a permit 
approving its proposed name, articles of association, and organization 
certificate.
    (2) Name. The name of the Edge corporation shall include 
international, foreign, overseas, or a similar word, but may not 
resemble the name of another organization to an extent that might 
mislead or deceive the public.
    (3) Federal Register notice. The Board shall publish in the Federal 
Register notice of any proposal to organize an Edge corporation and 
shall give interested persons an opportunity to express their views on 
the proposal.
    (4) Factors considered by Board. The factors considered by the Board 
in acting on a proposal to organize an Edge corporation include:
    (i) The financial condition and history of the applicant;
    (ii) The general character of its management;
    (iii) The convenience and needs of the community to be served with 
respect to international banking and financing services; and
    (iv) The effects of the proposal on competition.
    (5) Authority to commence business. After the Board issues a permit, 
the Edge corporation may elect officers and otherwise complete its 
organization, invest in obligations of the U.S. government, and maintain 
deposits with depository institutions, but it may not exercise any other 
powers until at least 25 percent of the authorized capital stock 
specified in the articles of association has been paid in cash, and each 
shareholder has paid in cash at least 25 percent of that shareholder's 
stock subscription.
    (6) Expiration of unexercised authority. Unexercised authority to 
commence business as an Edge corporation shall expire one year after 
issuance of the permit, unless the Board extends the period.
    (c) Other provisions regarding Edge corporations--(1) Amendments to 
articles of association. No amendment to the articles of association 
shall become effective until approved by the Board.
    (2) Shareholders' meeting. An Edge corporation shall provide in its 
bylaws that:
    (i) A shareholders' meeting shall be convened at the request of the 
Board within five business days after the Board gives notice of the 
request to the Edge corporation;
    (ii) Any shareholder or group of shareholders that owns or controls 
25 percent or more of the shares of the Edge corporation shall attend 
such a meeting in person or by proxy; and
    (iii) Failure by a shareholder or authorized representative to 
attend such meeting in person or by proxy may result in removal or 
barring of the shareholder or representative from further participation 
in the management or affairs of the Edge corporation.
    (3) Nature and ownership of shares--(i) Shares. Shares of stock in 
an Edge corporation may not include no-par-value shares and shall be 
issued and transferred only on its books and in compliance with section 
25A of the FRA (12 U.S.C. 611 et seq.) and this subpart.
    (ii) Contents of share certificates. The share certificates of an 
Edge corporation shall:
    (A) Name and describe each class of shares, indicating its character 
and

[[Page 324]]

any unusual attributes, such as preferred status or lack of voting 
rights; and
    (B) Conspicuously set forth the substance of:
    (1) Any limitations on the rights of ownership and transfer of 
shares imposed by section 25A of the FRA (12 U.S.C. 611 et seq.); and
    (2) Any rules that the Edge corporation prescribes in its bylaws to 
ensure compliance with this paragraph (c).
    (4) Change in status of shareholder. Any change in status of a 
shareholder that causes a violation of section 25A of the FRA (12 U.S.C. 
611 et seq.) shall be reported to the Board as soon as possible, and the 
Edge corporation shall take such action as the Board may direct.
    (d) Ownership of Edge corporations by foreign institutions--(1) 
Prior Board approval. One or more foreign or foreign-controlled domestic 
institutions referred to in section 25A(11) of the FRA (12 U.S.C. 619) 
may apply for the Board's prior approval to acquire, directly or 
indirectly, a majority of the shares of the capital stock of an Edge 
corporation.
    (2) Conditions and requirements. Such an institution shall:
    (i) Provide the Board with information related to its financial 
condition and activities and such other information as the Board may 
require;
    (ii) Ensure that any transaction by an Edge corporation with an 
affiliate\2\ is on substantially the same terms, including interest 
rates and collateral, as those prevailing at the same time for 
comparable transactions by the Edge corporation with nonaffiliated 
persons, and does not involve more than the normal risk of repayment or 
present other unfavorable features;
---------------------------------------------------------------------------

    \2\ For purposes of this paragraph (d)(2), affiliate means any 
organization that would be an affiliate under section 23A of the FRA (12 
U.S.C. 371c) if the Edge corporation were a member bank.
---------------------------------------------------------------------------

    (iii) Ensure that the Edge corporation will not provide funding on a 
continual or substantial basis to any affiliate or office of the foreign 
institution through transactions that would be inconsistent with the 
international and foreign business purposes for which Edge corporations 
are organized; and
    (iv) Comply with the limitation on aggregate investments in all Edge 
and agreement corporations set forth in paragraph (h) of this section.
    (3) Foreign institutions not subject to the BHC Act. In the case of 
a foreign institution not subject to section 4 of the BHC Act (12 U.S.C. 
1843), that institution shall:
    (i) Comply with any conditions that the Board may impose that are 
necessary to prevent undue concentration of resources, decreased or 
unfair competition, conflicts of interest, or unsound banking practices 
in the United States; and
    (ii) Give the Board 30 days' prior written notice before engaging in 
any nonbanking activity in the United States, or making any initial or 
additional investments in another organization, that would require prior 
Board approval or notice by an organization subject to section 4 of the 
BHC Act (12 U.S.C. 1843); in connection with such notice, the Board may 
impose conditions necessary to prevent adverse effects that may result 
from such activity or investment.
    (e) Change in control of an Edge corporation--(1) Prior notice. (i) 
Any person shall give the Board 60 days' prior written notice before 
acquiring, directly or indirectly, 25 percent or more of the voting 
shares, or otherwise acquiring control, of an Edge corporation.
    (ii) The Board may extend the 60-day period for an additional 30 
days by notifying the acquiring party.
    (iii) A notice under this paragraph (e) need not be filed where a 
change in control is effected through a transaction requiring the 
Board's approval under section 3 of the BHC Act (12 U.S.C. 1842).
    (2) Board review. In reviewing a notice filed under this paragraph 
(e), the Board shall consider the factors set forth in paragraph (b)(4) 
of this section, and may disapprove a notice or impose any conditions 
that it finds necessary to assure the safe and sound operation of the 
Edge corporation, to assure the international character of its 
operation, and to prevent adverse effects, such as decreased or unfair 
competition, conflicts of interest, or undue concentration of resources.

[[Page 325]]

    (f) Domestic branching by Edge corporations--(1) Prior notice. (i) 
An Edge corporation may establish branches in the United States 30 days 
after the Edge corporation has given written notice of its intention to 
do so to its Reserve Bank, unless the Edge corporation is notified to 
the contrary within that time.
    (ii) The notice to the Reserve Bank shall include a copy of the 
notice of the proposal published in a newspaper of general circulation 
in the communities to be served by the branch.
    (iii) The newspaper notice may appear no earlier than 90 calendar 
days prior to submission of notice of the proposal to the Reserve Bank. 
The newspaper notice shall provide an opportunity for the public to give 
written comment on the proposal to the appropriate Federal Reserve Bank 
for at least 30 days after the date of publication.
    (2) Factors considered. The factors considered in acting upon a 
proposal to establish a branch are enumerated in paragraph (b)(4) of 
this section.
    (3) Expiration of authority. Authority to establish a branch under 
prior notice shall expire one year from the earliest date on which that 
authority could have been exercised, unless the Board extends the 
period.
    (g) Agreement corporations--(1) General. With the prior approval of 
the Board, a member bank or bank holding company may invest in a 
federally or state-chartered corporation that has entered into an 
agreement or undertaking with the Board that it will not exercise any 
power that is impermissible for an Edge corporation under this subpart.
    (2) Factors considered by Board. The factors considered in acting 
upon a proposal to establish an agreement corporation are enumerated in 
paragraph (b)(4) of this section.
    (h) (1) Limitation on investment in Edge and agreement corporations. 
A member bank may invest up to 10 percent of its capital and surplus in 
the capital stock of Edge and agreement corporations or, with the prior 
approval of the Board, up to 20 percent of its capital and surplus in 
such stock.
    (2) Factors considered by Board. The factors considered by the Board 
in acting on a proposal under paragraph (h)(1) of this section shall 
include:
    (i) The composition of the assets of the bank's Edge and agreement 
corporations;
    (ii) The total capital invested by the bank in its Edge and 
agreement corporations when combined with retained earnings of the Edge 
and agreement corporations (including amounts invested in and retained 
earnings of any foreign bank subsidiaries) as a percentage of the bank's 
capital;
    (iii) Whether the bank, bank holding company, and Edge and agreement 
corporations are well-capitalized and well-managed;
    (iv) Whether the bank is adequately capitalized after 
deconsolidating and deducting the aggregate investment in and assets of 
all Edge or agreement corporations and all foreign bank subsidiaries; 
and
    (v) Any other factor the Board deems relevant to the safety and 
soundness of the member bank.
    (i) Reserve requirements and interest rate limitations. The deposits 
of an Edge or agreement corporation are subject to Regulations D and Q 
(12 CFR parts 204 and 217) in the same manner and to the same extent as 
if the Edge or agreement corporation were a member bank.
    (j) Liquid funds. Funds of an Edge or agreement corporation that are 
not currently employed in its international or foreign business, if held 
or invested in the United States, shall be in the form of:
    (1) Cash;
    (2) Deposits with depository institutions, as described in 
Regulation D (12 CFR part 204), and other Edge and agreement 
corporations;
    (3) Money-market instruments (including repurchase agreements with 
respect to such instruments), such as bankers' acceptances, federal 
funds sold, and commercial paper; and
    (4) Short- or long-term obligations of, or fully guaranteed by, 
federal, state, and local governments and their instrumentalities.
    (k) Reports by Edge and agreement corporations of crimes and 
suspected crimes. An Edge or agreement corporation, or any branch or 
subsidiary thereof, shall

[[Page 326]]

file a suspicious-activity report in accordance with the provisions of 
Sec. 208.62 of Regulation H (12 CFR 208.62).
    (l) Protection of customer information. An Edge or agreement 
corporation shall comply with the Interagency Guidelines Establishing 
Standards for Safeguarding Customer Information prescribed pursuant to 
sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 
6805), set forth in appendix D-2 to part 208 of this chapter.
    (m) Procedures for monitoring Bank Secrecy Act compliance. (1) 
[Reserved]
    (2) Customer identification program. Each Edge or agreement 
corporation is subject to the requirements of 31 U.S.C. 5318(l) and the 
implementing regulation jointly promulgated by the Board and the 
Department of the Treasury at 31 CFR 103.121, which require a customer 
identification program.

[66 FR 54374, Oct. 26, 2001, as amended at 66 FR 58655, Nov. 23, 2001; 
68 FR 25112, May 9, 2003]

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, Sec. 211.5 was 
amended by revising paragraph (l), effective July 1, 2005. For the 
convenience of the user, the revised text is set forth as follows:

Sec. 211.5  Edge and agreement corporations.

                                * * * * *

    (l) Protection of customer information and consumer information. An 
Edge or agreement corporation shall comply with the Interagency 
Guidelines Establishing Information Security Standards prescribed 
pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 
U.S.C. 6801 and 6805) and, with respect to the proper disposal of 
consumer information, section 216 of the Fair and Accurate Credit 
Transactions Act of 2003 (15 U.S.C. 1681w), set forth in appendix D-2 to 
part 208 of this chapter.

                                * * * * *



Sec. 211.6  Permissible activities of Edge and agreement corporations 
in the United States.

    (a) Activities incidental to international or foreign business. An 
Edge or agreement corporation may engage, directly or indirectly, in 
activities in the United States that are permitted by section 25A(6) of 
the FRA (12 U.S.C. 615) and are incidental to international or foreign 
business, and in such other activities as the Board determines are 
incidental to international or foreign business. The following 
activities will ordinarily be considered incidental to an Edge or 
agreement corporation's international or foreign business:
    (1) Deposit-taking activities--(i) Deposits from foreign governments 
and foreign persons. An Edge or agreement corporation may receive in the 
United States transaction accounts, savings, and time deposits 
(including issuing negotiable certificates of deposits) from foreign 
governments and their agencies and instrumentalities, and from foreign 
persons.
    (ii) Deposits from other persons. An Edge or agreement corporation 
may receive from any other person in the United States transaction 
accounts, savings, and time deposits (including issuing negotiable 
certificates of deposit) if such deposits:
    (A) Are to be transmitted abroad;
    (B) Consist of funds to be used for payment of obligations to the 
Edge or agreement corporation or collateral securing such obligations;
    (C) Consist of the proceeds of collections abroad that are to be 
used to pay for exported or imported goods or for other costs of 
exporting or importing or that are to be periodically transferred to the 
depositor's account at another financial institution;
    (D) Consist of the proceeds of extensions of credit by the Edge or 
agreement corporation;
    (E) Represent compensation to the Edge or agreement corporation for 
extensions of credit or services to the customer;
    (F) Are received from Edge or agreement corporations, foreign banks, 
and other depository institutions (as described in Regulation D (12 CFR 
part 204)); or
    (G) Are received from an organization that by its charter, license, 
or enabling law is limited to business that is of an international 
character, including foreign sales corporations, as defined in 26 U.S.C. 
922; transportation organizations engaged exclusively in the 
international transportation of passengers or in the movement of goods, 
wares, commodities, or merchandise in international or foreign

[[Page 327]]

commerce; and export trading companies established under subpart C of 
this part.
    (2) Borrowings. An Edge or agreement corporation may:
    (i) Borrow from offices of other Edge and agreement corporations, 
foreign banks, and depository institutions (as described in Regulation D 
(12 CFR part 204));
    (ii) Issue obligations to the United States or any of its agencies 
or instrumentalities;
    (iii) Incur indebtedness from a transfer of direct obligations of, 
or obligations that are fully guaranteed as to principal and interest 
by, the United States or any agency or instrumentality thereof that the 
Edge or agreement corporation is obligated to repurchase; and
    (iv) Issue long-term subordinated debt that does not qualify as a 
deposit under Regulation D (12 CFR part 204).
    (3) Credit activities. An Edge or agreement corporation may:
    (i) Finance the following:
    (A) Contracts, projects, or activities performed substantially 
abroad;
    (B) The importation into or exportation from the United States of 
goods, whether direct or through brokers or other intermediaries;
    (C) The domestic shipment or temporary storage of goods being 
imported or exported (or accumulated for export); and
    (D) The assembly or repackaging of goods imported or to be exported;
    (ii) Finance the costs of production of goods and services for which 
export orders have been received or which are identifiable as being 
directly for export;
    (iii) Assume or acquire participations in extensions of credit, or 
acquire obligations arising from transactions the Edge or agreement 
corporation could have financed, including acquisition of obligations of 
foreign governments;
    (iv) Guarantee debts, or otherwise agree to make payments on the 
occurrence of readily ascertainable events (including, but not limited 
to, nonpayment of taxes, rentals, customs duties, or cost of transport, 
and loss or nonconformance of shipping documents), so long as the 
guarantee or agreement specifies the maximum monetary liability 
thereunder and is related to a type of transaction described in 
paragraphs (a)(3)(i) and (ii) of this section; and
    (v) Provide credit and other banking services for domestic and 
foreign purposes to foreign governments and their agencies and 
instrumentalities, foreign persons, and organizations of the type 
described in paragraph (a)(1)(ii)(G) of this section.
    (4) Payments and collections. An Edge or agreement corporation may 
receive checks, bills, drafts, acceptances, notes, bonds, coupons, and 
other instruments for collection abroad, and collect such instruments in 
the United States for a customer abroad; and may transmit and receive 
wire transfers of funds and securities for depositors.
    (5) Foreign exchange. An Edge or agreement corporation may engage in 
foreign exchange activities.
    (6) Fiduciary and investment advisory activities. An Edge or 
agreement corporation may:
    (i) Hold securities in safekeeping for, or buy and sell securities 
upon the order and for the account and risk of, a person, provided such 
services for U.S. persons are with respect to foreign securities only;
    (ii) Act as paying agent for securities issued by foreign 
governments or other entities organized under foreign law;
    (iii) Act as trustee, registrar, conversion agent, or paying agent 
with respect to any class of securities issued to finance foreign 
activities and distributed solely outside the United States;
    (iv) Make private placements of participations in its investments 
and extensions of credit; however, except to the extent permissible for 
member banks under section 5136 of the Revised Statutes (12 U.S.C. 
24(Seventh)), no Edge or agreement corporation otherwise may engage in 
the business of underwriting, distributing, or buying or selling 
securities in the United States;
    (v) Act as investment or financial adviser by providing portfolio 
investment advice and portfolio management with respect to securities, 
other financial instruments, real-property interests,

[[Page 328]]

and other investment assets,\3\ and by providing advice on mergers and 
acquisitions, provided such services for U.S. persons are with respect 
to foreign assets only; and
---------------------------------------------------------------------------

    \3\ For purposes of this section, management of an investment 
portfolio does not include operational management of real property, or 
industrial or commercial assets.
---------------------------------------------------------------------------

    (vi) Provide general economic information and advice, general 
economic statistical forecasting services, and industry studies, 
provided such services for U.S. persons shall be with respect to foreign 
economies and industries only.
    (7) Banking services for employees. Provide banking services, 
including deposit services, to the officers and employees of the Edge or 
agreement corporation and its affiliates; however, extensions of credit 
to such persons shall be subject to the restrictions of Regulation O (12 
CFR part 215) as if the Edge or agreement corporation were a member 
bank.
    (b) Other activities. With the Board's prior approval, an Edge or 
agreement corporation may engage, directly or indirectly, in other 
activities in the United States that the Board determines are incidental 
to their international or foreign business.



Sec. 211.7  Voluntary liquidation of Edge and agreement corporations.

    (a) Prior notice. An Edge or agreement corporation desiring 
voluntarily to discontinue normal business and dissolve, shall provide 
the Board with 45 days' prior written notice of its intent to do so.
    (b) Waiver of notice period. The Board may waive the 45-day period 
if it finds that immediate action is required by the circumstances 
presented.



Sec. 211.8  Investments and activities abroad.

    (a) General policy. Activities abroad, whether conducted directly or 
indirectly, shall be confined to activities of a banking or financial 
nature and those that are necessary to carry on such activities. In 
doing so, investors \4\ shall at all times act in accordance with high 
standards of banking or financial prudence, having due regard for 
diversification of risks, suitable liquidity, and adequacy of capital. 
Subject to these considerations and the other provisions of this 
section, it is the Board's policy to allow activities abroad to be 
organized and operated as best meets corporate policies.
---------------------------------------------------------------------------

    \4\ For purposes of this section and Sec. Sec. 211.9 and 211.10 of 
this part, a direct subsidiary of a member bank is deemed to be an 
investor.
---------------------------------------------------------------------------

    (b) Direct investments by member banks. A member bank's direct 
investments under section 25 of the FRA (12 U.S.C. 601 et seq.) shall be 
limited to:
    (1) Foreign banks;
    (2) Domestic or foreign organizations formed for the sole purpose of 
holding shares of a foreign bank;
    (3) Foreign organizations formed for the sole purpose of performing 
nominee, fiduciary, or other banking services incidental to the 
activities of a foreign branch or foreign bank affiliate of the member 
bank; and
    (4) Subsidiaries established pursuant to Sec. 211.4(a)(8) of this 
part.
    (c) Eligible investments. Subject to the limitations set out in 
paragraphs (b) and (d) of this section, an investor may, directly or 
indirectly:
    (1) Investment in subsidiary. Invest in a subsidiary that engages 
solely in activities listed in Sec. 211.10 of this part, or in such 
other activities as the Board has determined in the circumstances of a 
particular case are permissible; provided that, in the case of an 
acquisition of a going concern, existing activities that are not 
otherwise permissible for a subsidiary may account for not more than 5 
percent of either the consolidated assets or consolidated revenues of 
the acquired organization;
    (2) Investment in joint venture. Invest in a joint venture; provided 
that, unless otherwise permitted by the Board, not more than 10 percent 
of the joint venture's consolidated assets or consolidated revenues are 
attributable to activities not listed in Sec. 211.10 of this part; and
    (3) Portfolio investments. Make portfolio investments in an 
organization, provided that:
    (i) Individual investment limits. The total direct and indirect 
portfolio investments by the investor and its affiliates in an 
organization engaged in activities that are not permissible for joint 
ventures, when combined with all

[[Page 329]]

other shares in the organization held under any other authority, do not 
exceed:
    (A) 40 percent of the total equity of the organization; or
    (B) 19.9 percent of the organization's voting shares.
    (ii) Aggregate Investment Limit. Portfolio investments made under 
authority of this subpart shall be subject to the aggregate equity limit 
of Sec. 211.10(a)(15)(iii).
    (iii) Loans and extensions of credit. Any loans and extensions of 
credit made by an investor or its affiliates to the organization are on 
substantially the same terms, including interest rates and collateral, 
as those prevailing at the same time for comparable transactions between 
the investor or its affiliates and nonaffiliated persons; and
    (iv) Protecting shareholder rights. Nothing in this paragraph (c)(3) 
shall prohibit an investor from otherwise exercising rights it may have 
as shareholder to protect the value of its investment, so long as the 
exercise of such rights does not result in the investor's direct or 
indirect control of the organization.
    (d) Investment limit. In calculating the amount that may be invested 
in any organization under this section and Sec. Sec. 211.9 and 211.10 
of this part, there shall be included any unpaid amount for which the 
investor is liable and any investments in the same organization held by 
affiliates under any authority.
    (e) Divestiture. An investor shall dispose of an investment promptly 
(unless the Board authorizes retention) if:
    (1) The organization invested in:
    (i) Engages in impermissible activities to an extent not permitted 
under paragraph (c) of this section; or
    (ii) Engages directly or indirectly in other business in the United 
States that is not permitted to an Edge corporation in the United 
States; provided that an investor may:
    (A) Retain portfolio investments in companies that derive no more 
than 10 percent of their total revenue from activities in the United 
States; and
    (B) Hold up to 5 percent of the shares of a foreign company that 
engages directly or indirectly in business in the United States that is 
not permitted to an Edge corporation; or
    (2) After notice and opportunity for hearing, the investor is 
advised by the Board that such investment is inappropriate under the 
FRA, the BHC Act, or this subpart.
    (f) Debts previously contracted. Shares or other ownership interests 
acquired to prevent a loss upon a debt previously contracted in good 
faith are not subject to the limitations or procedures of this section; 
provided that such interests shall be disposed of promptly but in no 
event later than two years after their acquisition, unless the Board 
authorizes retention for a longer period.
    (g) Investments made through debt-for-equity conversions--(1) 
Permissible investments. A bank holding company may make investments 
through the conversion of sovereign-or private-debt obligations of an 
eligible country, either through direct exchange of the debt obligations 
for the investment, or by a payment for the debt in local currency, the 
proceeds of which, including an additional cash investment not exceeding 
in the aggregate more than 10 percent of the fair value of the debt 
obligations being converted as part of such investment, are used to 
purchase the following investments:
    (i) Public-sector companies. A bank holding company may acquire up 
to and including 100 percent of the shares of (or other ownership 
interests in) any foreign company located in an eligible country, if the 
shares are acquired from the government of the eligible country or from 
its agencies or instrumentalities.
    (ii) Private-sector companies. A bank holding company may acquire up 
to and including 40 percent of the shares, including voting shares, of 
(or other ownership interests in) any other foreign company located in 
an eligible country subject to the following conditions:
    (A) A bank holding company may acquire more than 25 percent of the 
voting shares of the foreign company only if another shareholder or 
group of shareholders unaffiliated with the bank holding company holds a 
larger block of voting shares of the company;

[[Page 330]]

    (B) The bank holding company and its affiliates may not lend or 
otherwise extend credit to the foreign company in amounts greater than 
50 percent of the total loans and extensions of credit to the foreign 
company; and
    (C) The bank holding company's representation on the board of 
directors or on management committees of the foreign company may be no 
more than proportional to its shareholding in the foreign company.
    (2) Investments by bank subsidiary of bank holding company. Upon 
application, the Board may permit an indirect investment to be made 
pursuant to this paragraph (g) through an insured bank subsidiary of the 
bank holding company, where the bank holding company demonstrates that 
such ownership is consistent with the purposes of the FRA. In granting 
its consent, the Board may impose such conditions as it deems necessary 
or appropriate to prevent adverse effects, including prohibiting loans 
from the bank to the company in which the investment is made.
    (3) Divestiture--(i) Time limits for divestiture. A bank holding 
company shall divest the shares of, or other ownership interests in, any 
company acquired pursuant to this paragraph (g) within the longer of:
    (A) Ten years from the date of acquisition of the investment, except 
that the Board may extend such period if, in the Board's judgment, such 
an extension would not be detrimental to the public interest; or
    (B) Two years from the date on which the bank holding company is 
permitted to repatriate in full the investment in the foreign company.
    (ii) Maximum retention period. Notwithstanding the provisions of 
paragraph (g)(3)(i) of this section:
    (A) Divestiture shall occur within 15 years of the date of 
acquisition of the shares of, or other ownership interests in, any 
company acquired pursuant to this paragraph (g); and
    (B) A bank holding company may retain such shares or ownership 
interests if such retention is otherwise permissible at the time 
required for divestiture.
    (iii) Report to Board. The bank holding company shall report to the 
Board on its plans for divesting an investment made under this paragraph 
(g) two years prior to the final date for divestiture, in a manner to be 
prescribed by the Board.
    (iv) Other conditions requiring divestiture. All investments made 
pursuant to this paragraph (g) are subject to paragraph (e) of this 
section requiring prompt divestiture (unless the Board upon application 
authorizes retention), if the company invested in engages in 
impermissible business in the United States that exceeds in the 
aggregate 10 percent of the company's consolidated assets or revenues 
calculated on an annual basis; provided that such company may not engage 
in activities in the United States that consist of banking or financial 
operations (as defined in Sec. 211.23(f)(5)(iii)(B)) of this part, or 
types of activities permitted by regulation or order under section 
4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), except under regulations 
of the Board or with the prior approval of the Board.
    (4) Investment procedures--(i) General consent. Subject to the other 
limitations of this paragraph (g), the Board grants its general consent 
for investments made under this paragraph (g) if the total amount 
invested does not exceed the greater of $25 million or 1 percent of the 
tier 1 capital of the investor.
    (ii) All other investments shall be made in accordance with the 
procedures of Sec. 211.9(f) and (g) of this part, requiring prior 
notice or specific consent.
    (5) Conditions--(i) Name. Any company acquired pursuant to this 
paragraph (g) shall not bear a name similar to the name of the acquiring 
bank holding company or any of its affiliates.
    (ii) Confidentiality. Neither the bank holding company nor its 
affiliates shall provide to any company acquired pursuant to this 
paragraph (g) any confidential business information or other information 
concerning customers that are engaged in the same or related lines of 
business as the company.

[66 FR 54374, Oct. 26, 2001, as amended at 66 FR 58655, Nov. 23, 2001]

[[Page 331]]



Sec. 211.9  Investment procedures.

    (a) General provisions.\5\ Direct and indirect investments shall be 
made in accordance with the general consent, limited general consent, 
prior notice, or specific consent procedures contained in this section.
---------------------------------------------------------------------------

    \5\ When necessary, the provisions of this section relating to 
general consent and prior notice constitute the Board's approval under 
section 25A(8) of the FRA (12 U.S.C. 615) for investments in excess of 
the limitations therein based on capital and surplus.
---------------------------------------------------------------------------

    (1) Minimum capital adequacy standards. Except as the Board may 
otherwise determine, in order for an investor to make investments 
pursuant to the procedures set out in this section, the investor, the 
bank holding company, and the member bank shall be in compliance with 
applicable minimum standards for capital adequacy set out in the Capital 
Adequacy Guidelines; provided that, if the investor is an Edge or 
agreement corporation, the minimum capital required is total and tier 1 
capital ratios of 8 percent and 4 percent, respectively.
    (2) Composite rating. Except as the Board may otherwise determine, 
in order for an investor to make investments under the general consent 
or limited general consent procedures of paragraphs (b) and (c) of this 
section, the investor and any parent insured bank must have received a 
composite rating of at least 2 at the most recent examination.
    (3) Board's authority to modify or suspend procedures. The Board, at 
any time upon notice, may modify or suspend the procedures contained in 
this section with respect to any investor or with respect to the 
acquisition of shares of organizations engaged in particular kinds of 
activities.
    (4) Long-range investment plan. Any investor may submit to the Board 
for its specific consent a long-range investment plan. Any plan so 
approved shall be subject to the other procedures of this section only 
to the extent determined necessary by the Board to assure safety and 
soundness of the operations of the investor and its affiliates.
    (5) Prior specific consent for initial investment. An investor shall 
apply for and receive the prior specific consent of the Board for its 
initial investment under this subpart in its first subsidiary or joint 
venture, unless an affiliate previously has received approval to make 
such an investment.
    (6) Expiration of investment authority. Authority to make 
investments granted under prior notice or specific consent procedures 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless the Board determines a longer period 
shall apply.
    (7) Conditional approval; Access to information. The Board may 
impose such conditions on authority granted by it under this section as 
it deems necessary, and may require termination of any activities 
conducted under authority of this subpart if an investor is unable to 
provide information on its activities or those of its affiliates that 
the Board deems necessary to determine and enforce compliance with U.S. 
banking laws.
    (b) General consent. The Board grants its general consent for a well 
capitalized and well managed investor to make investments, subject to 
the following:
    (1) Well capitalized and well managed investor. In order to qualify 
for making investments under authority of this paragraph (b), both 
before and immediately after the proposed investment, the investor, any 
parent insured bank, and any parent bank holding company shall be well 
capitalized and well managed.
    (2) Individual limit for investment in subsidiary. In the case of an 
investment in a subsidiary, the total amount invested directly or 
indirectly in such subsidiary (in one transaction or a series of 
transactions) does not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 2 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 2 percent of the tier 1 capital of any parent 
insured bank or 10 percent of the investor's tier 1 capital, for any 
other investor.
    (3) Individual limit for investment in joint venture. In the case of 
an investment in a joint venture, the total amount invested directly or 
indirectly

[[Page 332]]

in such joint venture (in one transaction or a series of transactions) 
does not exceed:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of the tier 1 capital of any parent 
insured bank or 5 percent of the investor's tier 1 capital, for any 
other investor.
    (4) Individual limit for portfolio investment. In the case of a 
portfolio investment, the total amount invested directly or indirectly 
in such company (in one transaction or a series of transactions) does 
not exceed the lesser of $25 million, or
    (i) 5 percent of the investor's tier 1 capital in the case of a bank 
holding company or its subsidiary, or Edge corporation engaged in 
banking; or
    (ii) 25 percent of the investor's tier 1 capital in the case of an 
Edge corporation not engaged in banking.
    (5) Investment in a general partnership or unlimited liability 
company. An investment in a general partnership or unlimited liability 
company may be made under authority of paragraph (b) of this section, 
subject to the limits set out in paragraph (c) of this section.
    (6) Aggregate investment limits--(i) Investment limits. All 
investments made, directly or indirectly, during the previous 12-month 
period under authority of this section, when aggregated with the 
proposed investment, shall not exceed:
    (A) 20 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (B) 10 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (C) The lesser of 10 percent of the tier 1 capital of any parent 
insured bank or 50 percent of the tier 1 capital of the investor, for 
any other investor.
    (ii) Downstream investments. In determining compliance with the 
aggregate limits set out in this paragraph (b), an investment by an 
investor in a subsidiary shall be counted only once, notwithstanding 
that such subsidiary may, within 12 months of the date of making the 
investment, downstream all or any part of such investment to another 
subsidiary.
    (7) Application of limits. In determining compliance with the limits 
set out in this paragraph (b), an investor is not required to combine 
the value of all shares of an organization held in trading or dealing 
accounts under Sec. 211.10(a)(15) of this part with investments in the 
same organization.
    (c) Limited general consent--(1) Individual limit. The Board grants 
its general consent for an investor that is not well capitalized and 
well managed to make an investment in a subsidiary or joint venture, or 
to make a portfolio investment, if the total amount invested directly or 
indirectly (in one transaction or in a series of transactions) does not 
exceed the lesser of $25 million or:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of any parent insured bank's tier 1 
capital or 5 percent of the investor's tier 1 capital, for any other 
investor.
    (2) Aggregate limit. The amount of general consent investments made 
by any investor directly or indirectly under authority of this paragraph 
(c) during the previous 12-month period, when aggregated with the 
proposed investment, shall not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 5 percent of the investor's tier 1 capital, where the investor 
is a member bank; and
    (iii) The lesser of 5 percent of any parent insured bank's tier 1 
capital or 25 percent of the investor's tier 1 capital, for any other 
investor.
    (3) Application of limits. In calculating compliance with the limits 
of this paragraph (c), the rules set forth in paragraphs (b)(6)(ii) and 
(b)(7) of this section shall apply.
    (d) Other eligible investments under general consent. In addition to 
the authority granted under paragraphs (b) and (c) of this section, the 
Board

[[Page 333]]

grants its general consent for any investor to make the following 
investments:
    (1) Investment in organization equal to cash dividends. Any 
investment in an organization in an amount equal to cash dividends 
received from that organization during the preceding 12 calendar months; 
and
    (2) Investment acquired from affiliate. Any investment that is 
acquired from an affiliate at net asset value or through a contribution 
of shares.
    (e) Investments ineligible for general consent. An investment in a 
foreign bank may not be made under authority of paragraphs (b) or (c) of 
this section if:
    (1) After the investment, the foreign bank would be an affiliate of 
a member bank; and
    (2) The foreign bank is located in a country in which the member 
bank and its affiliates have no existing banking presence.
    (f) Prior notice. An investment that does not qualify for general 
consent under paragraph (b), (c), or (d) of this section may be made 
after the investor has given the Board 30 days' prior written notice, 
such notice period to commence at the time the notice is received, 
provided that:
    (1) The Board may waive the 30-day period if it finds the full 
period is not required for consideration of the proposed investment, or 
that immediate action is required by the circumstances presented; and
    (2) The Board may suspend the 30-day period or act on the investment 
under the Board's specific consent procedures.
    (g) Specific consent. Any investment that does not qualify for 
either the general consent or the prior notice procedure may not be 
consummated without the specific consent of the Board.

[66 FR 54374, Oct. 26, 2001, as amended at 66 FR 58655, Nov. 23, 2001]



Sec. 211.10  Permissible activities abroad.

    (a) Activities usual in connection with banking. The Board has 
determined that the following activities are usual in connection with 
the transaction of banking or other financial operations abroad:
    (1) Commercial and other banking activities;
    (2) Financing, including commercial financing, consumer financing, 
mortgage banking, and factoring;
    (3) Leasing real or personal property, or acting as agent, broker, 
or advisor in leasing real or personal property consistent with the 
provisions of Regulation Y (12 CFR part 225);
    (4) Acting as fiduciary;
    (5) Underwriting credit life insurance and credit accident and 
health insurance;
    (6) Performing services for other direct or indirect operations of a 
U.S. banking organization, including representative functions, sale of 
long-term debt, name-saving, holding assets acquired to prevent loss on 
a debt previously contracted in good faith, and other activities that 
are permissible domestically for a bank holding company under sections 
4(a)(2)(A) and 4(c)(1)(C) of the BHC Act (12 U.S.C. 1843(a)(2)(A), 
(c)(1)(C));
    (7) Holding the premises of a branch of an Edge or agreement 
corporation or member bank or the premises of a direct or indirect 
subsidiary, or holding or leasing the residence of an officer or 
employee of a branch or subsidiary;
    (8) Providing investment, financial, or economic advisory services;
    (9) General insurance agency and brokerage;
    (10) Data processing;
    (11) Organizing, sponsoring, and managing a mutual fund, if the 
fund's shares are not sold or distributed in the United States or to 
U.S. residents and the fund does not exercise managerial control over 
the firms in which it invests;
    (12) Performing management consulting services, if such services, 
when rendered with respect to the U.S. market, shall be restricted to 
the initial entry;
    (13) Underwriting, distributing, and dealing in debt securities 
outside the United States;
    (14) Underwriting and distributing equity securities outside the 
United States as follows:
    (i) Limits for well-capitalized and well-managed investor--(A) 
General. After providing 30 days' prior written notice to the Board, an 
investor that is well

[[Page 334]]

capitalized and well managed may underwrite equity securities, provided 
that commitments by an investor and its subsidiaries for the shares of a 
single organization do not, in the aggregate, exceed:
    (1) 15 percent of the bank holding company's tier 1 capital, where 
the investor is a bank holding company;
    (2) 3 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (3) The lesser of 3 percent of any parent insured bank's tier 1 
capital or 15 percent of the investor's tier 1 capital, for any other 
investor;
    (B) Qualifying criteria. An investor will be considered well-
capitalized and well-managed for purposes of paragraph (a)(14)(i) of 
this section only if each of the bank holding company, member bank, and 
Edge or agreement corporation qualify as well-capitalized and well-
managed.
    (ii) Limits for investor that is not well capitalized and well 
managed. After providing 30 days' prior written notice to the Board, an 
investor that is not well capitalized and well managed may underwrite 
equity securities, provided that commitments by the investor and its 
subsidiaries for the shares of an organization do not, in the aggregate, 
exceed $60 million; and
    (iii) Application of limits. For purposes of determining compliance 
with the limitations of this paragraph (a)(14), the investor may 
subtract portions of an underwriting that are covered by binding 
commitments obtained by the investor or its affiliates from sub-
underwriters or other purchasers;
    (15) Dealing in equity securities outside the United States as 
follows:
    (i) Grandfathered authority. By an investor, or an affiliate, that 
had commenced such activities prior to March 27, 1991, and subject to 
the limitations in effect at that time (See 12 CFR part 211, revised 
January 1, 1991); or
    (ii) Limit on shares of a single issuer. After providing 30 days' 
prior written notice to the Board, an investor may deal in the shares of 
an organization where the shares held in the trading or dealing accounts 
of an investor and its affiliates under authority of this paragraph 
(a)(15) do not in the aggregate exceed the lesser of:
    (A) $40 million; or
    (B) 10 percent of the investor's tier 1 capital;
    (iii) Aggregate equity limit. The total shares held directly and 
indirectly by the investor and its affiliates under authority of this 
paragraph (a)(15) and Sec. 211.8(c)(3) of this part in organizations 
engaged in activities that are not permissible for joint ventures do not 
exceed:
    (A) 25 percent of the bank holding company's tier 1 capital, where 
the investor is a bank holding company;
    (B) 20 percent of the investor's tier 1 capital, where the investor 
is a member bank; \6\ and
---------------------------------------------------------------------------

    \6\ For this purpose, a direct subsidiary of a member bank is deemed 
to be an investor.
---------------------------------------------------------------------------

    (C) The lesser of 20 percent of any parent insured bank's tier 1 
capital or 100 percent of the investor's tier 1 capital, for any other 
investor;
    (iv) Determining compliance with limits--(A) General. For purposes 
of determining compliance with all limits set out in this paragraph 
(a)(15):
    (1) Long and short positions in the same security may be netted; and
    (2) Except as provided in paragraph (a)(15)(iv)(B)(4) of this 
section, equity securities held in order to hedge bank permissible 
equity derivatives contracts shall not be included.
    (B) Use of internal hedging models. After providing 30 days' prior 
written notice to the Board the investor may use an internal hedging 
model that:
    (1) Nets long and short positions in the same security and offsets 
positions in a security by futures, forwards, options, and other similar 
instruments referenced to the same security, for purposes of determining 
compliance with the single issuer limits of paragraph (a)(15)(ii) of 
this section;\7\ and
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    \7\ A basket of stocks, specifically segregated as an offset to a 
position in a stock index derivative product, as computed by the 
investor's internal model, may be offset against the stock index.
---------------------------------------------------------------------------

    (2) Offsets its long positions in equity securities by futures, 
forwards, options, and similar instruments, on a portfolio basis, and 
for purposes of determining compliance with the aggregate equity limits 
of paragraph (a)(15)(iii) of this section.

[[Page 335]]

    (3) With respect to all equity securities held under authority of 
paragraph (a)(15) of this section, no net long position in a security 
shall be deemed to have been reduced by more than 75 percent through use 
of internal hedging models under this paragraph (a)(15)(iv)(B); and
    (4) With respect to equity securities acquired to hedge bank 
permissible equity derivatives contracts under authority of paragraph 
(a)(1) of this section, any residual position that remains in the 
securities of a single issuer after netting and offsetting of positions 
relating to the security under the investor's internal hedging models 
shall be included in calculating compliance with the limits of this 
paragraph (a)(15)(ii) and (iii).
    (C) Underwriting commitments. Any shares acquired pursuant to an 
underwriting commitment that are held for longer than 90 days after the 
payment date for such underwriting shall be subject to the limits set 
out in paragraph (a)(15) of this section and the investment provisions 
of Sec. Sec. 211.8 and 211.9 of this part.
    (v) Authority to deal in shares of U.S. organization. The authority 
to deal in shares under paragraph (a)(15) of this section includes the 
authority to deal in the shares of a U.S. organization:
    (A) With respect to foreign persons only; and
    (B) Subject to the limitations on owning or controlling shares of a 
company in section 4(c)(6) of the BHC Act (12 U.S.C. 1843(c)(6)) and 
Regulation Y (12 CFR part 225).
    (vi) Report to senior management. Any shares held in trading or 
dealing accounts for longer than 90 days shall be reported to the senior 
management of the investor;
    (16) Operating a travel agency, but only in connection with 
financial services offered abroad by the investor or others;
    (17) Underwriting life, annuity, pension fund-related, and other 
types of insurance, where the associated risks have been previously 
determined by the Board to be actuarially predictable; provided that:
    (i) Investments in, and loans and extensions of credit (other than 
loans and extensions of credit fully secured in accordance with the 
requirements of section 23A of the FRA (12 U.S.C. 371c), or with such 
other standards as the Board may require) to, the company by the 
investor or its affiliates are deducted from the capital of the investor 
(with 50 percent of such capital deduction to be taken from tier 1 
capital); and
    (ii) Activities conducted directly or indirectly by a subsidiary of 
a U.S. insured bank are excluded from the authority of this paragraph 
(a)(17), unless authorized by the Board;
    (18) Providing futures commission merchant services (including 
clearing without executing and executing without clearing) for 
nonaffiliated persons with respect to futures and options on futures 
contracts for financial and nonfinancial commodities; provided that 
prior notice under Sec. 211.9(f) of this part shall be provided to the 
Board before any subsidiaries of a member bank operating pursuant to 
this subpart may join a mutual exchange or clearinghouse, unless the 
potential liability of the investor to the exchange, clearinghouse, or 
other members of the exchange, as the case may be, is legally limited by 
the rules of the exchange or clearinghouse to an amount that does not 
exceed applicable general consent limits under Sec. 211.9 of this part;
    (19) Acting as principal or agent in commodity-swap transactions in 
relation to:
    (i) Swaps on a cash-settled basis for any commodity, provided that 
the investor's portfolio of swaps contracts is hedged in a manner 
consistent with safe and sound banking practices; and
    (ii) Contracts that require physical delivery of a commodity, 
provided that:
    (A) Such contracts are entered into solely for the purpose of 
hedging the investor's positions in the underlying commodity or 
derivative contracts based on the commodity;
    (B) The contract allows for assignment, termination or offset prior 
to expiration; and
    (C) Reasonable efforts are made to avoid delivery.
    (b) Regulation Y activities. An investor may engage in activities 
that the Board has determined in Sec. 225.28(b) of Regulation Y (12 CFR 
225.28(b)) are

[[Page 336]]

closely related to banking under section 4(c)(8) of the BHC Act (12 
U.S.C. 1843(c)(8)).
    (c) Specific approval. With the Board's specific approval, an 
investor may engage in other activities that the Board determines are 
usual in connection with the transaction of the business of banking or 
other financial operations abroad and are consistent with the FRA or the 
BHC Act.



Sec. 211.11  Advisory opinions under Regulation K.

    (a) Request for advisory opinion. Any person may submit a request to 
the Board for an advisory opinion regarding the scope of activities 
permissible under any subpart of this part.
    (b) Form and content of the request. Any request for an advisory 
opinion under this section shall be:
    (1) Submitted in writing to the Board;
    (2) Contain a clear description of the proposed parameters of the 
activity, or the service or product, at issue; and
    (3) Contain a concise explanation of the grounds on which the 
submitter contends the activity is or should be considered by the Board 
to be permissible under this part.
    (c) Response to request. In response to a request received under 
this section, the Board shall:
    (1) Direct the submitter to provide such additional information as 
the Board may deem necessary to complete the record for a full 
consideration of the issue presented; and
    (2) Provide an advisory opinion within 45 days after the record on 
the request has been determined to be complete.



Sec. 211.12  Lending limits and capital requirements.

    (a) Acceptances of Edge corporations. (1) Limitations. An Edge 
corporation shall be and remain fully secured for acceptances of the 
types described in section 13(7) of the FRA (12 U.S.C. 372), as follows:
    (i) All acceptances outstanding in excess of 200 percent of its tier 
1 capital; and
    (ii) All acceptances outstanding for any one person in excess of 10 
percent of its tier 1 capital.
    (2) Exceptions. These limitations do not apply if the excess 
represents the international shipment of goods, and the Edge corporation 
is:
    (i) Fully covered by primary obligations to reimburse it that are 
guaranteed by banks or bankers; or
    (ii) Covered by participation agreements from other banks, as 
described in 12 CFR 250.165.
    (b) Loans and extensions of credit to one person--(1) Loans and 
extensions of credit defined. Loans and extensions of credit has the 
meaning set forth in Sec. 211.2(q) of this part \8\ and, for purposes 
of this paragraph (b), also include:
---------------------------------------------------------------------------

    \8\ In the case of a foreign government, these includes loans and 
extensions of credit to the foreign government's departments or agencies 
deriving their current funds principally from general tax revenues. In 
the case of a partnership or firm, these include loans and extensions of 
credit to its members and, in the case of a corporation, these include 
loans and extensions of credit to the corporation's affiliates, where 
the affiliate incurs the liability for the benefit of the corporation.
---------------------------------------------------------------------------

    (i) Acceptances outstanding that are not of the types described in 
section 13(7) of the FRA (12 U.S.C. 372);
    (ii) Any liability of the lender to advance funds to or on behalf of 
a person pursuant to a guarantee, standby letter of credit, or similar 
agreements;
    (iii) Investments in the securities of another organization other 
than a subsidiary; and
    (iv) Any underwriting commitments to an issuer of securities, where 
no binding commitments have been secured from subunderwriters or other 
purchasers.
    (2) Limitations. Except as the Board may otherwise specify:
    (i) The total loans and extensions of credit outstanding to any 
person by an Edge corporation engaged in banking, and its direct or 
indirect subsidiaries, may not exceed 15 percent of the Edge 
corporation's tier 1 capital;\9\ and
---------------------------------------------------------------------------

    \9\ For purposes of this pargraph (b), subsidiaries includes 
subsidiaries controlled by the Edge corporation, but does not include 
companies otherwise controlled by affiliates of the Edge corporation.
---------------------------------------------------------------------------

    (ii) The total loans and extensions of credit to any person by a 
foreign bank or Edge corporation subsidiary of a member bank, and by 
majority-owned subsidiaries of a foreign bank or Edge

[[Page 337]]

corporation, when combined with the total loans and extensions of credit 
to the same person by the member bank and its majority-owned 
subsidiaries, may not exceed the member bank's limitation on loans and 
extensions of credit to one person.
    (3) Exceptions. The limitations of paragraph (b)(2) of this section 
do not apply to:
    (i) Deposits with banks and federal funds sold;
    (ii) Bills or drafts drawn in good faith against actual goods and on 
which two or more unrelated parties are liable;
    (iii) Any banker's acceptance, of the kind described in section 
13(7) of the FRA (12 U.S.C. 372), that is issued and outstanding;
    (iv) Obligations to the extent secured by cash collateral or by 
bonds, notes, certificates of indebtedness, or Treasury bills of the 
United States;
    (v) Loans and extensions of credit that are covered by bona fide 
participation agreements; and
    (vi) Obligations to the extent supported by the full faith and 
credit of the following:
    (A) The United States or any of its departments, agencies, 
establishments, or wholly owned corporations (including obligations, to 
the extent insured against foreign political and credit risks by the 
Export-Import Bank of the United States or the Foreign Credit Insurance 
Association), the International Bank for Reconstruction and Development, 
the International Finance Corporation, the International Development 
Association, the Inter-American Development Bank, the African 
Development Bank, the Asian Development Bank, or the European Bank for 
Reconstruction and Development;
    (B) Any organization, if at least 25 percent of such an obligation 
or of the total credit is also supported by the full faith and credit 
of, or participated in by, any institution designated in paragraph 
(b)(3)(vi)(A) of this section in such manner that default to the lender 
would necessarily include default to that entity. The total loans and 
extensions of credit under this paragraph (b)(3)(vi)(B) to any person 
shall at no time exceed 100 percent of the tier 1 capital of the Edge 
corporation.
    (c) Capitalization. (1) An Edge corporation shall at all times be 
capitalized in an amount that is adequate in relation to the scope and 
character of its activities.
    (2) In the case of an Edge corporation engaged in banking, the 
minimum ratio of qualifying total capital to risk-weighted assets, as 
determined under the Capital Adequacy Guidelines, shall not be less than 
10 percent, of which at least 50 percent shall consist of tier 1 
capital.
    (3) For purposes of this paragraph (c), no limitation shall apply on 
the inclusion of subordinated debt that qualifies as tier 2 capital 
under the Capital Adequacy Guidelines.



Sec. 211.13  Supervision and reporting.

    (a) Supervision. (1) Foreign branches and subsidiaries. U.S. banking 
organizations conducting international operations under this subpart 
shall supervise and administer their foreign branches and subsidiaries 
in such a manner as to ensure that their operations conform to high 
standards of banking and financial prudence.
    (i) Effective systems of records, controls, and reports shall be 
maintained to keep management informed of their activities and 
condition.
    (ii) Such systems shall provide, in particular, information on risk 
assets, exposure to market risk, liquidity management, operations, 
internal controls, legal and operational risk, and conformance to 
management policies.
    (iii) Reports on risk assets shall be sufficient to permit an 
appraisal of credit quality and assessment of exposure to loss, and, for 
this purpose, provide full information on the condition of material 
borrowers.
    (iv) Reports on operations and controls shall include internal and 
external audits of the branch or subsidiary.
    (2) Joint ventures. Investors shall maintain sufficient information 
with respect to joint ventures to keep informed of their activities and 
condition.
    (i) Such information shall include audits and other reports on 
financial performance, risk exposure, management policies, operations, 
and controls.
    (ii) Complete information shall be maintained on all transactions 
with

[[Page 338]]

the joint venture by the investor and its affiliates.
    (3) Availability of reports and information to examiners. The 
reports specified in paragraphs (a)(1) and (2) of this section and any 
other information deemed necessary to determine compliance with U.S. 
banking law shall be made available to examiners of the appropriate bank 
supervisory agencies.
    (b) Examinations. Examiners appointed by the Board shall examine 
each Edge corporation once a year. An Edge or agreement corporation 
shall make available to examiners information sufficient to assess its 
condition and operations and the condition and activities of any 
organization whose shares it holds.
    (c) Reports--(1) Reports of condition. Each Edge or agreement 
corporation shall make reports of condition to the Board at such times 
and in such form as the Board may prescribe. The Board may require that 
statements of condition or other reports be published or made available 
for public inspection.
    (2) Foreign operations. Edge and agreement corporations, member 
banks, and bank holding companies shall file such reports on their 
foreign operations as the Board may require.
    (3) Acquisition or disposition of shares. Member banks, Edge and 
agreement corporations, and bank holding companies shall report, in a 
manner prescribed by the Board, any acquisition or disposition of 
shares.
    (d) Filing and processing procedures--(1) Place of filing. Unless 
otherwise directed by the Board, applications, notices, and reports 
required by this part shall be filed with the Federal Reserve Bank of 
the District in which the parent bank or bank holding company is located 
or, if none, the Reserve Bank of the District in which the applying or 
reporting institution is located. Instructions and forms for 
applications, notices, and reports are available from the Reserve Banks.
    (2) Timing. The Board shall act on an application under this subpart 
within 60 calendar days after the Reserve Bank has received the 
application, unless the Board notifies the investor that the 60-day 
period is being extended and states the reasons for the extension.



                 Subpart B_Foreign Banking Organizations

    Source: 66 FR 53474, Oct. 26, 2001, unless otherwise noted.



Sec. 211.20  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.) and the 
International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act and the IBA. It applies to foreign banks and 
foreign banking organizations with respect to:
    (1) The limitations on interstate banking under section 5 of the IBA 
(12 U.S.C. 3103);
    (2) The exemptions from the nonbanking prohibitions of the BHC Act 
and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12 
U.S.C. 1841(h), 1843(c)(9));
    (3) Board approval of the establishment of an office of a foreign 
bank in the United States under sections 7(d) and 10(a) of the IBA (12 
U.S.C. 3105(d), 3107(a));
    (4) The termination by the Board of a foreign bank's representative 
office, state branch, state agency, or commercial lending company 
subsidiary under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(e), 
3107(b)), and the transmission of a recommendation to the Comptroller to 
terminate a federal branch or federal agency under section 7(e)(5) of 
the IBA (12 U.S.C. 3105(e)(5));
    (5) The examination of an office or affiliate of a foreign bank in 
the United States as provided in sections 7(c) and 10(c) of the IBA (12 
U.S.C. 3105(c), 3107(c));
    (6) The disclosure of supervisory information to a foreign 
supervisor under section 15 of the IBA (12 U.S.C. 3109);
    (7) The limitations on loans to one borrower by state branches and 
state agencies of a foreign bank under section 7(h)(2) of the IBA (12 
U.S.C. 3105(h)(2));
    (8) The limitation of a state branch and a state agency to 
conducting only activities that are permissible for a

[[Page 339]]

federal branch under section (7)(h)(1) of the IBA (12 U.S.C. 
3105(h)(1)); and
    (9) The deposit insurance requirement for retail deposit taking by a 
foreign bank under section 6 of the IBA (12 U.S.C. 3104).
    (10) The management of shell branches (12 U.S.C. 3105(k)).
    (c) Additional requirements. Compliance by a foreign bank with the 
requirements of this subpart and the laws administered and enforced by 
the Board does not relieve the foreign bank of responsibility to comply 
with the laws and regulations administered by the licensing authority.



Sec. 211.21  Definitions.

    The definitions contained in Sec. Sec. 211.1 and 211.2 apply to 
this subpart, except as a term is otherwise defined in this section:
    (a) Affiliate of a foreign bank or of a parent of a foreign bank 
means any company that controls, is controlled by, or is under common 
control with, the foreign bank or the parent of the foreign bank.
    (b) Agency means any place of business of a foreign bank, located in 
any state, at which credit balances are maintained, checks are paid, 
money is lent, or, to the extent not prohibited by state or federal law, 
deposits are accepted from a person or entity that is not a citizen or 
resident of the United States. Obligations shall not be considered 
credit balances unless they are:
    (1) Incidental to, or arise out of the exercise of, other lawful 
banking powers;
    (2) To serve a specific purpose;
    (3) Not solicited from the general public;
    (4) Not used to pay routine operating expenses in the United States 
such as salaries, rent, or taxes;
    (5) Withdrawn within a reasonable period of time after the specific 
purpose for which they were placed has been accomplished; and
    (6) Drawn upon in a manner reasonable in relation to the size and 
nature of the account.
    (c)(1) Appropriate Federal Reserve Bank means, unless the Board 
designates a different Federal Reserve Bank:
    (i) For a foreign banking organization, the Reserve Bank assigned to 
the foreign banking organization in Sec. 225.3(b)(2) of Regulation Y 
(12 CFR 225.3(b)(2));
    (ii) For a foreign bank that is not a foreign banking organization 
and proposes to establish an office, an Edge corporation, or an 
agreement corporation, the Reserve Bank of the Federal Reserve District 
in which the foreign bank proposes to establish such office or 
corporation; and
    (iii) In all other cases, the Reserve Bank designated by the Board.
    (2) The appropriate Federal Reserve Bank need not be the Reserve 
Bank of the Federal Reserve District in which the foreign bank's home 
state is located.
    (d) Banking subsidiary, with respect to a specified foreign bank, 
means a bank that is a subsidiary as the terms bank and subsidiary are 
defined in section 2 of the BHC Act (12 U.S.C. 1841).
    (e) Branch means any place of business of a foreign bank, located in 
any state, at which deposits are received, and that is not an agency, as 
that term is defined in paragraph (b) of this section.
    (f) Change the status of an office means to convert a representative 
office into a branch or agency, or an agency or limited branch into a 
branch, but does not include renewal of the license of an existing 
office.
    (g) Commercial lending company means any organization, other than a 
bank or an organization operating under section 25 of the Federal 
Reserve Act (FRA) (12 U.S.C. 601-604a), organized under the laws of any 
state, that maintains credit balances permissible for an agency, and 
engages in the business of making commercial loans. Commercial lending 
company includes any company chartered under article XII of the banking 
law of the State of New York.
    (h) Comptroller means the Office of the Comptroller of the Currency.
    (i) Control has the same meaning as in section 2(a) of the BHC Act 
(12 U.S.C. 1841(a)), and the terms controlled and controlling shall be 
construed consistently with the term control.
    (j) Domestic branch means any place of business of a foreign bank, 
located in any state, that may accept domestic

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deposits and deposits that are incidental to or for the purpose of 
carrying out transactions in foreign countries.
    (k) A foreign bank engages directly in the business of banking 
outside the United States if the foreign bank engages directly in 
banking activities usual in connection with the business of banking in 
the countries where it is organized or operating.
    (l) To establish means:
    (1) To open and conduct business through an office;
    (2) To acquire directly, through merger, consolidation, or similar 
transaction with another foreign bank, the operations of an office that 
is open and conducting business;
    (3) To acquire an office through the acquisition of a foreign bank 
subsidiary that will cease to operate in the same corporate form 
following the acquisition;
    (4) To change the status of an office; or
    (5) To relocate an office from one state to another.
    (m) Federal agency, federal branch, state agency, and state branch 
have the same meanings as in section 1 of the IBA (12 U.S.C. 3101).
    (n) Foreign bank means an organization that is organized under the 
laws of a foreign country and that engages directly in the business of 
banking outside the United States. The term foreign bank does not 
include a central bank of a foreign country that does not engage or seek 
to engage in a commercial banking business in the United States through 
an office.
    (o) Foreign banking organization means:
    (1) A foreign bank, as defined in section 1(b)(7) of the IBA (12 
U.S.C. 3101(7)), that:
    (i) Operates a branch, agency, or commercial lending company 
subsidiary in the United States;
    (ii) Controls a bank in the United States; or
    (iii) Controls an Edge corporation acquired after March 5, 1987; and
    (2) Any company of which the foreign bank is a subsidiary.
    (p) Home country, with respect to a foreign bank, means the country 
in which the foreign bank is chartered or incorporated.
    (q) Home country supervisor, with respect to a foreign bank, means 
the governmental entity or entities in the foreign bank's home country 
with responsibility for the supervision and regulation of the foreign 
bank.
    (r) Licensing authority means:
    (1) The relevant state supervisor, with respect to an application to 
establish a state branch, state agency, commercial lending company, or 
representative office of a foreign bank; or
    (2) The Comptroller, with respect to an application to establish a 
federal branch or federal agency.
    (s) Limited branch means a branch of a foreign bank that receives 
only such deposits as would be permitted for a corporation organized 
under section 25A of the Federal Reserve Act (12 U.S.C. 611-631).
    (t) Office or office of a foreign bank means any branch, agency, 
representative office, or commercial lending company subsidiary of a 
foreign bank in the United States.
    (u) A parent of a foreign bank means a company of which the foreign 
bank is a subsidiary. An immediate parent of a foreign bank is a company 
of which the foreign bank is a direct subsidiary. An ultimate parent of 
a foreign bank is a parent of the foreign bank that is not the 
subsidiary of any other company.
    (v) Regional administrative office means a representative office 
that:
    (1) Is established by a foreign bank that operates two or more 
branches, agencies, commercial lending companies, or banks in the United 
States;
    (2) Is located in the same city as one or more of the foreign bank's 
branches, agencies, commercial lending companies, or banks in the United 
States;
    (3) Manages, supervises, or coordinates the operations of the 
foreign bank or its affiliates, if any, in a particular geographic area 
that includes the United States or a region thereof, including by 
exercising credit approval authority in that area pursuant to written 
standards, credit policies, and procedures established by the foreign 
bank; and
    (4) Does not solicit business from actual or potential customers of 
the foreign bank or its affiliates.
    (w) Relevant state supervisor means the state entity that is 
authorized to

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supervise and regulate a state branch, state agency, commercial lending 
company, or representative office.
    (x) Representative office means any office of a foreign bank which 
is located in any state and is not a Federal branch, Federal agency, 
State branch, State agency, or commercial lending company subsidiary.
    (y) State means any state of the United States or the District of 
Columbia.
    (z) Subsidiary means any organization that:
    (1) Has 25 percent or more of its voting shares directly or 
indirectly owned, controlled, or held with the power to vote by a 
company, including a foreign bank or foreign banking organization; or
    (2) Is otherwise controlled, or capable of being controlled, by a 
foreign bank or foreign banking organization.



Sec. 211.22  Interstate banking operations of foreign banking 
organizations.

    (a) Determination of home state. (1) A foreign bank that, as of 
December 10, 1997, had declared a home state or had a home state 
determined pursuant to the law and regulations in effect prior to that 
date shall have that state as its home state.
    (2) A foreign bank that has any branches, agencies, commercial 
lending company subsidiaries, or subsidiary banks in one state, and has 
no such offices or subsidiaries in any other states, shall have as its 
home state the state in which such offices or subsidiaries are located.
    (b) Change of home state--(1) Prior notice. A foreign bank may 
change its home state once, if it files 30 days' prior notice of the 
proposed change with the Board.
    (2) Application to change home state. (i) A foreign bank, in 
addition to changing its home state by filing prior notice under 
paragraph (b)(1) of this section, may apply to the Board to change its 
home state, upon showing that a national bank or state-chartered bank 
with the same home state as the foreign bank would be permitted to 
change its home state to the new home state proposed by the foreign 
bank.
    (ii) A foreign bank may apply to the Board for such permission one 
or more times.
    (iii) In determining whether to grant the request of a foreign bank 
to change its home state, the Board shall consider whether the proposed 
change is consistent with competitive equity between foreign and 
domestic banks.
    (3) Effect of change in home state. The home state of a foreign bank 
and any change in its home state by a foreign bank shall not affect 
which Federal Reserve Bank or Reserve Banks supervise the operations of 
the foreign bank, and shall not affect the obligation of the foreign 
bank to file required reports and applications with the appropriate 
Federal Reserve Bank.
    (4) Conforming branches to new home state. Upon any change in home 
state by a foreign bank under paragraph (b)(1) or (b)(2) of this 
section, the domestic branches of the foreign bank established in 
reliance on any previous home state of the foreign bank shall be 
conformed to those which a foreign bank with the new home state could 
permissibly establish or operate as of the date of such change.
    (c) Prohibition against interstate deposit production offices. A 
covered interstate branch of a foreign bank may not be used as a deposit 
production office in accordance with the provisions in Sec. 208.7 of 
Regulation H (12 CFR 208.7).



Sec. 211.23  Nonbanking activities of foreign banking organizations.

    (a) Qualifying foreign banking organizations. Unless specifically 
made eligible for the exemptions by the Board, a foreign banking 
organization shall qualify for the exemptions afforded by this section 
only if, disregarding its United States banking, more than half of its 
worldwide business is banking; and more than half of its banking 
business is outside the United States.\10\ In

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order to qualify, a foreign banking organization shall:
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    \10\ None of the assets, revenues, or net income, whether held or 
derived directly or indirectly, of a subsidiary bank, branch, agency, 
commercial lending company, or other company engaged in the business of 
banking in the United States (including any territory of the United 
States, Puerto Rico, Guam, American Samoa, or the Virgin Islands) shall 
be considered held or derived from the business of banking ``outside the 
United States''.
---------------------------------------------------------------------------

    (1) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed total 
worldwide nonbanking assets;
    (ii) Revenues derived from the business of banking outside the 
United States exceed total revenues derived from its worldwide 
nonbanking business; or
    (iii) Net income derived from the business of banking outside the 
United States exceeds total net income derived from its worldwide 
nonbanking business; and
    (2) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed banking 
assets held in the United States;
    (ii) Revenues derived from the business of banking outside the 
United States exceed revenues derived from the business of banking in 
the United States; or
    (iii) Net income derived from the business of banking outside the 
United States exceeds net income derived from the business of banking in 
the United States.
    (b) Determining assets, revenues, and net income. (1)(i) For 
purposes of paragraph (a) of this section, the total assets, revenues, 
and net income of an organization may be determined on a consolidated or 
combined basis.
    (ii) The foreign banking organization shall include assets, 
revenues, and net income of companies in which it owns 50 percent or 
more of the voting shares when determining total assets, revenues, and 
net income.
    (iii) The foreign banking organization may include assets, revenues, 
and net income of companies in which it owns 25 percent or more of the 
voting shares, if all such companies within the organization are 
included.
    (2) Assets devoted to, or revenues or net income derived from, 
activities listed in Sec. 211.10(a) shall be considered banking assets, 
or revenues or net income derived from the banking business, when 
conducted within the foreign banking organization by a foreign bank or 
its subsidiaries.
    (c) Limited exemptions available to foreign banking organizations in 
certain circumstances. The following shall apply where a foreign bank 
meets the requirements of paragraph (a) of this section but its ultimate 
parent does not:
    (1) Such foreign bank shall be entitled to the exemptions available 
to a qualifying foreign banking organization if its ultimate parent 
meets the requirements set forth in paragraph (a)(2) of this section and 
could meet the requirements in paragraph (a)(1) of this section but for 
the requirement in paragraph (b)(2) of this section that activities must 
be conducted by the foreign bank or its subsidiaries in order to be 
considered derived from the banking business;
    (2) An ultimate parent as described in paragraph (c)(1) of this 
section shall be eligible for the exemptions available to a qualifying 
foreign banking organization except for those provided in Sec. 
211.23(f)(5)(iii).
    (d) Loss of eligibility for exemptions--(1) Failure to meet 
qualifying test. A foreign banking organization that qualified under 
paragraph (a) or (c) of this section shall cease to be eligible for the 
exemptions of this section if it fails to meet the requirements of 
paragraphs (a) or (c) of this section for two consecutive years, as 
reflected in its annual reports (FR Y-7) filed with the Board.
    (2) Continuing activities and investments. (i) A foreign banking 
organization that ceases to be eligible for the exemptions of this 
section may continue to engage in activities or retain investments 
commenced or acquired prior to the end of the first fiscal year for 
which its annual report reflects nonconformance with paragraph (a) or 
(c) of this section.
    (ii) Termination or divestiture. Activities commenced or investments 
made after that date shall be terminated or divested within three months 
of the filing of the second annual report, or at such time as the Board 
may determine upon request by the foreign banking

[[Page 343]]

organization to extend the period, unless the Board grants consent to 
continue the activity or retain the investment under paragraph (e) of 
this section.
    (3) Request for specific determination of eligibility. (i) A foreign 
banking organization that ceases to qualify under paragraph (a) or (c) 
of this section, or an affiliate of such foreign banking organization, 
that requests a specific determination of eligibility under paragraph 
(e) of this section may, prior to the Board's determination on 
eligibility, continue to engage in activities and make investments under 
the provisions of paragraphs (f)(1), (2), (3), and (4) of this section.
    (ii) The Board may grant consent for the foreign banking 
organization or its affiliate to make investments under paragraph (f)(5) 
of this section.
    (e) Specific determination of eligibility for organizations that do 
not qualify for the exemptions--(1) Application. (i) A foreign 
organization that is not a foreign banking organization or a foreign 
banking organization that does not qualify under paragraph (a) or (c) of 
this section for some or all of the exemptions afforded by this section, 
or that has lost its eligibility for the exemptions under paragraph (d) 
of this section, may apply to the Board for a specific determination of 
eligibility for some or all of the exemptions.
    (ii) A foreign banking organization may apply for a specific 
determination prior to the time it ceases to be eligible for the 
exemptions afforded by this section.
    (2) Factors considered by Board. In determining whether eligibility 
for the exemptions would be consistent with the purposes of the BHC Act 
and in the public interest, the Board shall consider:
    (i) The history and the financial and managerial resources of the 
foreign organization or foreign banking organization;
    (ii) The amount of its business in the United States;
    (iii) The amount, type, and location of its nonbanking activities, 
including whether such activities may be conducted by U.S. banks or bank 
holding companies;
    (iv) Whether eligibility of the foreign organization or foreign 
banking organization would result in undue concentration of resources, 
decreased or unfair competition, conflicts of interests, or unsound 
banking practices; and
    (v) The extent to which the foreign banking organization is subject 
to comprehensive supervision or regulation on a consolidated basis or 
the foreign organization is subject to oversight by regulatory 
authorities in its home country.
    (3) Conditions and limitations. The Board may impose any conditions 
and limitations on a determination of eligibility, including 
requirements to cease activities or dispose of investments.
    (4) Eligibility not granted. Determinations of eligibility generally 
would not be granted where a majority of the business of the foreign 
organization or foreign banking organization derives from commercial or 
industrial activities.
    (f) Permissible activities and investments. A foreign banking 
organization that qualifies under paragraph (a) of this section may:
    (1) Engage in activities of any kind outside the United States;
    (2) Engage directly in activities in the United States that are 
incidental to its activities outside the United States;
    (3) Own or control voting shares of any company that is not engaged, 
directly or indirectly, in any activities in the United States, other 
than those that are incidental to the international or foreign business 
of such company;
    (4) Own or control voting shares of any company in a fiduciary 
capacity under circumstances that would entitle such shareholding to an 
exemption under section 4(c)(4) of the BHC Act (12 U.S.C. 1843(c)(4)) if 
the shares were held or acquired by a bank;
    (5) Own or control voting shares of a foreign company that is 
engaged directly or indirectly in business in the United States other 
than that which is incidental to its international or foreign business, 
subject to the following limitations:
    (i) More than 50 percent of the foreign company's consolidated 
assets shall be located, and consolidated revenues derived from, outside 
the United

[[Page 344]]

States; provided that, if the foreign company fails to meet the 
requirements of this paragraph (f)(5)(i) for two consecutive years (as 
reflected in annual reports (FR Y-7) filed with the Board by the foreign 
banking organization), the foreign company shall be divested or its 
activities terminated within one year of the filing of the second 
consecutive annual report that reflects nonconformance with the 
requirements of this paragraph (f)(5)(i), unless the Board grants 
consent to retain the investment under paragraph (g) of this section;
    (ii) The foreign company shall not directly underwrite, sell, or 
distribute, nor own or control more than 10 percent of the voting shares 
of a company that underwrites, sells, or distributes securities in the 
United States, except to the extent permitted bank holding companies;
    (iii) If the foreign company is a subsidiary of the foreign banking 
organization, the foreign company must be, or must control, an operating 
company, and its direct or indirect activities in the United States 
shall be subject to the following limitations:
    (A) The foreign company's activities in the United States shall be 
the same kind of activities, or related to the activities, engaged in 
directly or indirectly by the foreign company abroad, as measured by the 
``establishment'' categories of the Standard Industrial Classification 
(SIC). An activity in the United States shall be considered related to 
an activity outside the United States if it consists of supply, 
distribution, or sales in furtherance of the activity;
    (B) The foreign company may engage in activities in the United 
States that consist of banking, securities, insurance, or other 
financial operations, or types of activities permitted by regulation or 
order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), only 
under regulations of the Board or with the prior approval of the Board, 
subject to the following;
    (1) Activities within Division H (Finance, Insurance, and Real 
Estate) of the SIC shall be considered banking or financial operations 
for this purpose, with the exception of acting as operators of 
nonresidential buildings (SIC 6512), operators of apartment buildings 
(SIC 6513), operators of dwellings other than apartment buildings (SIC 
6514), and operators of residential mobile home sites (SIC 6515); and 
operating title abstract offices (SIC 6541); and
    (2) The following activities shall be considered financial 
activities and may be engaged in only with the approval of the Board 
under paragraph (g) of this section: credit reporting services (SIC 
7323); computer and data processing services (SIC 7371, 7372, 7373, 
7374, 7375, 7376, 7377, 7378, and 7379); armored car services (SIC 
7381); management consulting (SIC 8732, 8741, 8742, and 8748); certain 
rental and leasing activities (SIC 4741, 7352, 7353, 7359, 7513, 7514, 
7515, and 7519); accounting, auditing, and bookkeeping services (SIC 
8721); courier services (SIC 4215 and 4513); and arrangement of 
passenger transportation (SIC 4724, 4725, and 4729).
    (g) Exemptions under section 4(c)(9) of the BHC Act. A foreign 
banking organization that is of the opinion that other activities or 
investments may, in particular circumstances, meet the conditions for an 
exemption under section 4(c)(9) of the BHC Act (12 U.S.C. 1843(c)(9)) 
may apply to the Board for such a determination by submitting to the 
appropriate Federal Reserve Bank a letter setting forth the basis for 
that opinion.
    (h) Reports. The foreign banking organization shall report in a 
manner prescribed by the Board any direct activities in the United 
States by a foreign subsidiary of the foreign banking organization and 
the acquisition of all shares of companies engaged, directly or 
indirectly, in activities in the United States that were acquired under 
the authority of this section.
    (i) Availability of information. If any information required under 
this section is unknown and not reasonably available to the foreign 
banking organization (either because obtaining it would involve 
unreasonable effort or expense, or because it rests exclusively within 
the knowledge of a company that is not controlled by the organization) 
the organization shall:
    (1) Give such information on the subject as it possesses or can 
reasonably acquire, together with the sources thereof; and

[[Page 345]]

    (2) Include a statement showing that unreasonable effort or expense 
would be involved, or indicating that the company whose shares were 
acquired is not controlled by the organization, and stating the result 
of a request for information.



Sec. 211.24  Approval of offices of foreign banks; procedures for 

applications; standards for approval; representative office activities 
and standards for approval; preservation of existing authority.

    (a) Board approval of offices of foreign banks--(1) Prior Board 
approval of branches, agencies, commercial lending companies, or 
representative offices of foreign banks. (i) Except as otherwise 
provided in paragraphs (a)(2) and (a)(3) of this section, a foreign bank 
shall obtain the approval of the Board before it:
    (A) Establishes a branch, agency, commercial lending company 
subsidiary, or representative office in the United States; or
    (B) Acquires ownership or control of a commercial lending company 
subsidiary.
    (2) Prior notice for certain offices. (i) After providing 45 days' 
prior written notice to the Board, a foreign bank may establish:
    (A) An additional office (other than a domestic branch outside the 
home state of the foreign bank established pursuant to section 5(a)(3) 
of the IBA (12 U.S.C. 3103(a)(3))), provided that the Board has 
previously determined the foreign bank to be subject to comprehensive 
supervision or regulation on a consolidated basis by its home country 
supervisor (comprehensive consolidated supervision or CCS); or
    (B) A representative office, if:
    (1) The Board has not yet determined the foreign bank to be subject 
to consolidated comprehensive supervision, but the foreign bank is 
subject to the BHC Act, either directly or through section 8(a) of the 
IBA (12 U.S.C. 3106(a)); or
    (2) The Board previously has approved an application by the foreign 
bank to establish a branch or agency pursuant to the standard set forth 
in paragraph (c)(1)(iii) of this section; or
    (3) The Board previously has approved an application by the foreign 
bank to establish a representative office.
    (ii) The Board may waive the 45-day notice period if it finds that 
immediate action is required by the circumstances presented. The notice 
period shall commence at the time the notice is received by the 
appropriate Federal Reserve Bank. The Board may suspend the period or 
require Board approval prior to the establishment of such office if the 
notification raises significant policy or supervisory concerns.
    (3) General consent for certain representative offices. (i) The 
Board grants its general consent for a foreign bank that is subject to 
the BHC Act, either directly or through section 8(a) of the IBA (12 
U.S.C. 3106(a)), to establish:
    (A) A representative office, but only if the Board has previously 
determined that the foreign bank proposing to establish a representative 
office is subject to consolidated comprehensive supervision;
    (B) A regional administrative office; or
    (C) An office that solely engages in limited administrative 
functions (such as separately maintaining back-office support systems) 
that:
    (1) Are clearly defined;
    (2) Are performed in connection with the U.S. banking activities of 
the foreign bank; and
    (3) Do not involve contact or liaison with customers or potential 
customers, beyond incidental contact with existing customers relating to 
administrative matters (such as verification or correction of account 
information).
    (4) Suspension of general consent or prior notice procedures. The 
Board may, at any time, upon notice, modify or suspend the prior notice 
and general consent procedures in paragraphs (a)(2) and (3) of this 
section for any foreign bank with respect to the establishment by such 
foreign bank of any U.S. office of such foreign bank.
    (5) Temporary offices. The Board may, in its discretion, determine 
that a foreign bank has not established an office if the foreign bank 
temporarily operates at one or more additional locations in the same 
city of an existing branch or agency due to renovations, an expansion of 
activities, a merger or

[[Page 346]]

consolidation of the operations of affiliated foreign banks or 
companies, or other similar circumstances. The foreign bank must provide 
reasonable advance notice of its intent temporarily to utilize 
additional locations, and the Board may impose such conditions in 
connection with its determination as it deems necessary.
    (6) After-the-fact Board approval. Where a foreign bank proposes to 
establish an office in the United States through the acquisition of, or 
merger or consolidation with, another foreign bank with an office in the 
United States, the Board may, in its discretion, allow the acquisition, 
merger, or consolidation to proceed before an application to establish 
the office has been filed or acted upon under this section if:
    (i) The foreign bank or banks resulting from the acquisition, 
merger, or consolidation, will not directly or indirectly own or control 
more than 5 percent of any class of the voting securities of, or 
control, a U.S. bank;
    (ii) The Board is given reasonable advance notice of the proposed 
acquisition, merger, or consolidation; and
    (iii) Prior to consummation of the acquisition, merger, or 
consolidation, each foreign bank, as appropriate, commits in writing 
either:
    (A) To comply with the procedures for an application under this 
section within a reasonable period of time; to engage in no new lines of 
business, or otherwise to expand its U.S. activities until the 
disposition of the application; and to abide by the Board's decision on 
the application, including, if necessary, a decision to terminate the 
activities of any such U.S. office, as the Board or the Comptroller may 
require; or
    (B) Promptly to wind-down and close any office, the establishment of 
which would have required an application under this section; and to 
engage in no new lines of business or otherwise to expand its U.S. 
activities prior to the closure of such office.
    (7) Notice of change in ownership or control or conversion of 
existing office or establishment of representative office under general-
consent authority. A foreign bank with a U.S. office shall notify the 
Board in writing within 10 days of the occurrence of any of the 
following events:
    (i) A change in the foreign bank's ownership or control, where the 
foreign bank is acquired or controlled by another foreign bank or 
company and the acquired foreign bank with a U.S. office continues to 
operate in the same corporate form as prior to the change in ownership 
or control;
    (ii) The conversion of a branch to an agency or representative 
office; an agency to a representative office; or a branch or agency from 
a federal to a state license, or a state to a federal license; or
    (iii) The establishment of a representative office under general-
consent authority.
    (8) Transactions subject to approval under Regulation Y. Subpart B 
of Regulation Y (12 CFR 225.11-225.17) governs the acquisition by a 
foreign banking organization of direct or indirect ownership or control 
of any voting securities of a bank or bank holding company in the United 
States if the acquisition results in the foreign banking organization's 
ownership or control of more than 5 percent of any class of voting 
securities of a U.S. bank or bank holding company, including through 
acquisition of a foreign bank or foreign banking organization that owns 
or controls more than 5 percent of any class of the voting securities of 
a U.S. bank or bank holding company.
    (b) Procedures for application--(1) Filing application. An 
application for the Board's approval pursuant to this section shall be 
filed in the manner prescribed by the Board.
    (2) Publication requirement--(i) Newspaper notice. Except with 
respect to a proposed transaction where more extensive notice is 
required by statute or as otherwise provided in paragraphs (b)(2)(ii) 
and (iii) of this section, an applicant under this section shall publish 
a notice in a newspaper of general circulation in the community in which 
the applicant proposes to engage in business.
    (ii) Contents of notice. The newspaper notice shall:
    (A) State that an application is being filed as of the date of the 
newspaper notice; and

[[Page 347]]

    (B) Provide the name of the applicant, the subject matter of the 
application, the place where comments should be sent, and the date by 
which comments are due, pursuant to paragraph (b)(3) of this section.
    (iii) Copy of notice with application. The applicant shall furnish 
with its application to the Board a copy of the newspaper notice, the 
date of its publication, and the name and address of the newspaper in 
which it was published.
    (iv) Exception. The Board may modify the publication requirement of 
paragraphs (b)(2)(i) and (ii) of this section in appropriate 
circumstances.
    (v) Federal branch or federal agency. In the case of an application 
to establish a federal branch or federal agency, compliance with the 
publication procedures of the Comptroller shall satisfy the publication 
requirement of this section. Comments regarding the application should 
be sent to the Board and the Comptroller.
    (3) Written comments. (i) Within 30 days after publication, as 
required in paragraph (b)(2) of this section, any person may submit to 
the Board written comments and data on an application.
    (ii) The Board may extend the 30-day comment period if the Board 
determines that additional relevant information is likely to be provided 
by interested persons, or if other extenuating circumstances exist.
    (4) Board action on application. (i) Time limits. (A) The Board 
shall act on an application from a foreign bank to establish a branch, 
agency, or commercial lending company subsidiary within 180 calendar 
days after the receipt of the application.
    (B) The Board may extend for an additional 180 calendar days the 
period within which to take final action, after providing notice of and 
reasons for the extension to the applicant and the licensing authority.
    (C) The time periods set forth in this paragraph (b)(4)(i) may be 
waived by the applicant.
    (ii) Additional information. The Board may request any information 
in addition to that supplied in the application when the Board believes 
that the information is necessary for its decision, and may deny an 
application if it does not receive the information requested from the 
applicant or its home country supervisor in sufficient time to permit 
adequate evaluation of the information within the time periods set forth 
in paragraph (b)(4)(i) of this section.
    (5) Coordination with other regulators. Upon receipt of an 
application by a foreign bank under this section, the Board shall 
promptly notify, consult with, and consider the views of the licensing 
authority.
    (c) Standards for approval of U.S. offices of foreign banks-- (1) 
Mandatory standards--(i) General. As specified in section 7(d) of the 
IBA (12 U.S.C. 3105(d)), the Board may not approve an application to 
establish a branch or an agency, or to establish or acquire ownership or 
control of a commercial lending company, unless it determines that:
    (A) Each of the foreign bank and any parent foreign bank engages 
directly in the business of banking outside the United States and, 
except as provided in paragraph (c)(1)(iii) of this section, is subject 
to comprehensive supervision or regulation on a consolidated basis by 
its home country supervisor; and
    (B) The foreign bank has furnished to the Board the information that 
the Board requires in order to assess the application adequately.
    (ii) Basis for determining comprehensive consolidated supervision. 
In determining whether a foreign bank and any parent foreign bank is 
subject to comprehensive consolidated supervision, the Board shall 
determine whether the foreign bank is supervised or regulated in such a 
manner that its home country supervisor receives sufficient information 
on the worldwide operations of the foreign bank (including the 
relationships of the bank to any affiliate) to assess the foreign bank's 
overall financial condition and compliance with law and regulation. In 
making such a determination, the Board shall assess, among other 
factors, the extent to which the home country supervisor:
    (A) Ensures that the foreign bank has adequate procedures for 
monitoring and controlling its activities worldwide;

[[Page 348]]

    (B) Obtains information on the condition of the foreign bank and its 
subsidiaries and offices outside the home country through regular 
reports of examination, audit reports, or otherwise;
    (C) Obtains information on the dealings and relationship between the 
foreign bank and its affiliates, both foreign and domestic;
    (D) Receives from the foreign bank financial reports that are 
consolidated on a worldwide basis, or comparable information that 
permits analysis of the foreign bank's financial condition on a 
worldwide, consolidated basis;
    (E) Evaluates prudential standards, such as capital adequacy and 
risk asset exposure, on a worldwide basis.
    (iii) Determination of comprehensive consolidated supervision not 
required in certain circumstances. (A) If the Board is unable to find, 
under paragraph (c)(1)(i) of this section, that a foreign bank is 
subject to comprehensive consolidated supervision, the Board may, 
nevertheless, approve an application by the foreign bank if:
    (1) The home country supervisor is actively working to establish 
arrangements for the consolidated supervision of such bank; and
    (2) All other factors are consistent with approval.
    (B) In deciding whether to use its discretion under this paragraph 
(c)(1)(iii), the Board also shall consider whether the foreign bank has 
adopted and implemented procedures to combat money laundering. The Board 
also may take into account whether the home country supervisor is 
developing a legal regime to address money laundering or is 
participating in multilateral efforts to combat money laundering. In 
approving an application under this paragraph (c)(1)(iii), the Board, 
after requesting and taking into consideration the views of the 
licensing authority, may impose any conditions or restrictions relating 
to the activities or business operations of the proposed branch, agency, 
or commercial lending company subsidiary, including restrictions on 
sources of funding. The Board shall coordinate with the licensing 
authority in the implementation of such conditions or restrictions.
    (2) Additional standards. In acting on any application under this 
subpart, the Board may take into account:
    (i) Consent of home country supervisor. Whether the home country 
supervisor of the foreign bank has consented to the proposed 
establishment of the branch, agency, or commercial lending company 
subsidiary;
    (ii) Financial resources. The financial resources of the foreign 
bank (including the foreign bank's capital position, projected capital 
position, profitability, level of indebtedness, and future prospects) 
and the condition of any U.S. office of the foreign bank;
    (iii) Managerial resources. The managerial resources of the foreign 
bank, including the competence, experience, and integrity of the 
officers and directors; the integrity of its principal shareholders; 
management's experience and capacity to engage in international banking; 
and the record of the foreign bank and its management of complying with 
laws and regulations, and of fulfilling any commitments to, and any 
conditions imposed by, the Board in connection with any prior 
application;
    (iv) Sharing information with supervisors. Whether the foreign 
bank's home country supervisor and the home country supervisor of any 
parent of the foreign bank share material information regarding the 
operations of the foreign bank with other supervisory authorities;
    (v) Assurances to Board. (A) Whether the foreign bank has provided 
the Board with adequate assurances that information will be made 
available to the Board on the operations or activities of the foreign 
bank and any of its affiliates that the Board deems necessary to 
determine and enforce compliance with the IBA, the BHC Act, and other 
applicable federal banking statutes.
    (B) These assurances shall include a statement from the foreign bank 
describing the laws that would restrict the foreign bank or any of its 
parents from providing information to the Board;
    (vi) Measures for prevention of money laundering. Whether the 
foreign bank has adopted and implemented procedures to combat money 
laundering, whether there is a legal regime in place

[[Page 349]]

in the home country to address money laundering, and whether the home 
country is participating in multilateral efforts to combat money 
laundering;
    (vii) Compliance with U.S. law. Whether the foreign bank and its 
U.S. affiliates are in compliance with applicable U.S. law, and whether 
the applicant has established adequate controls and procedures in each 
of its offices to ensure continuing compliance with U.S. law, including 
controls directed to detection of money laundering and other unsafe or 
unsound banking practices; and (viii) The needs of the community and the 
history of operation of the foreign bank and its relative size in its 
home country, provided that the size of the foreign bank is not the sole 
factor in determining whether an office of a foreign bank should be 
approved.
    (3) Additional standards for certain interstate applications. (i) As 
specified in section 5(a)(3) of the IBA (12 U.S.C. 3103(a)(3)), the 
Board may not approve an application by a foreign bank to establish a 
branch, other than a limited branch, outside the home state of the 
foreign bank under section 5(a)(1) or (2) of the IBA (12 U.S.C. 
3103(a)(1), (2)) unless the Board:
    (A) Determines that the foreign bank's financial resources, 
including the capital level of the bank, are equivalent to those 
required for a domestic bank to be approved for branching under section 
5155 of the Revised Statutes (12 U.S.C. 36) and section 44 of the 
Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1831u);
    (B) Consults with the Department of the Treasury regarding capital 
equivalency;
    (C) Applies the standards specified in section 7(d) of the IBA (12 
U.S.C. 3105(d)) and this paragraph (c); and
    (D) Applies the same requirements and conditions to which an 
application by a domestic bank for an interstate merger is subject under 
section 44(b)(1), (3), and (4) of the FDIA (12 U.S.C. 1831u(b)(1), (3), 
(4)); and
    (ii) As specified in section 5(a)(7) of the IBA (12 U.S.C. 
3103(a)(7)), the Board may not approve an application to establish a 
branch through a change in status of an agency or limited branch outside 
the foreign bank's home state unless:
    (A) The establishment and operation of such branch is permitted by 
such state; and
    (B) Such agency or branch has been in operation in such state for a 
period of time that meets the state's minimum age requirement permitted 
under section 44(a)(5) of the Federal Deposit Insurance Act (12 U.S.C. 
183u(a)(5)).
    (4) Board conditions on approval. The Board may impose any 
conditions on its approval as it deems necessary, including a condition 
which may permit future termination by the Board of any activities or, 
in the case of a federal branch or a federal agency, by the Comptroller, 
based on the inability of the foreign bank to provide information on its 
activities or those of its affiliates that the Board deems necessary to 
determine and enforce compliance with U.S. banking laws.
    (d) Representative offices--(1) Permissible activities. A 
representative office may engage in:
    (i) Representational and administrative functions. Representational 
and administrative functions in connection with the banking activities 
of the foreign bank, which may include soliciting new business for the 
foreign bank; conducting research; acting as liaison between the foreign 
bank's head office and customers in the United States; performing 
preliminary and servicing steps in connection with lending; \11\ or 
performing back-office functions; but shall not include contracting for 
any deposit or deposit-like liability, lending money, or engaging in any 
other banking activity for the foreign bank;
---------------------------------------------------------------------------

    \11\ See 12 CFR 250.141(h) for activities that constitute 
preliminary and servicing steps.
---------------------------------------------------------------------------

    (ii) Credit approvals under certain circumstances. Making credit 
decisions if the foreign bank also operates one or more branches or 
agencies in the United States, the loans approved at the representative 
office are made by a U.S. office of the bank, and the loan proceeds are 
not disbursed in the representative office; and
    (iii) Other functions. Other functions for or on behalf of the 
foreign bank or its affiliates, such as operating as a regional 
administrative office of the foreign bank, but only to the extent that

[[Page 350]]

these other functions are not banking activities and are not prohibited 
by applicable federal or state law, or by ruling or order of the Board.
    (2) Standards for approval of representative offices. As specified 
in section 10(a)(2) of the IBA (12 U.S.C. 3107(a)(2)), in acting on the 
application of a foreign bank to establish a representative office, the 
Board shall take into account, to the extent it deems appropriate, the 
standards for approval set out in paragraph (c) of this section. The 
standard regarding supervision by the foreign bank's home country 
supervisor (as set out in paragraph (c)(1)(i)(A) of this section) will 
be met, in the case of a representative office application, if the Board 
makes a finding that the applicant bank is subject to a supervisory 
framework that is consistent with the activities of the proposed 
representative office, taking into account the nature of such activities 
and the operating record of the applicant.
    (3) Special-purpose foreign government-owned banks. A foreign 
government-owned organization engaged in banking activities in its home 
country that are not commercial in nature may apply to the Board for a 
determination that the organization is not a foreign bank for purposes 
of this section. A written request setting forth the basis for such a 
determination may be submitted to the Reserve Bank of the District in 
which the foreign organization's representative office is located in the 
United States, or to the Board, in the case of a proposed establishment 
of a representative office. The Board shall review and act upon each 
request on a case-by-case basis.
    (4) Additional requirements. The Board may impose any additional 
requirements that it determines to be necessary to carry out the 
purposes of the IBA.
    (e) Preservation of existing authority. Nothing in this subpart 
shall be construed to relieve any foreign bank or foreign banking 
organization from any otherwise applicable requirement of federal or 
state law, including any applicable licensing requirement.
    (f) Reports of crimes and suspected crimes. Except for a federal 
branch or a federal agency or a state branch that is insured by the 
Federal Deposit Insurance Corporation (FDIC), a branch, agency, or 
representative office of a foreign bank operating in the United States 
shall file a suspicious activity report in accordance with the 
provisions of Sec. 208.62 of Regulation H (12 CFR 208.62).
    (g) Management of shell branches. (1) A state-licensed branch or 
agency shall not manage, through an office of the foreign bank which is 
located outside the United States and is managed or controlled by such 
state-licensed branch or agency, any type of activity that a bank 
organized under the laws of the United States or any state is not 
permitted to manage at any branch or subsidiary of such bank which is 
located outside the United States.
    (2) For purposes of this paragraph (g), an office of a foreign bank 
located outside the United States is ``managed or controlled'' by a 
state-licensed branch or agency if a majority of the responsibility for 
business decisions, including but not limited to decisions with regard 
to lending or asset management or funding or liability management, or 
the responsibility for recordkeeping in respect of assets or liabilities 
for that non-U.S. office, resides at the state-licensed branch or 
agency.
    (3) The types of activities that a state-licensed branch or agency 
may manage through an office located outside the United States that it 
manage or controls include the types of activities authorized to a U.S. 
bank by state or federal charters, regulations issued by chartering or 
regulatory authorities, and other U.S. banking laws, including the 
Federal Reserve Act, and the implementing regulations, but U.S. 
procedural or quantitative requirements that may be applicable to the 
conduct of such activities by U.S. banks shall not apply.
    (h) Government securities sales practices. An uninsured state-
licensed branch or agency of a foreign bank that is required to give 
notice to the Board under section 15C of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-5) and the Department of the Treasury rules under 
section 15C (17 CFR 400.1(d) and part 401) shall be subject to the 
provisions of 12 CFR 208.37 to the same extent as a state member

[[Page 351]]

bank that is required to give such notice.
    (i) Protection of customer information. An uninsured state-licensed 
branch or agency of a foreign bank shall comply with the Interagency 
Guidelines Establishing Standards for Safeguarding Customer Information 
prescribed pursuant to sections 501 and 505 of the Gramm-Leach-Bliley 
Act (15 U.S.C. 6801 and 6805), set forth in appendix D-2 to part 208 of 
this chapter.
    (j) Procedures for monitoring Bank Secrecy Act compliance. (1) 
[Reserved]
    (2) Customer identification program. Except for a federal branch or 
a federal agency or a state branch that is insured by the FDIC, a 
branch, agency, or representative office of a foreign bank operating in 
the United States is subject to the requirements of 31 U.S.C. 5318(l) 
and the implementing regulation jointly promulgated by the Board and the 
Department of the Treasury at 31 CFR 103.121, which require a customer 
identification program.

[66 FR 53474, Oct. 26, 2001, as amended at 68 FR 35112, May 9, 2003]

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, Sec. 211.24 was 
amended by revising paragraph (i), effective July 1, 2005. For the 
convenience of the user, the revised text is set forth as follows:

Sec. 211.24  Approval of offices of foreign banks; procedures for 
          applications; standards for approval; representative-office 
          activities and standards for approval; preservation of 
          existing authority.

                                * * * * *

    (i) Protection of customer information and consumer information. An 
uninsured state-licensed branch or agency of a foreign bank shall comply 
with the Interagency Guidelines Establishing Information Security 
Standards prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805) and, with respect to the 
proper disposal of consumer information, section 216 of the Fair and 
Accurate Credit Transactions Act of 2003 (15 U.S.C. 1681w), set forth in 
appendix D-2 to part 208 of this chapter.



Sec. 211.25  Termination of offices of foreign banks.

    (a) Grounds for termination--(1) General. Under sections 7(e) and 
10(b) of the IBA (12 U.S.C. 3105(d), 3107(b)), the Board may order a 
foreign bank to terminate the activities of its representative office, 
state branch, state agency, or commercial lending company subsidiary if 
the Board finds that:
    (i) The foreign bank is not subject to comprehensive consolidated 
supervision in accordance with Sec. 211.24(c)(1), and the home country 
supervisor is not making demonstrable progress in establishing 
arrangements for the consolidated supervision of the foreign bank; or
    (ii) Both of the following criteria are met:
    (A) There is reasonable cause to believe that the foreign bank, or 
any of its affiliates, has committed a violation of law or engaged in an 
unsafe or unsound banking practice in the United States; and
    (B) As a result of such violation or practice, the continued 
operation of the foreign bank's representative office, state branch, 
state agency, or commercial lending company subsidiary would not be 
consistent with the public interest, or with the purposes of the IBA, 
the BHC Act, or the FDIA.
    (2) Additional ground. The Board also may enforce any condition 
imposed in connection with an order issued under Sec. 211.24.
    (b) Factor. In making its findings under this section, the Board may 
take into account the needs of the community, the history of operation 
of the foreign bank, and its relative size in its home country, provided 
that the size of the foreign bank shall not be the sole determining 
factor in a decision to terminate an office.
    (c) Consultation with relevant state supervisor. Except in the case 
of termination pursuant to the expedited procedure in paragraph (d)(3) 
of this section, the Board shall request and consider the views of the 
relevant state supervisor before issuing an order terminating the 
activities of a state branch, state agency, representative office, or 
commercial lending company subsidiary under this section.
    (d) Termination procedures--(1) Notice and hearing. Except as 
otherwise provided in paragraph (d)(3) of this section, an order issued 
under paragraph (a)(1) of this section shall be issued only after notice 
to the relevant state

[[Page 352]]

supervisor and the foreign bank and after an opportunity for a hearing.
    (2) Procedures for hearing. Hearings under this section shall be 
conducted pursuant to the Board's Rules of Practice for Hearings (12 CFR 
part 263).
    (3) Expedited procedure. The Board may act without providing an 
opportunity for a hearing, if it determines that expeditious action is 
necessary in order to protect the public interest. When the Board finds 
that it is necessary to act without providing an opportunity for a 
hearing, the Board, solely in its discretion, may:
    (i) Provide the foreign bank that is the subject of the termination 
order with notice of the intended termination order;
    (ii) Grant the foreign bank an opportunity to present a written 
submission opposing issuance of the order; or
    (iii) Take any other action designed to provide the foreign bank 
with notice and an opportunity to present its views concerning the 
order.
    (e) Termination of federal branch or federal agency. The Board may 
transmit to the Comptroller a recommendation that the license of a 
federal branch or federal agency be terminated if the Board has 
reasonable cause to believe that the foreign bank or any affiliate of 
the foreign bank has engaged in conduct for which the activities of a 
state branch or state agency may be terminated pursuant to this section.
    (f) Voluntary termination. A foreign bank shall notify the Board at 
least 30 days prior to terminating the activities of any office. Notice 
pursuant to this paragraph (f) is in addition to, and does not satisfy, 
any other federal or state requirements relating to the termination of 
an office or the requirement for prior notice of the closing of a 
branch, pursuant to section 39 of the FDIA (12 U.S.C. 1831p).



Sec. 211.26  Examination of offices and affiliates of foreign banks.

    (a) Conduct of examinations--(1) Examination of branches, agencies, 
commercial lending companies, and affiliates. The Board may examine:
    (i) Any branch or agency of a foreign bank;
    (ii) Any commercial lending company or bank controlled by one or 
more foreign banks, or one or more foreign companies that control a 
foreign bank; and
    (iii) Any other office or affiliate of a foreign bank conducting 
business in any state.
    (2) Examination of representative offices. The Board may examine any 
representative office in the manner and with the frequency it deems 
appropriate.
    (b) Coordination of examinations. To the extent possible, the Board 
shall coordinate its examinations of the U.S. offices and U.S. 
affiliates of a foreign bank with the licensing authority and, in the 
case of an insured branch, the Federal Deposit Insurance Corporation 
(FDIC), including through simultaneous examinations of the U.S. offices 
and U.S. affiliates of a foreign bank.
    (c) Frequency of on-site examination--(1) General. Each branch or 
agency of a foreign bank shall be examined on-site at least once during 
each 12-month period (beginning on the date the most recent examination 
of the office ended) by--
    (i) The Board;
    (ii) The FDIC, if the branch of the foreign bank accepts or 
maintains insured deposits;
    (iii) The Comptroller, if the branch or agency of the foreign bank 
is licensed by the Comptroller; or
    (iv) The state supervisor, if the office of the foreign bank is 
licensed or chartered by the state.
    (2) 18-month cycle for certain small institutions--(i) Mandatory 
standards. The Board may conduct a full-scope, on-site examination at 
least once during each 18-month period, rather than each 12-month period 
as required in paragraph (c)(1) of this section, if the branch or 
agency--
    (A) Has total assets of $250 million or less;
    (B) Has received a composite ROCA supervisory rating (which rates 
risk management, operational controls, compliance, and asset quality) of 
1 or 2 at its most recent examination;
    (C) Satisfies the requirement of either the following paragraph 
(c)(2)(i)(C)(1) or (2):
    (1) The foreign bank's most recently reported capital adequacy 
position consists of, or is equivalent to, tier 1 and

[[Page 353]]

total risk-based capital ratios of at least 6 percent and 10 percent, 
respectively, on a consolidated basis; or
    (2) The branch or agency has maintained on a daily basis, over the 
past three quarters, eligible assets in an amount not less than 108 
percent of the preceding quarter's average third-party liabilities 
(determined consistent with applicable federal and state law) and 
sufficient liquidity is currently available to meet its obligations to 
third parties;
    (D) Is not subject to a formal enforcement action or order by the 
Board, FDIC, or OCC; and
    (E) Has not experienced a change in control during the preceding 12-
month period in which a full-scope, on-site examination would have been 
required but for this section.
    (ii) Discretionary standards. In determining whether a branch or 
agency of a foreign bank that meets the standards of paragraph (c)(2)(i) 
of this section should not be eligible for an 18-month examination cycle 
pursuant to this paragraph (c)(2), the Board may consider additional 
factors, including whether--
    (A) Any of the individual components of the ROCA supervisory rating 
of a branch or agency of a foreign bank is rated ``3'' or worse;
    (B) The results of any off-site surveillance indicate a 
deterioration in the condition of the office;
    (C) The size, relative importance, and role of a particular office 
when reviewed in the context of the foreign bank's entire U.S. 
operations otherwise necessitate an annual examination; and
    (D) The condition of the foreign bank gives rise to such a need.
    (3) Authority to conduct more frequent examinations. Nothing in 
paragraphs (c)(1) and (2) of this section limits the authority of the 
Board to examine any U.S. branch or agency of a foreign bank as 
frequently as it deems necessary.



Sec. 211.27  Disclosure of supervisory information to foreign supervisors.

    (a) Disclosure by Board. The Board may disclose information obtained 
in the course of exercising its supervisory or examination authority to 
a foreign bank regulatory or supervisory authority, if the Board 
determines that disclosure is appropriate for bank supervisory or 
regulatory purposes and will not prejudice the interests of the United 
States.
    (b) Confidentiality. Before making any disclosure of information 
pursuant to paragraph (a) of this section, the Board shall obtain, to 
the extent necessary, the agreement of the foreign bank regulatory or 
supervisory authority to maintain the confidentiality of such 
information to the extent possible under applicable law.



Sec. 211.28  Provisions applicable to branches and agencies: limitation 
on loans to one borrower.

    (a) Limitation on loans to one borrower. Except as provided in 
paragraph (b) of this section, the total loans and extensions of credit 
by all the state branches and state agencies of a foreign bank 
outstanding to a single borrower at one time shall be aggregated with 
the total loans and extensions of credit by all federal branches and 
federal agencies of the same foreign bank outstanding to such borrower 
at the time; and shall be subject to the limitations and other 
provisions of section 5200 of the Revised Statutes (12 U.S.C. 84), and 
the regulations promulgated thereunder, in the same manner that 
extensions of credit by a federal branch or federal agency are subject 
to section 4(b) of the IBA (12 U.S.C. 3102(b)) as if such state branches 
and state agencies were federal branches and federal agencies.
    (b) Preexisting loans and extensions of credit. Any loans or 
extensions of credit to a single borrower that were originated prior to 
December 19, 1991, by a state branch or state agency of the same foreign 
bank and that, when aggregated with loans and extensions of credit by 
all other branches and agencies of the foreign bank, exceed the limits 
set forth in paragraph (a) of this section, may be brought into 
compliance with such limitations through routine repayment, provided 
that any new loans or extensions of credit (including renewals of 
existing unfunded credit lines, or extensions of the maturities of 
existing loans) to the same borrower shall comply with the limits set 
forth in paragraph (a) of this section.

[[Page 354]]



Sec. 211.29  Applications by state branches and state agencies to conduct 
activities not permissible for federal branches.

    (a) Scope. A state branch or state agency shall file with the Board 
a prior written application for permission to engage in or continue to 
engage in any type of activity that:
    (1) Is not permissible for a federal branch, pursuant to statute, 
regulation, official bulletin or circular, or order or interpretation 
issued in writing by the Comptroller; or
    (2) Is rendered impermissible due to a subsequent change in statute, 
regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction.
    (b) Exceptions. No application shall be required by a state branch 
or state agency to conduct any activity that is otherwise permissible 
under applicable state and federal law or regulation and that:
    (1) Has been determined by the FDIC, pursuant to 12 CFR 
362.4(c)(3)(i) through (c)(3)(ii)(A), not to present a significant risk 
to the affected deposit insurance fund;
    (2) Is permissible for a federal branch, but the Comptroller imposes 
a quantitative limitation on the conduct of such activity by the federal 
branch;
    (3) Is conducted as agent rather than as principal, provided that 
the activity is one that could be conducted by a state-chartered bank 
headquartered in the same state in which the branch or agency is 
licensed; or
    (4) Any other activity that the Board has determined may be 
conducted by any state branch or state agency of a foreign bank without 
further application to the Board.
    (c) Contents of application. An application submitted pursuant to 
paragraph (a) of this section shall be in letter form and shall contain 
the following information:
    (1) A brief description of the activity, including the manner in 
which it will be conducted, and an estimate of the expected dollar 
volume associated with the activity;
    (2) An analysis of the impact of the proposed activity on the 
condition of the U.S. operations of the foreign bank in general, and of 
the branch or agency in particular, including a copy, if available, of 
any feasibility study, management plan, financial projections, business 
plan, or similar document concerning the conduct of the activity;
    (3) A resolution by the applicant's board of directors or, if a 
resolution is not required pursuant to the applicant's organizational 
documents, evidence of approval by senior management, authorizing the 
conduct of such activity and the filing of this application;
    (4) If the activity is to be conducted by a state branch insured by 
the FDIC, statements by the applicant:
    (i) Of whether or not it is in compliance with 12 CFR 346.19 (Pledge 
of Assets) and 12 CFR 346.20 (Asset Maintenance);
    (ii) That it has complied with all requirements of the FDIC 
concerning an application to conduct the activity and the status of the 
application, including a copy of the FDIC's disposition of such 
application, if available; and
    (iii) Explaining why the activity will pose no significant risk to 
the deposit insurance fund; and
    (5) Any other information that the Reserve Bank deems appropriate.
    (d) Factors considered in determination. (1) The Board shall 
consider the following factors in determining whether a proposed 
activity is consistent with sound banking practice:
    (i) The types of risks, if any, the activity poses to the U.S. 
operations of the foreign banking organization in general, and the 
branch or agency in particular;
    (ii) If the activity poses any such risks, the magnitude of each 
risk; and
    (iii) If a risk is not de minimis, the actual or proposed procedures 
to control and minimize the risk.
    (2) Each of the factors set forth in paragraph (d)(1) of this 
section shall be evaluated in light of the financial condition of the 
foreign bank in general and the branch or agency in particular and the 
volume of the activity.
    (e) Application procedures. Applications pursuant to this section 
shall be filed with the appropriate Federal Reserve Bank. An application 
shall not be deemed complete until it contains all

[[Page 355]]

the information requested by the Reserve Bank and has been accepted. 
Approval of such an application may be conditioned on the applicant's 
agreement to conduct the activity subject to specific conditions or 
limitations.
    (f) Divestiture or cessation. (1) If an application for permission 
to continue to conduct an activity is not approved by the Board or, if 
applicable, the FDIC, the applicant shall submit a detailed written plan 
of divestiture or cessation of the activity to the appropriate Federal 
Reserve Bank within 60 days of the disapproval.
    (i) The divestiture or cessation plan shall describe in detail the 
manner in which the applicant will divest itself of or cease the 
activity, and shall include a projected timetable describing how long 
the divestiture or cessation is expected to take.
    (ii) Divestiture or cessation shall be complete within one year from 
the date of the disapproval, or within such shorter period of time as 
the Board shall direct.
    (2) If a foreign bank operating a state branch or state agency 
chooses not to apply to the Board for permission to continue to conduct 
an activity that is not permissible for a federal branch, or which is 
rendered impermissible due to a subsequent change in statute, 
regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction, the 
foreign bank shall submit a written plan of divestiture or cessation, in 
conformance with paragraph (f)(1) of this section within 60 days of the 
effective date of this part or of such change or decision.



Sec. 211.30  Criteria for evaluating U.S. operations of foreign banks 
not subject to consolidated supervision.

    (a) Development and publication of criteria. Pursuant to the Foreign 
Bank Supervision Enhancement Act, Pub. L. 102-242, 105 Stat. 2286 
(1991), the Board shall develop and publish criteria to be used in 
evaluating the operations of any foreign bank in the United States that 
the Board has determined is not subject to comprehensive consolidated 
supervision.
    (b) Criteria considered by Board. Following a determination by the 
Board that, having taken into account the standards set forth in Sec. 
211.24(c)(1), a foreign bank is not subject to CCS, the Board shall 
consider the following criteria in determining whether the foreign 
bank's U.S. operations should be permitted to continue and, if so, 
whether any supervisory constraints should be placed upon the bank in 
connection with those operations:
    (1) The proportion of the foreign bank's total assets and total 
liabilities that are located or booked in its home country, as well as 
the distribution and location of its assets and liabilities that are 
located or booked elsewhere;
    (2) The extent to which the operations and assets of the foreign 
bank and any affiliates are subject to supervision by its home country 
supervisor;
    (3) Whether the home country supervisor of such foreign bank is 
actively working to establish arrangements for comprehensive 
consolidated supervision of the bank, and whether demonstrable progress 
is being made;
    (4) Whether the foreign bank has effective and reliable systems of 
internal controls and management information and reporting, which enable 
its management properly to oversee its worldwide operations;
    (5) Whether the foreign bank's home country supervisor has any 
objection to the bank continuing to operate in the United States;
    (6) Whether the foreign bank's home country supervisor and the home 
country supervisor of any parent of the foreign bank share material 
information regarding the operations of the foreign bank with other 
supervisory authorities;
    (7) The relationship of the U.S. operations to the other operations 
of the foreign bank, including whether the foreign bank maintains funds 
in its U.S. offices that are in excess of amounts due to its U.S. 
offices from the foreign bank's non-U.S. offices;
    (8) The soundness of the foreign bank's overall financial condition;
    (9) The managerial resources of the foreign bank, including the 
competence, experience, and integrity of the officers and directors, and 
the integrity of its principal shareholders;
    (10) The scope and frequency of external audits of the foreign bank;

[[Page 356]]

    (11) The operating record of the foreign bank generally and its role 
in the banking system in its home country;
    (12) The foreign bank's record of compliance with relevant laws, as 
well as the adequacy of its anti-money-laundering controls and 
procedures, in respect of its worldwide operations;
    (13) The operating record of the U.S. offices of the foreign bank;
    (14) The views and recommendations of the Comptroller or the 
relevant state supervisors in those states in which the foreign bank has 
operations, as appropriate;
    (15) Whether the foreign bank, if requested, has provided the Board 
with adequate assurances that such information will be made available on 
the operations or activities of the foreign bank and any of its 
affiliates as the Board deems necessary to determine and enforce 
compliance with the IBA, the BHC Act, and other U.S. banking statutes; 
and
    (16) Any other information relevant to the safety and soundness of 
the U.S. operations of the foreign bank.
    (c) Restrictions on U.S. operations--(1) Terms of agreement. Any 
foreign bank that the Board determines is not subject to CCS may be 
required to enter into an agreement to conduct its U.S. operations 
subject to such restrictions as the Board, having considered the 
criteria set forth in paragraph (b) of this section, determines to be 
appropriate in order to ensure the safety and soundness of its U.S. 
operations.
    (2) Failure to enter into or comply with agreement. A foreign bank 
that is required by the Board to enter into an agreement pursuant to 
paragraph (c)(1) of this section and either fails to do so, or fails to 
comply with the terms of such agreement, may be subject to:
    (i) Enforcement action, in order to ensure safe and sound banking 
operations, under 12 U.S.C. 1818; or
    (ii) Termination or a recommendation for termination of its U.S. 
operations, under Sec. 211.25(a) and (e) and section (7)(e) of the IBA 
(12 U.S.C. 3105(e)).



                   Subpart C_Export Trading Companies

    Source: 66 FR 54374, Oct. 26, 2001, unless otherwise noted.



Sec. 211.31  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.), the Bank 
Export Services Act (title II, Pub. L. 97-290, 96 Stat. 1235 (1982)) 
(BESA), and the Export Trading Company Act Amendments of 1988 (title 
III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (ETC Act Amendments).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act, the BESA, and the ETC Act Amendments, the 
latter two statutes being designed to increase U.S. exports by 
encouraging investments and participation in export trading companies by 
bank holding companies and the specified investors. The provisions of 
this subpart apply to eligible investors as defined in this subpart.



Sec. 211.32  Definitions.

    The definitions in Sec. Sec. 211.1 and 211.2 of subpart A apply to 
this subpart, subject to the following:
    (a) Appropriate Federal Reserve Bank has the same meaning as in 
Sec. 211.21(c).
    (b) Bank has the same meaning as in section 2(c) of the BHC Act (12 
U.S.C. 1841(c)).
    (c) Company has the same meaning as in section 2(b) of the BHC Act 
(12 U.S.C. 1841(b)).
    (d) Eligible investors means:
    (1) Bank holding companies, as defined in section 2(a) of the BHC 
Act (12 U.S.C. 1841(a));
    (2) Edge and agreement corporations that are subsidiaries of bank 
holding companies but are not subsidiaries of banks;
    (3) Banker's banks, as described in section 4(c)(14)(F)(iii) of the 
BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
    (4) Foreign banking organizations, as defined in Sec. 211.21(o).
    (e) Export trading company means a company that is exclusively 
engaged in activities related to international trade and, by engaging in 
one or more export trade services, derives:
    (1) At least one-third of its revenues in each consecutive four-year 
period from the export of, or from facilitating the export of, goods and 
services produced in the United States by persons

[[Page 357]]

other than the export trading company or its subsidiaries; and
    (2) More revenues in each four-year period from export activities as 
described in paragraph (e)(1) of this section than it derives from the 
import, or facilitating the import, into the United States of goods or 
services produced outside the United States. The four-year period within 
which to calculate revenues derived from its activities under this 
section shall be deemed to have commenced with the first fiscal year 
after the respective export trading company has been in operation for 
two years.
    (f) Revenues shall include net sales revenues from exporting, 
importing, or third-party trade in goods by the export trading company 
for its own account and gross revenues derived from all other activities 
of the export trading company.
    (g) Subsidiary has the same meaning as in section 2(d) of the BHC 
Act (12 U.S.C. 1841(d)).
    (h) Well capitalized has the same meaning as in Sec. 225.2(r) of 
Regulation Y (12 CFR 225.2(r)).
    (i) Well managed has the same meaning as in Sec. 225.2(s) of 
Regulation Y (12 CFR 225.2(s)).



Sec. 211.33  Investments and extensions of credit.

    (a) Amount of investments. In accordance with the procedures of 
Sec. 211.34, an eligible investor may invest no more than 5 percent of 
its consolidated capital and surplus in one or more export trading 
companies, except that an Edge or agreement corporation not engaged in 
banking may invest as much as 25 percent of its consolidated capital and 
surplus but no more than 5 percent of the consolidated capital and 
surplus of its parent bank holding company.
    (b) Extensions of credit--(1) Amount. An eligible investor in an 
export trading company or companies may extend credit directly or 
indirectly to the export trading company or companies in a total amount 
that at no time exceeds 10 percent of the investor's consolidated 
capital and surplus.
    (2) Terms. (i) An eligible investor in an export trading company may 
not extend credit directly or indirectly to the export trading company 
or any of its customers or to any other investor holding 10 percent or 
more of the shares of the export trading company on terms more favorable 
than those afforded similar borrowers in similar circumstances, and such 
extensions of credit shall not involve more than the normal risk of 
repayment or present other unfavorable features.
    (ii) For the purposes of this section, an investor in an export 
trading company includes any affiliate of the investor.
    (3) Collateral requirements. Covered transactions between a bank and 
an affiliated export trading company in which a bank holding company has 
invested pursuant to this subpart are subject to the collateral 
requirements of section 23A of the Federal Reserve Act (12 U.S.C. 371c), 
except where a bank issues a letter of credit or advances funds to an 
affiliated export trading company solely to finance the purchase of 
goods for which:
    (i) The export trading company has a bona fide contract for the 
subsequent sale of the goods; and
    (ii) The bank has a security interest in the goods or in the 
proceeds from their sale at least equal in value to the letter of credit 
or the advance.



Sec. 211.34  Procedures for filing and processing notices.

    (a) General policy. Direct and indirect investments by eligible 
investors in export trading companies shall be made in accordance with 
the general consent or prior notice procedures contained in this 
section. The Board may at any time, upon notice, modify or suspend the 
general-consent procedures with respect to any eligible investor.
    (b) General consent--(1) Eligibility for general consent. Subject to 
the other limitations of this subpart, the Board grants its general 
consent for any investment an export trading company:
    (i) If the eligible investor is well capitalized and well managed;
    (ii) In an amount equal to cash dividends received from that export 
trading company during the preceding 12 calendar months; or
    (iii) That is acquired from an affiliate at net asset value or 
through a contribution of shares.

[[Page 358]]

    (2) Post-investment notice. By the end of the month following the 
month in which the investment is made, the investor shall provide the 
Board with the following information:
    (i) The amount of the investment and the source of the funds with 
which the investment was made; and
    (ii) In the case of an initial investment, a description of the 
activities in which the export trading company proposes to engage and 
projections for the export trading company for the first year following 
the investment.
    (c) Filing notice--(1) Prior notice. An eligible investor shall give 
the Board 60 days' prior written notice of any investment in an export 
trading company that does not qualify under the general consent 
procedure.
    (2) Notice of change of activities. (i) An eligible investor shall 
give the Board 60 days' prior written notice of changes in the 
activities of an export trading company that is a subsidiary of the 
investor if the export trading company expands its activities beyond 
those described in the initial notice to include:
    (A) Taking title to goods where the export trading company does not 
have a firm order for the sale of those goods;
    (B) Product research and design;
    (C) Product modification; or
    (D) Activities not specifically covered by the list of activities 
contained in section 4(c)(14)(F)(ii) of the BHC Act (12 U.S.C. 
1843(c)(14)(F)(ii)).
    (ii) Such an expansion of activities shall be regarded as a proposed 
investment under this subpart.
    (d) Time period for Board action. (1) A proposed investment that has 
not been disapproved by the Board may be made 60 days after the 
appropriate Federal Reserve Bank accepts the notice for processing. A 
proposed investment may be made before the expiration of the 60-day 
period if the Board notifies the investor in writing of its intention 
not to disapprove the investment.
    (2) The Board may extend the 60-day period for an additional 30 days 
if the Board determines that the investor has not furnished all 
necessary information or that any material information furnished is 
substantially inaccurate. The Board may disapprove an investment if the 
necessary information is provided within a time insufficient to allow 
the Board reasonably to consider the information received.
    (3) Within three days of a decision to disapprove an investment, the 
Board shall notify the investor in writing and state the reasons for the 
disapproval.
    (e) Time period for investment. An investment in an export trading 
company that has not been disapproved shall be made within one year from 
the date of the notice not to disapprove, unless the time period is 
extended by the Board or by the appropriate Federal Reserve Bank.



               Subpart D_International Lending Supervision

    Source: 49 FR 5592, Feb. 13, 1984, unless otherwise noted.



Sec. 211.41   Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the 
International Lending Supervision Act of 1983 (Pub. L. 98-181, title IX, 
97 Stat. 1153) (International Lending Supervision Act); the Federal 
Reserve Act (12 U.S.C. 221 et seq.) (FRA), and the Bank Holding Company 
Act of 1956, as amended (12 U.S.C. 1841 et seq.) (BHC Act).
    (b) Purpose and scope. This subpart is issued in furtherance of the 
purposes of the International Lending Supervision Act. It applies to 
State banks that are members of the Federal Reserve System (State member 
banks); corporations organized under section 25A of the FRA (12 U.S.C. 
611 through 631) (Edge Corporations); corporations operating subject to 
an agreement with the Board under section 25 of the FRA (12 U.S.C. 601 
through 604a) (Agreement Corporations); and bank holding companies (as 
defined in section 2 of the BHC Act (12 U.S.C. 1841(a)) but not 
including a bank holding company that is a foreign banking organization 
as defined in Sec. 211.21(o).

[Reg. K, 68 FR 1159, Jan. 9, 2003]



Sec. 211.42  Definitions.

    For the purposes of this subpart:
    (a) Administrative cost means those costs which are specifically 
identified

[[Page 359]]

with negotiating, processing and consummating the loan. These costs 
include, but are not necessarily limited to: legal fees; costs of 
preparing and processing loan documents; and an allocable portion of 
salaries and related benefits of employees engaged in the international 
lending function. No portion of supervisory and administrative expenses 
or other indirect expenses such as occupancy and other similar overhead 
costs shall be included.
    (b) Banking institution means a State member bank; bank holding 
company; Edge Corporation and Agreement Corporation engaged in banking. 
Banking institution does not include a foreign banking organization as 
defined in Sec. 211.21(o).
    (c) Federal banking agencies means the Board of Governors of the 
Federal Reserve System, the Comptroller of the Currency, and the Federal 
Deposit Insurance Corporation.
    (d) International assets means those assets required to be included 
in banking institutions' Country Exposure Report forms (FFIEC No. 009).
    (e) International loan means a loan as defined in the instructions 
to the Report of Condition and Income for the respective banking 
institution (FFIEC Nos. 031 and 041) and made to a foreign government, 
or to an individual, a corporation, or other entity not a citizen of, 
resident in, or organized or incorporated in the United States.
    (f) Restructured international loan means a loan that meets the 
following criteria:
    (1) The borrower is unable to service the existing loan according to 
its terms and is a resident of a foreign country in which there is a 
generalized inability of public and private sector obligors to meet 
their external debt obligations on a timely basis because of a lack of, 
or restraints on the availability of, needed foreign exchange in the 
country; and
    (2) The terms of the existing loan are amended to reduce stated 
interest or extend the schedule of payments; or
    (3) A new loan is made to, or for the benefit of, the borrower, 
enabling the borrower to service or refinance the existing debt.
    (g) Transfer risk means the possibility that an asset cannot be 
serviced in the currency of payment because of a lack of, or restraints 
on the availability of, needed foreign exchange in the country of the 
obligor.

[Reg. K, 68 FR 1159, Jan. 9, 2003]



Sec. 211.43   Allocated transfer risk reserve.

    (a) Establishment of Allocated Transfer Risk Reserve. A banking 
institution shall establish an allocated transfer risk reserve (ATRR) 
for specified international assets when required by the Board in 
accordance with this section.
    (b) Procedures and standards-(1) Joint agency determination. At 
least annually, the Federal banking agencies shall determine jointly, 
based on the standards set forth in paragraph (b)(2) of this section, 
the following:
    (i) Which international assets subject to transfer risk warrant 
establishment of an ATRR;
    (ii) The amount of the ATRR for the specified assets; and
    (iii) Whether an ATRR established for specified assets may be 
reduced.
    (2) Standards for requiring ATRR-(i) Evaluation of assets. The 
Federal banking agencies shall apply the following criteria in 
determining whether an ATRR is required for particular international 
assets:
    (A) Whether the quality of a banking institution's assets has been 
impaired by a protracted inability of public or private obligors in a 
foreign country to make payments on their external indebtedness as 
indicated by such factors, among others, as whether:
    (1) Such obligors have failed to make full interest payments on 
external indebtedness; or
    (2) Such obligors have failed to comply with the terms of any 
restructured indebtedness; or
    (3) A foreign country has failed to comply with any International 
Monetary Fund or other suitable adjustment program; or
    (B) Whether no definite prospects exist for the orderly restoration 
of debt service.
    (ii) Determination of amount of ATRR. (A) In determining the amount 
of the ATRR, the Federal banking agencies shall consider:
    (1) The length of time the quality of the asset has been impaired;

[[Page 360]]

    (2) Recent actions taken to restore debt service capability;
    (3) Prospects for restored asset quality; and
    (4) Such other factors as the Federal banking agencies may consider 
relevant to the quality of the asset.
    (B) The initial year's provision for the ATRR shall be ten percent 
of the principal amount of each specified international asset, or such 
greater or lesser percentage determined by the Federal banking agencies. 
Additional provision, if any, for the ATRR in subsequent years shall be 
fifteen percent of the principal amount of each specified international 
asset, or such greater or lesser percentage determined by the Federal 
banking agencies.
    (3) Board notification. Based on the joint agency determinations 
under paragraph (b)(1) of this section, the Board shall notify each 
banking institution holding assets subject to an ATRR:
    (i) Of the amount of the ATRR to be established by the institution 
for specified international assets; and
    (ii) That an ATRR established for specified assets may be reduced.
    (c) Accounting treatment of ATRR-(1) Charge to current income. A 
banking institution shall establish an ATRR by a charge to current 
income and the amounts so charged shall not be included in the banking 
institution's capital or surplus.
    (2) Separate accounting. A banking institution shall account for an 
ATRR separately from the Allowance for Loan and Lease Losses, and shall 
deduct the ATRR from ``gross loans and leases'' to arrive at ``net loans 
and leases.'' The ATRR must be established for each asset subject to the 
ATRR in the percentage amount specified.
    (3) Consolidation. A banking institution shall establish an ATRR, as 
required, on a consolidated basis. For banks, consolidation should be in 
accordance with the procedures and tests of significance set forth in 
the instructions for preparation of Consolidated Reports of Condition 
and Income (FFIEC 031 and 041). For bank holding companies, the 
consolidation shall be in accordance with the principles set forth in 
the ``Instructions to Consolidated Financial Statements for Bank Holding 
Companies'' (Form F.R. Y-9C). Edge and Agreement corporations engaged in 
banking shall report in accordance with instructions for preparation of 
the Report of Condition for Edge and Agreement Corporations (Form F.R. 
2886b).
    (4) Alternative accounting treatment. A banking institution need not 
establish an ATRR if it writes down in the period in which the ATRR is 
required, or has written down in prior periods, the value of the 
specified international assets in the requisite amount for each such 
asset. For purposes of this paragraph, international assets may be 
written down by a charge to the Allowance for Loan and Lease Losses or a 
reduction in the principal amount of the asset by application of 
interest payments or other collections on the asset; provided, that only 
those international assets that may be charged to the Allowance for Loan 
and Lease Losses pursuant to generally accepted accounting principles 
may be written down by a charge to the Allowance for Loan and Lease 
Losses. However, the Allowance for Loan and Lease Losses must be 
replenished in such amount necessary to restore it to a level which 
adequately provides for the estimated losses inherent in the banking 
institution's loan portfolio.
    (5) Reduction of ATRR. A banking institution may reduce an ATRR when 
notified by the Board or, at any time, by writing down such amount of 
the international asset for which the ATRR was established.

[Reg. K, 68 FR 1159, Jan. 9, 2003]



Sec. 211.44  Reporting and disclosure of international assets.

    (a) Requirements. (1) Pursuant to section 907(a) of the 
International Lending Supervision Act of 1983 (Title IX, Pub. L. 98-181, 
97 Stat. 1153) (ILSA), a banking institution shall submit to the Board, 
at least quarterly, information regarding the amounts and composition of 
its holdings of international assets.
    (2) Pursuant to section 907(b) of ILSA, a banking institution shall 
submit to the Board information regarding concentrations in its holdings 
of international assets that are material in relation to total assets 
and to capital of

[[Page 361]]

the institution, such information to be made publicly available by the 
Board on request.
    (b) Procedures. The format, content and reporting and filing dates 
of the reports required under paragraph (a) of this section shall be 
determined jointly by the Federal banking agencies. The requirements to 
be prescribed by the Federal banking agencies may include changes to 
existing reporting forms (such as the Country Exposure Report, form 
FFIEC No. 009) or such other requirements as the Federal banking 
agencies deem appropriate. The Federal banking agencies also may 
determine to exempt from the requirements of paragraph (a) of this 
section banking institutions that, in the Federal banking agencies' 
judgment, have de minimis holdings of international assets.
    (c) Reservation of authority. Nothing contained in this rule shall 
preclude the Board from requiring from a banking institution such 
additional or more frequent information on the institution's holding of 
international assets as the Board may consider necessary.

[Reg. K, 68 FR 1159, Jan. 9, 2003]



Sec. 211.45  Accounting for fees on international loans.

    (a) Restrictions on fees for restructured international loans. No 
banking institution shall charge, in connection with the restructuring 
of an international loan, any fee exceeding the administrative cost of 
the restructuring unless it amortizes the amount of the fee exceeding 
the administrative cost over the effective life of the loan.
    (b) Accounting treatment. Subject to paragraph (a) of this section, 
banking institutions shall account for fees on international loans in 
accordance with generally accepted accounting principles.

[Reg. K, 68 FR 1159, Jan. 9, 2003]

                             Interpretations



Sec. 211.601  Status of certain offices for purposes of the International 
Banking Act restrictions on interstate banking operations.

    The Board has considered the question of whether a foreign bank's 
California office that may accept deposits from certain foreign sources 
(e.g., a United States citizen residing abroad) is a branch or an agency 
for the purposes of the grandfather provisions of section 5 of the 
International Banking Act of 1978 (12 U.S.C. 3103(b)). The question has 
arisen as a result of the definitions in the International Banking Act 
of branch and agency, and the limited deposit-taking capabilities of 
certain California offices of foreign banks.
    The International Banking Act defines agency as ``any office * * * 
at which deposits may not be accepted from citizens or residents of the 
United States,'' and defines branch as ``any office * * * of a foreign 
bank * * * at which deposits are received'' (12 U.S.C. 3101(1) and (3)). 
Offices of foreign banks in California prior to the International 
Banking Act were generally prohibited from accepting deposits by the 
requirement of State law that such offices obtain Federal deposit 
insurance (Cal. Fin. Code 1756); until the passage of the International 
Banking Act an office of a foreign bank could not obtain such insurance. 
California law, however, permits offices of foreign banks, with the 
approval of the Banking Department, to accept deposits from any person 
that resides, is domiciled, and maintains its principal place of 
business in a foreign country (Cal. Fin. Code 1756.2). Thus, under a 
literal reading of the definitions of branch and agency contained in the 
International Banking Act, a foreign bank's California office that 
accepts deposits from certain foreign sources (e.g., a U.S. citizen 
residing abroad), is a branch rather than an agency.
    Section 5 of the International Banking Act establishes certain 
limitations on the expansion of the domestic deposit-taking capabilities 
of a foreign bank outside its home State. It also grandfathers offices 
established or applied for prior to July 27, 1978, and permits a foreign 
bank to select its home State from among the States in which it operated 
branches and agencies on the grandfather date. If a foreign bank's 
office that was established or applied for prior to June 27, 1978, is a 
branch as defined in the International Banking Act, then it is 
grandfathered as a branch. Accordingly, a foreign bank could designate a 
State other than California as its home State and

[[Page 362]]

subsequently convert its California office to a full domestic deposit-
taking facility by obtaining Federal deposit insurance. If, however, the 
office is determined to be an agency, then it is grandfathered as such 
and the foreign bank may may not expand its deposit-taking capabilities 
in California without declaring California its home State.
    In the Board's view, it would be inconsistent with the purposes and 
the legislative history of the International Banking Act to enable a 
foreign bank to expand its domestic interstate deposit-taking 
capabilities by grandfathering these California offices as branches 
because of their ability to receive certain foreign source deposits. The 
Board also notes that such deposits are of the same general type that 
may be received by an Edge Corporation and, hence in accordance with 
section 5(a) of the International Banking Act, by branches established 
and operated outside a foreign bank's home State. It would be 
inconsistent with the structure of the interstate banking provisions of 
the International Banking Act to grandfather as full deposit-taking 
offices those facilities whose activities have been determined by 
Congress to be appropriate for a foreign bank's out-of-home State 
branches.
    Accordingly, the Board, in administering the interstate banking 
provisions of the IBA, regards as agencies those offices of foreign 
banks that do not accept domestic deposits but that may accept deposits 
from any person that resides, is domiciled, and maintains its principal 
place of business in a foreign country.

[45 FR 67309, Oct. 10, 1980]



Sec. 211.602  Investments by United States Banking Organizations in 
foreign companies that transact business in the United States.

    Section 25(a) of the Federal Reserve Act (12 U.S.C. 611, the ``Edge 
Act'') provides for the establishment of corporations to engage in 
international or foreign banking or other international or foreign 
financial operations (``Edge Corporations''). Congress has declared that 
Edge Corporations are to serve the purpose of stimulating the provision 
of international banking and financing services throughout the United 
States and are to have powers sufficiently broad to enable them to 
compete effectively with foreign-owned institutions in the United States 
and abroad. The Board was directed by the International Banking Act of 
1978 (12 U.S.C. 3101) to revise its regulations governing Edge 
Corporations in order to accomplish these and other objectives and was 
further directed to modify or eliminate any interpretations that impede 
the attainment of these purposes.
    One of the powers of Edge Corporations is that of investing in 
foreign companies. Under the relevant statutes, however, an Edge 
Corporation is prohibited from investing in foreign companies that 
engage in the general business of buying or selling goods, wares, 
merchandise or commodities in the United States. In addition, an Edge 
Corporation may not invest in foreign companies that transact any 
business in the United States that is not, in the Board's judgment, 
``incidental'' to its international or foreign business. The latter 
limitation also applies to investments by bank holding companies (12 
U.S.C. 1843(c)(13)) and member banks (12 U.S.C. 601).
    The Board has been asked to determine whether an Edge Corporation's 
minority investment (involving less than 25 percent of the voting 
shares) in a foreign company would continue to be permissible after the 
foreign company establishes or acquires a United States subsidiary that 
engages in domestic activities that are closely related to banking. The 
Board has also been asked to determine whether an Edge Corporation's 
minority investment in a foreign bank would continue to be permissible 
after the foreign bank establishes a branch in the United States that 
engages in domestic banking activities. In the latter case, the branch 
would be located outside the State in which the Edge Corporation and its 
parent bank are located.
    In the past the Board, in exercising its discretionary authority to 
determine those activities that are permissible in the United States, 
has followed the policy that an Edge Corporation could not hold even a 
minority interest

[[Page 363]]

in a foreign company that engaged, directly or indirectly, in any purely 
domestic business in the United States. The United States activities 
considered permissible were those internationally related activities 
that Edge Corporations may engage in directly. If this policy were 
applied to the subject requests, the Edge Corporations would be required 
to divest their interests in the foreign companies notwithstanding the 
fact that, in each case, the Edge Corporation, as a minority investor, 
did not control the decision to undertake activities in the United 
States, and that even after the United States activities are undertaken 
the business of the foreign company will remain predominantly outside 
the United States.
    International banking and finance have undergone considerable growth 
and change in recent years. It is increasingly common, for example, for 
United States institutions to have direct or indirect offices in foreign 
countries and to engage in activities at those offices that are 
domestically as well as internationally oriented. In this climate, 
United States banking organizations would be placed at a competitive 
disadvantage if their minority investments in foreign companies were 
limited to those companies that do no domestic business in the United 
States. Moreover, continued adherence to the existing policy would be 
contrary to the declaration in the International Banking Act of 1978 
that Edge Corporations' powers are to be sufficiently broad to enable 
them to compete effectively in the United States and abroad. 
Furthermore, where the activities to be conducted in the United States 
by the foreign company are banking or closely related to banking, it 
does not appear that any regulatory or supervisory purpose would be 
served by prohibiting a minority investment in the foreign firm by a 
United States banking organization.
    In view of these considerations, the Board has reviewed its policy 
relating to the activities that may be engaged in in the United States 
by foreign companies (including foreign banks) in which Edge 
Corporations, member banks, and bank holding companies invest. As a 
result of that review, the Board has determined that it would be 
appropriate to interpret sections 25 and 25(a)of the Federal Reserve Act 
(12 U.S.C. 601, 611) and section 4(c)(13) of the Bank Holding Company 
Act (12 U.S.C. 1843(c)(13)) generally to allow United States banking 
organizations, with the prior consent of the Board, to acquire and hold 
investments in foreign companies that do business in the United States 
subject to the following conditions:
    (1) The foreign company is engaged predominantly in business outside 
the United States or in internationally related activities in the United 
States;*
---------------------------------------------------------------------------

    *This condition would ordinarily not be met where a foreign company 
merely maintains a majority of its business in international activities. 
Each case will be scrutinized to ensure that the activities in the 
United States do not alter substantially the international orientation 
of the foreign company's business.
---------------------------------------------------------------------------

    (2) The direct or indirect activities of the foreign company in the 
United States are either banking or closely related to banking; and
    (3) The United States banking organization does not own 25 percent 
or more of the voting stock of, or otherwise control, the foreign 
company.


In considering whether to grant its consent for such investments, the 
Board would also review the proposals to ensure that they are consistent 
with the purposes of the Bank Holding Company Act and the Federal 
Reserve Act.

[46 FR 8437, Jan. 27, 1981]



Sec. 211.603  Commodity swap transactions.

    For text of interpretation relating to this subject, see Sec. 
208.128 of this chapter.

[56 FR 63408, Dec. 4, 1991]



Sec. 211.604  Data processing activities.

    (a) Introduction. As a result of a recent proposal by a bank holding 
company to engage in data processing activities abroad, the Board has 
considered the scope of permissible data processing activities under 
Regulation K (12 CFR part 211). This question has arisen as a result of 
the fact that Sec. 211.5(d)(10) of Regulation K does not specifically 
indicate the scope of data

[[Page 364]]

processing as a permissible activity abroad.
    (b) Scope of data processing activities. (1) Prior to 1979, the 
Board authorized specific banking organizations to engage in data 
processing activities abroad with the expectation that such activity 
would be primarily related to financial activities. When Regulation K 
was issued in 1979, data processing was included as a permissible 
activity abroad. Although the regulation did not provide specific 
guidance on the scope of this authority, the Board has considered such 
authority to be coextensive with the authority granted in specific cases 
prior to the issuance of Regulation K, which relied on the fact that 
most of the activity would relate to financial data. Regulation K does 
not address related activities such as the manufacture of hardware or 
the provision of software or related or incidental services.
    (2) In 1979, when the activity was included in Regulation K for the 
first time, the data processing authority in Regulation K was somewhat 
broader than that permissible in the United States under Regulation Y 
(12 CFR part 225) at that time, as the Regulation K authority permitted 
limited non-financial data processing. In 1979, Regulation Y authorized 
only financial data processing activities for third parties, with very 
limited exceptions. By 1997, however, the scope of data processing 
activities under Regulation Y was expanded such that bank holding 
companies are permitted to derive up to 30 percent of their data 
processing revenues from processing data that is not financial, banking, 
or economic. Moreover, in other respects, the Regulation Y provision is 
broader than the data processing provision in Regulation K.
    (3) In light of the fact that the permissible scope of data 
processing activities under Regulation Y is now equal to, and in some 
respects, broader than the activity originally authorized under 
Regulation K, the Board believes that Sec. 211.5(d)(10) should be read 
to encompass all of the activities permissible under Sec. 225.28(b)(14) 
of Regulation Y. In addition, the limitations of that section would also 
apply to Sec. 211.5(d)(10).
    (c) Applications. If a U.S. banking organization wishes to engage 
abroad in data processing or data transmission activities beyond those 
described in Regulation Y, it must apply for the Board's prior consent 
under Sec. 211.5(d)(20) of Regulation K. In addition, if any investor 
has commenced activities beyond those permitted under Sec. 
225.28(b)(14) of Regulation Y in reliance on Regulation K, it should 
consult with staff of the Board to determine whether such activities 
have been properly authorized under Regulation K.

[Reg. K, 64 FR 58781, Nov. 1, 1999]



Sec. 211.605  Permissible underwriting activities of foreign banks.

    (a) Introduction. A number of foreign banks that are subject to the 
Bank Holding Company Act (``BHC Act'') have participated as co-managers 
in the underwriting of securities to be distributed in the United States 
despite the fact that the foreign banks in question do not have 
authority to engage in underwriting activity in the United States under 
either the Gramm-Leach-Bliley Act (``GLB Act'') or section 4(c)(8) of 
the BHC Act (12 U.S.C. 1843(c)(8)). This interpretation clarifies the 
scope of existing restrictions on underwriting by such foreign banks 
with respect to securities that are distributed in the United States.
    (b) Underwriting transactions engaged in by foreign banks. (1) In 
the transactions in question, a foreign bank typically becomes a member 
of the underwriting syndicate for securities that are registered and 
intended to be distributed in the United States. The lead underwriter, 
usually a registered U.S. broker-dealer not affiliated with the foreign 
bank, agrees to be responsible for distributing the securities being 
underwritten. The underwriting obligation is assumed by a foreign office 
or affiliate of the foreign bank.
    (2) The foreign banks have used their U.S. offices or affiliates to 
act as liaison with the U.S. issuer and the lead underwriter in the 
United States, to prepare documentation and to provide other services in 
connection with the underwriting. In some cases, the U.S. offices or 
affiliates that assisted the

[[Page 365]]

foreign bank with the underwriting receive a substantial portion of the 
revenue generated by the foreign bank's participation in the 
underwriting. In other cases, the U.S. offices receive ``credit'' from 
the head office of the foreign bank for their assistance in generating 
profits arising from the underwriting.
    (3) By assuming the underwriting risk and booking the underwriting 
fees in their foreign offices or affiliates, the foreign banks are able 
to take advantage of an exemption under U.S. securities laws; a foreign 
underwriter is not required to register in the United States if the 
underwriter either does not distribute any of the securities in the 
United States or distributes them only through a registered broker-
dealer.
    (c) Permissible scope of underwriting activities. (1) A foreign bank 
that is subject to the BHC Act may engage in underwriting activities in 
the United States only if it has been authorized under section 4 of the 
Act. The foreign banks in question have argued that they are not engaged 
in underwriting activity in the United States because the underwriting 
activity takes place only outside the United States where the 
transaction is booked. The foreign banks refer to Regulation K, which 
defines ``engaged in business'' or ``engaged in activities'' to mean 
conducting an activity through an office or subsidiary in the United 
States. Because the underwriting is not booked in a U.S. office or 
subsidiary, the banks assert that the activity cannot be considered 
conducted in the United States.
    (2) The Board believes that the position taken by the foreign banks 
is not supported by the Board's regulations or policies. Section 225.124 
of the Board's Regulation Y (12 CFR 225.124(d)) states that a foreign 
bank will not be considered to be engaged in the activity of 
underwriting in the United States if the shares to be underwritten are 
distributed outside the United States. In the transactions in question, 
all of the securities to be underwritten by the foreign banks are 
distributed in the United States.
    (3) Regulation K (12 CFR part 211) was amended in 1985 to provide 
clarification that a foreign bank may not own or control voting shares 
of a foreign company that directly underwrites, sells or distributes 
securities in the United States (emphasis added). 12 CFR 
211.23(f)(5)(ii). In proposing this latter provision, the Board 
clarified that no part of the prohibited underwriting process may take 
place in the United States and that the prohibition on the activity does 
not depend on the activity being conducted through an office or 
subsidiary in the United States. Moreover, in the transactions in 
question, there was significant participation by U.S. offices and 
affiliates of the foreign banks in the underwriting process. In some 
transactions, the foreign office at which the transactions were booked 
did not have any documentation on the particular transactions; all 
documentation was maintained in the United States office. In all cases, 
the U.S. offices or affiliates provided virtually all technical support 
for participation in the underwriting process and benefitted from 
profits generated by the activity.
    (4) The fact that some technological and regulatory constraints on 
the delivery of cross-border services into the United States have been 
eliminated since the Regulation K definition of ``engaged in business'' 
was adopted in 1979 creates greater scope for banking organizations to 
deal with customers outside the U.S. bank regulatory framework. The 
definition in Regulation K, however, does not authorize foreign banking 
organizations to evade regulatory restrictions on securities activities 
in the United States by directly underwriting securities to be 
distributed in the United States or by using U.S. offices and affiliates 
to facilitate the prohibited activity. In the GLB Act, Congress 
established a framework within which both domestic and foreign banking 
organizations may underwrite and deal in securities in the United 
States. The GLB Act requires that banking organizations meet certain 
financial and managerial requirements in order to be able to engage in 
these activities in the United States. The Board believes the practices 
described above undermine this legislative framework and constitute an 
evasion of the requirements of the GLB

[[Page 366]]

Act and the Board's Regulation K. Foreign banking organizations that 
wish to conduct securities underwriting activity in the United States 
have long had the option of obtaining section 20 authority and now have 
the option of obtaining financial holding company status.
    (d) Conclusion. The Board finds that the underwriting of securities 
to be distributed in the United States is an activity conducted in the 
United States, regardless of the location at which the underwriting risk 
is assumed and the underwriting fees are booked. Consequently, any 
banking organization that wishes to engage in such activity must either 
be a financial holding company under the GLB Act or have authority to 
engage in underwriting activity under section 4(c)(8) of the BHC Act 
(so-called ``section 20 authority''). Revenue generated by underwriting 
bank-ineligible securities in such transactions should be attributed to 
the section 20 company for those foreign banks that operate under 
section 20 authority.

[Reg. K, 68 FR 7899, Feb. 19, 2003]



PART 212_MANAGEMENT OFFICIAL INTERLOCKS--Table of Contents




Sec.
212.1 Authority, purpose, and scope.
212.2 Definitions.
212.3 Prohibitions.
212.4 Interlocking relationships permitted by statute.
212.5 Small market share exemption.
212.6 General exemption.
212.7 Change in circumstances.
212.8 Enforcement.
212.9 Effect of Interlocks Act on Clayton Act.

    Authority: 12 U.S.C. 3201-3208; 15 U.S.C. 19.

    Source: 61 FR 40302, Aug. 2, 1996, unless otherwise noted.



Sec. 212.1  Authority, purpose, and scope.

    (a) Authority. This part is issued under the provisions of the 
Depository Institution Management Interlocks Act (Interlocks Act) (12 
U.S.C. 3201 et seq.), as amended.
    (b) Purpose. The purpose of the Interlocks Act and this part is to 
foster competition by generally prohibiting a management official from 
serving two nonaffiliated depository organizations in situations where 
the management interlock likely would have an anticompetitive effect.
    (c) Scope. This part applies to management officials of state member 
banks, bank holding companies, and their affiliates.



Sec. 212.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Affiliate. (1) The term affiliate has the meaning given in 
section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of that 
section 202, shares held by an individual include shares held by members 
of his or her immediate family. ``Immediate family'' means spouse, 
mother, father, child, grandchild, sister, brother, or any of their 
spouses, whether or not any of their shares are held in trust.
    (2) For purposes of section 202(3)(B) of the Interlocks Act (12 
U.S.C. 3201(3)(B)), an affiliate relationship based on common ownership 
does not exist if the Board determines, after giving the affected 
persons the opportunity to respond, that the asserted affiliation was 
established in order to avoid the prohibitions of the Interlocks Act and 
does not represent a true commonality of interest between the depository 
organizations. In making this determination, the Board considers, among 
other things, whether a person, including members of his or her 
immediate family, whose shares are necessary to constitute the group 
owns a nominal percentage of the shares of one of the organizations and 
the percentage is substantially disproportionate to that person's 
ownership of shares in the other organization.
    (b) Area median income means:
    (1) The median family income for the metropolitan statistical area 
(MSA), if a depository organization is located in an MSA; or
    (2) The statewide nonmetropolitan median family income, if a 
depository organization is located outside an MSA.
    (c) Community means a city, town, or village, and contiguous and 
adjacent cities, towns, or villages.

[[Page 367]]

    (d) Contiguous or adjacent cities, towns, or villages means cities, 
towns, or villages whose borders touch each other or whose borders are 
within 10 road miles of each other at their closest points. The property 
line of an office located in an unincorporated city, town, or village is 
the boundary line of that city, town, or village for the purpose of this 
definition.
    (e) Depository holding company means a bank holding company or a 
savings and loan holding company (as more fully defined in section 202 
of the Interlocks Act (12 U.S.C. 3201)) having its principal office 
located in the United States.
    (f) Depository institution means a commercial bank (including a 
private bank), a savings bank, a trust company, a savings and loan 
association, a building and loan association, a homestead association, a 
cooperative bank, an industrial bank, or a credit union, chartered under 
the laws of the United States and having a principal office located in 
the United States. Additionally, a United States office, including a 
branch or agency, of a foreign commercial bank is a depository 
institution.
    (g) Depository institution affiliate means a depository institution 
that is an affiliate of a depository organization.
    (h) Depository organization means a depository institution or a 
depository holding company.
    (i) Low- and moderate-income areas means census tracts (or, if an 
area is not in a census tract, block numbering areas delineated by the 
United States Bureau of the Census) where the median family income is 
less than 100 percent of the area median income.
    (j) Management official. (1) The term management official means:
    (i) A director;
    (ii) An advisory or honorary director of a depository institution 
with total assets of $100 million or more;
    (iii) A senior executive officer as that term is defined in 12 CFR 
225.71(a);
    (iv) A branch manager;
    (v) A trustee of a depository organization under the control of 
trustees; and
    (vi) Any person who has a representative or nominee, as defined in 
paragraph (p) of this section, serving in any of the capacities in this 
paragraph (l)(1).
    (2) The term management official does not include:
    (i) A person whose management functions relate exclusively to the 
business of retail merchandising or manufacturing;
    (ii) A person whose management functions relate principally to a 
foreign commercial bank's business outside the United States; or
    (iii) A person described in the provisos of section 202(4) of the 
Interlocks Act (referring to an officer of a State-chartered savings 
bank, cooperative bank, or trust company that neither makes real estate 
mortgage loans nor accepts savings).
    (k) Office means a principal or branch office of a depository 
institution located in the United States. Office does not include a 
representative office of a foreign commercial bank, an electronic 
terminal, a loan production office, or any office of a depository 
holding company.
    (l) Person means a natural person, corporation, or other business 
entity.
    (m) Relevant metropolitan statistical area (RMSA) means an MSA, a 
primary MSA, or a consolidated MSA that is not comprised of designated 
Primary MSAs to the extent that these terms are defined and applied by 
the Office of Management and Budget.
    (n) Representative or nominee means a natural person who serves as a 
management official and has an obligation to act on behalf of another 
person with respect to management responsibilities. The Board will find 
that a person has an obligation to act on behalf of another person only 
if the first person has an agreement, express or implied, to act on 
behalf of the second person with respect to management responsibilities. 
The Board will determine, after giving the affected persons an 
opportunity to respond, whether a person is a representative or nominee.
    (o) Total assets. (1) The term total assets means assets measured on 
a consolidated basis and reported in the most recent fiscal year-end 
Consolidated Report of Condition and Income.
    (2) The term total assets does not include:

[[Page 368]]

    (i) Assets of a diversified savings and loan holding company as 
defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) other than the assets of its depository institution 
affiliate;
    (ii) Assets of a bank holding company that is exempt from the 
prohibitions of section 4 of the Bank Holding Company Act of 1956 
pursuant to an order issued under section 4(d) of that Act (12 U.S.C. 
1843(d)) other than the assets of its depository institution affiliate; 
or
    (iii) Assets of offices of a foreign commercial bank other than the 
assets of its United States branch or agency.
    (p) United States means the United States of America, any State or 
territory of the United States of America, the District of Columbia, 
Puerto Rico, Guam, American Samoa, and the Virgin Islands.

[61 FR 40302, Aug. 2, 1996, as amended at 64 FR 51679, Sept. 24, 1999]



Sec. 212.3  Prohibitions.

    (a) Community. A management official of a depository organization 
may not serve at the same time as a management official of an 
unaffiliated depository organization if the depository organizations in 
question (or a depository institution affiliate thereof) have offices in 
the same community.
    (b) RMSA. A management official of a depository organization may not 
serve at the same time as a management official of an unaffiliated 
depository organization if the depository organizations in question (or 
a depository institution affiliate thereof) have offices in the same 
RMSA and, in the case of depository institutions, each depository 
organization has total assets of $20 million or more.
    (c) Major assets. A management official of a depository organization 
with total assets exceeding $2.5 billion (or any affiliate of such an 
organization) may not serve at the same time as a management official of 
an unaffiliated depository organization with total assets exceeding $1.5 
billion (or any affiliate of such an organization), regardless of the 
location of the two depository organizations. The Board will adjust 
these thresholds, as necessary, based on the year-to-year change in the 
average of the Consumer Price Index for the Urban Wage Earners and 
Clerical Workers, not seasonally adjusted, with rounding to the nearest 
$100 million. The Board will announce the revised thresholds by 
publishing a final rule without notice and comment in the Federal 
Register.

[61 FR 40302, Aug. 2, 1996, as amended at 64 FR 51679, Sept. 24, 1999]



Sec. 212.4  Interlocking relationships permitted by statute.

    The prohibitions of Sec. 212.3 do not apply in the case of any one 
or more of the following organizations or to a subsidiary thereof:
    (a) A depository organization that has been placed formally in 
liquidation, or which is in the hands of a receiver, conservator, or 
other official exercising a similar function;
    (b) A corporation operating under section 25 or section 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq., 
respectively) (Edge Corporations and Agreement Corporations);
    (c) A credit union being served by a management official of another 
credit union;
    (d) A depository organization that does not do business within the 
United States except as an incident to its activities outside the United 
States;
    (e) A State-chartered savings and loan guaranty corporation;
    (f) A Federal Home Loan Bank or any other bank organized solely to 
serve depository institutions (a bankers' bank) or solely for the 
purpose of providing securities clearing services and services related 
thereto for depository institutions and securities companies;
    (g) A depository organization that is closed or is in danger of 
closing as determined by the appropriate Federal depository 
institution's regulatory agency and is acquired by another depository 
organization. This exemption lasts for five years, beginning on the date 
the depository organization is acquired; and
    (h)(1) A diversified savings and loan holding company (as defined in 
section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) with respect to the service of a director of such 
company who also is a director of

[[Page 369]]

an unaffiliated depository organization if:
    (i) Both the diversified savings and loan holding company and the 
unaffiliated depository organization notify their appropriate Federal 
depository institutions regulatory agency at least 60 days before the 
dual service is proposed to begin; and
    (ii) The appropriate regulatory agency does not disapprove the dual 
service before the end of the 60-day period.
    (2) The Board may disapprove a notice of proposed service if it 
finds that:
    (i) The service cannot be structured or limited so as to preclude an 
anticompetitive effect in financial services in any part of the United 
States;
    (ii) The service would lead to substantial conflicts of interest or 
unsafe or unsound practices; or
    (iii) The notificant failed to furnish all the information required 
by the Board.
    (3) The Board may require that any interlock permitted under this 
paragraph (h) be terminated if a change in circumstances occurs with 
respect to one of the interlocked depository organizations that would 
have provided a basis for disapproval of the interlock during the notice 
period.



Sec. 212.5  Small market share exemption.

    (a) Exemption. A management interlock that is prohibited by Sec. 
212.3 is permissible, if:
    (1) The interlock is not prohibited by Sec. 212.3(c); and
    (2) The depository organizations (and their depository institution 
affiliates) hold, in the aggregate, no more than 20 percent of the 
deposits in each RMSA or community in which both depository 
organizations (or their depository institution affiliates) have offices. 
The amount of deposits shall be determined by reference to the most 
recent annual Summary of Deposits published by the FDIC for the RMSA or 
community.
    (b) Confirmation and records. Each depository organization must 
maintain records sufficient to support its determination of eligibility 
for the exemption under paragraph (a) of this section, and must 
reconfirm that determination on an annual basis.

[64 FR 51679, Sept. 24, 1999]



Sec. 212.6  General exemption.

    (a) Exemption. The Board may, by agency order, exempt an interlock 
from the prohibitions in Sec. 212.3, if the Board finds that the 
interlock would not result in a monopoly or substantial lessening of 
competition, and would not present safety and soundness concerns.
    (b) Presumptions. In reviewing an application for an exemption under 
this section, the Board will apply a rebuttable presumption that an 
interlock will not result in a monopoly or substantial lessening of 
competition if the depository organization seeking to add a management 
official:
    (1) Primarily serves low- and moderate-income areas;
    (2) Is controlled or managed by persons who are members of a 
minority group, or women;
    (3) Is a depository institution that has been chartered for less 
than two years; or
    (4) Is deemed to be in ``troubled condition'' as defined in 12 CFR 
225.71.
    (c) Duration. Unless a shorter expiration period is provided in the 
Board approval, an exemption permitted by paragraph (a) of this section 
may continue so long as it does not result in a monopoly or substantial 
lessening of competition, or is unsafe or unsound. If the Board grants 
an interlock exemption in reliance upon a presumption under paragraph 
(b) of this section, the interlock may continue for three years, unless 
otherwise provided by the Board in writing.

[64 FR 51679, Sept. 24, 1999]



Sec. 212.7  Change in circumstances.

    (a) Termination. A management official shall terminate his or her 
service or apply for an exemption if a change in circumstances causes 
the service to become prohibited. A change in circumstances may include 
an increase in asset size of an organization, a change in the 
delineation of the RMSA or community, the establishment of an office, an 
increase in the aggregate deposits of the depository organization, or an 
acquisition, merger, consolidation, or reorganization of the ownership 
structure of a depository organization that

[[Page 370]]

causes a previously permissible interlock to become prohibited.
    (b) Transition period. A management official described in paragraph 
(a) of this section may continue to serve the state member bank or bank 
holding company involved in the interlock for 15 months following the 
date of the change in circumstances. The Board may shorten this period 
under appropriate circumstances.

[61 FR 40302, Aug. 2, 1996, as amended at 64 FR 51679, Sept. 24, 1999]



Sec. 212.8  Enforcement.

    Except as provided in this section, the Board administers and 
enforces the Interlocks Act with respect to state member banks, bank 
holding companies, and affiliates of either, and may refer any case of a 
prohibited interlocking relationship involving these entities to the 
Attorney General of the United States to enforce compliance with the 
Interlocks Act and this part. If an affiliate of a state member bank or 
a bank holding company is subject to the primary regulation of another 
Federal depository organization supervisory agency, then the Board does 
not administer and enforce the Interlocks Act with respect to that 
affiliate.



Sec. 212.9  Effect of Interlocks Act on Clayton Act.

    The Board regards the provisions of the first three paragraphs of 
section 8 of the Clayton Act (15 U.S.C. 19) to have been supplanted by 
the revised and more comprehensive prohibitions on management official 
interlocks between depository organizations in the Interlocks Act.



PART 213_CONSUMER LEASING (REGULATION M)--Table of Contents




Sec.
213.1 Authority, scope, purpose, and enforcement.
213.2 Definitions.
213.3 General disclosure requirements.
213.4 Content of disclosures.
213.5 Renegotiations, extensions, and assumptions.
213.6 Electronic communication.
213.7 Advertising.
213.8 Record retention.
213.9 Relation to state laws.

Appendix A to Part 213--Model Forms
Appendix B to Part 213--Federal Enforcement Agencies
Appendix C to Part 213--Issuance of Staff Interpretations
Supplement I to Part 213--Official Staff Commentary to Regulation M

    Authority: 15 U.S.C. 1604; 1667f.

    Source: Reg. M, 61 FR 52258, Oct. 7, 1996, unless otherwise noted.



Sec. 213.1  Authority, scope, purpose, and enforcement.

    (a) Authority. The regulation in this part, known as Regulation M, 
is issued by the Board of Governors of the Federal Reserve System to 
implement the consumer leasing provisions of the Truth in Lending Act, 
which is Title I of the Consumer Credit Protection Act, as amended (15 
U.S.C. 1601 et seq.). Information collection requirements contained in 
this regulation have been approved by the Office of Management and 
Budget under the provisions of 44 U.S.C. 3501 et seq. and have been 
assigned OMB control number 7100-0202.
    (b) Scope and purpose. This part applies to all persons that are 
lessors of personal property under consumer leases as those terms are 
defined in Sec. 213.2(e)(1) and (h). The purpose of this part is:
    (1) To ensure that lessees of personal property receive meaningful 
disclosures that enable them to compare lease terms with other leases 
and, where appropriate, with credit transactions;
    (2) To limit the amount of balloon payments in consumer lease 
transactions; and
    (3) To provide for the accurate disclosure of lease terms in 
advertising.
    (c) Enforcement and liability. Section 108 of the act contains the 
administrative enforcement provisions. Sections 112, 130, 131, and 185 
of the act contain the liability provisions for failing to comply with 
the requirements of the act and this part.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 62 FR 15367, Apr. 1, 
1997]



Sec. 213.2  Definitions.

    For the purposes of this part the following definitions apply:

[[Page 371]]

    (a) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.) and 
the Consumer Leasing Act is chapter 5 of the Truth in Lending Act.
    (b) Advertisement means a commercial message in any medium that 
directly or indirectly promotes a consumer lease transaction.
    (c) Board refers to the Board of Governors of the Federal Reserve 
System.
    (d) Closed-end lease means a consumer lease other than an open-end 
lease as defined in this section.
    (e)(1) Consumer lease means a contract in the form of a bailment or 
lease for the use of personal property by a natural person primarily for 
personal, family, or household purposes, for a period exceeding four 
months and for a total contractual obligation not exceeding $25,000, 
whether or not the lessee has the option to purchase or otherwise become 
the owner of the property at the expiration of the lease. Unless the 
context indicates otherwise, in this part ``lease'' means ``consumer 
lease.''
    (2) The term does not include a lease that meets the definition of a 
credit sale in Regulation Z (12 CFR 226.2(a)). It also does not include 
a lease for agricultural, business, or commercial purposes or a lease 
made to an organization.
    (3) This part does not apply to a lease transaction of personal 
property which is incident to the lease of real property and which 
provides that:
    (i) The lessee has no liability for the value of the personal 
property at the end of the lease term except for abnormal wear and tear; 
and
    (ii) The lessee has no option to purchase the leased property.
    (f) Gross capitalized cost means the amount agreed upon by the 
lessor and the lessee as the value of the leased property and any items 
that are capitalized or amortized during the lease term, including but 
not limited to taxes, insurance, service agreements, and any outstanding 
prior credit or lease balance. Capitalized cost reduction means the 
total amount of any rebate, cash payment, net trade-in allowance, and 
noncash credit that reduces the gross capitalized cost. The adjusted 
capitalized cost equals the gross capitalized cost less the capitalized 
cost reduction, and is the amount used by the lessor in calculating the 
base periodic payment.
    (g) Lessee means a natural person who enters into or is offered a 
consumer lease.
    (h) Lessor means a person who regularly leases, offers to lease, or 
arranges for the lease of personal property under a consumer lease. A 
person who has leased, offered, or arranged to lease personal property 
more than five times in the preceding calendar year or more than five 
times in the current calendar year is subject to the act and this part.
    (i) Open-end lease means a consumer lease in which the lessee's 
liability at the end of the lease term is based on the difference 
between the residual value of the leased property and its realized 
value.
    (j) Organization means a corporation, trust, estate, partnership, 
cooperative, association, or government entity or instrumentality.
    (k) Person means a natural person or an organization.
    (l) Personal property means any property that is not real property 
under the law of the state where the property is located at the time it 
is offered or made available for lease.
    (m) Realized value means:
    (1) The price received by the lessor for the leased property at 
disposition;
    (2) The highest offer for disposition of the leased property; or
    (3) The fair market value of the leased property at the end of the 
lease term.
    (n) Residual value means the value of the leased property at the end 
of the lease term, as estimated or assigned at consummation by the 
lessor, used in calculating the base periodic payment.
    (o) Security interest and security mean any interest in property 
that secures the payment or performance of an obligation.
    (p) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, and any territory or possession of the 
United States.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 62 FR 15367, Apr. 1, 
1997]



Sec. 213.3  General disclosure requirements.

    (a) General requirements. A lessor shall make the disclosures 
required by

[[Page 372]]

Sec. 213.4, as applicable. The disclosures shall be made clearly and 
conspicuously in writing in a form the consumer may keep, in accordance 
with this section.
    (1) Form of disclosures. The disclosures required by Sec. 213.4 
shall be given to the lessee together in a dated statement that 
identifies the lessor and the lessee; the disclosures may be made either 
in a separate statement that identifies the consumer lease transaction 
or in the contract or other document evidencing the lease. 
Alternatively, the disclosures required to be segregated from other 
information under paragraph (a)(2) of this section may be provided in a 
separate dated statement that identifies the lease, and the other 
required disclosures may be provided in the lease contract or other 
document evidencing the lease. In a lease of multiple items, the 
property description required by Sec. 213.4(a) may be given in a 
separate statement that is incorporated by reference in the disclosure 
statement required by this paragraph.
    (2) Segregation of certain disclosures. The following disclosures 
shall be segregated from other information and shall contain only 
directly related information: Sec. Sec. 213.4(b) through (f), (g)(2), 
(h)(3), (i)(1), (j), and (m)(1). The headings, content, and format for 
the disclosures referred to in this paragraph (a)(2) shall be provided 
in a manner substantially similar to the applicable model form in 
appendix A of this part.
    (3) Timing of disclosures. A lessor shall provide the disclosures to 
the lessee prior to the consummation of a consumer lease.
    (4) Language of disclosures. The disclosures required by Sec. 213.4 
may be made in a language other than English provided that they are made 
available in English upon the lessee's request.
    (5) Electronic communication. For rules governing the electronic 
delivery of disclosures, including a definition of electronic 
communication, see Sec. 213.6.
    (b) Additional information; nonsegregated disclosures. Additional 
information may be provided with any disclosure not listed in paragraph 
(a)(2) of this section, but it shall not be stated, used, or placed so 
as to mislead or confuse the lessee or contradict, obscure, or detract 
attention from any disclosure required by this part.
    (c) Multiple lessors or lessees. When a transaction involves more 
than one lessor, the disclosures required by this part may be made by 
one lessor on behalf of all the lessors. When a lease involves more than 
one lessee, the lessor may provide the disclosures to any lessee who is 
primarily liable on the lease.
    (d) Use of estimates. If an amount or other item needed to comply 
with a required disclosure is unknown or unavailable after reasonable 
efforts have been made to ascertain the information, the lessor may use 
a reasonable estimate that is based on the best information available to 
the lessor, is clearly identified as an estimate, and is not used to 
circumvent or evade any disclosures required by this part.
    (e) Effect of subsequent occurrence. If a required disclosure 
becomes inaccurate because of an event occurring after consummation, the 
inaccuracy is not a violation of this part.
    (f) Minor variations. A lessor may disregard the effects of the 
following in making disclosures:
    (1) That payments must be collected in whole cents;
    (2) That dates of scheduled payments may be different because a 
scheduled date is not a business day;
    (3) That months have different numbers of days; and
    (4) That February 29 occurs in a leap year.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 66 FR 17328, Mar. 30, 
2001]



Sec. 213.4  Content of disclosures.

    For any consumer lease subject to this part, the lessor shall 
disclose the following information, as applicable:
    (a) Description of property. A brief description of the leased 
property sufficient to identify the property to the lessee and lessor.
    (b) Amount due at lease signing or delivery. The total amount to be 
paid prior to or at consummation or by delivery, if delivery occurs 
after consummation, using the term ``amount due at lease signing or 
delivery.'' The lessor shall itemize each component by type and amount, 
including any refundable security deposit, advance monthly or other 
periodic payment,

[[Page 373]]

and capitalized cost reduction; and in motor-vehicle leases, shall 
itemize how the amount due will be paid, by type and amount, including 
any net trade-in allowance, rebates, noncash credits, and cash payments 
in a format substantially similar to the model forms in appendix A of 
this part.
    (c) Payment schedule and total amount of periodic payments. The 
number, amount, and due dates or periods of payments scheduled under the 
lease, and the total amount of the periodic payments.
    (d) Other charges. The total amount of other charges payable to the 
lessor, itemized by type and amount, that are not included in the 
periodic payments. Such charges include the amount of any liability the 
lease imposes upon the lessee at the end of the lease term; the 
potential difference between the residual and realized values referred 
to in paragraph (k) of this section is excluded.
    (e) Total of payments. The total of payments, with a description 
such as ``the amount you will have paid by the end of the lease.'' This 
amount is the sum of the amount due at lease signing (less any 
refundable amounts), the total amount of periodic payments (less any 
portion of the periodic payment paid at lease signing), and other 
charges under paragraphs (b), (c), and (d) of this section. In an open-
end lease, a description such as ``you will owe an additional amount if 
the actual value of the vehicle is less than the residual value'' shall 
accompany the disclosure.
    (f) Payment calculation. In a motor-vehicle lease, a mathematical 
progression of how the scheduled periodic payment is derived, in a 
format substantially similar to the applicable model form in appendix A 
of this part, which shall contain the following:
    (1) Gross capitalized cost. The gross capitalized cost, including a 
disclosure of the agreed upon value of the vehicle, a description such 
as ``the agreed upon value of the vehicle [state the amount] and any 
items you pay for over the lease term (such as service contracts, 
insurance, and any outstanding prior credit or lease balance),'' and a 
statement of the lessee's option to receive a separate written 
itemization of the gross capitalized cost. If requested by the lessee, 
the itemization shall be provided before consummation.
    (2) Capitalized cost reduction. The capitalized cost reduction, with 
a description such as ``the amount of any net trade-in allowance, 
rebate, noncash credit, or cash you pay that reduces the gross 
capitalized cost.''
    (3) Adjusted capitalized cost. The adjusted capitalized cost, with a 
description such as ``the amount used in calculating your base 
[periodic] payment.''
    (4) Residual value. The residual value, with a description such as 
``the value of the vehicle at the end of the lease used in calculating 
your base [periodic] payment.''
    (5) Depreciation and any amortized amounts. The depreciation and any 
amortized amounts, which is the difference between the adjusted 
capitalized cost and the residual value, with a description such as 
``the amount charged for the vehicle's decline in value through normal 
use and for any other items paid over the lease term.''
    (6) Rent charge. The rent charge, with a description such as ``the 
amount charged in addition to the depreciation and any amortized 
amounts.'' This amount is the difference between the total of the base 
periodic payments over the lease term minus the depreciation and any 
amortized amounts.
    (7) Total of base periodic payments. The total of base periodic 
payments with a description such as ``depreciation and any amortized 
amounts plus the rent charge.''
    (8) Lease payments. The lease payments with a description such as 
``the number of payments in your lease.''
    (9) Base periodic payment. The total of the base periodic payments 
divided by the number of payment periods in the lease.
    (10) Itemization of other charges. An itemization of any other 
charges that are part of the periodic payment.
    (11) Total periodic payment. The sum of the base periodic payment 
and any other charges that are part of the periodic payment.
    (g) Early termination--(1) Conditions and disclosure of charges. A 
statement of the conditions under which the lessee or lessor may 
terminate the lease prior to the end of the lease term; and

[[Page 374]]

the amount or a description of the method for determining the amount of 
any penalty or other charge for early termination, which must be 
reasonable.
    (2) Early-termination notice. In a motor-vehicle lease, a notice 
substantially similar to the following: ``Early Termination. You may 
have to pay a substantial charge if you end this lease early. The charge 
may be up to several thousand dollars. The actual charge will depend on 
when the lease is terminated. The earlier you end the lease, the greater 
this charge is likely to be.''
    (h) Maintenance responsibilities. The following provisions are 
required:
    (1) Statement of responsibilities. A statement specifying whether 
the lessor or the lessee is responsible for maintaining or servicing the 
leased property, together with a brief description of the 
responsibility;
    (2) Wear and use standard. A statement of the lessor's standards for 
wear and use (if any), which must be reasonable; and
    (3) Notice of wear and use standard. In a motor-vehicle lease, a 
notice regarding wear and use substantially similar to the following: 
``Excessive Wear and Use. You may be charged for excessive wear based on 
our standards for normal use.'' The notice shall also specify the amount 
or method for determining any charge for excess mileage.
    (i) Purchase option. A statement of whether or not the lessee has 
the option to purchase the leased property, and:
    (1) End of lease term. If at the end of the lease term, the purchase 
price; and
    (2) During lease term. If prior to the end of the lease term, the 
purchase price or the method for determining the price and when the 
lessee may exercise this option.
    (j) Statement referencing nonsegregated disclosures. A statement 
that the lessee should refer to the lease documents for additional 
information on early termination, purchase options and maintenance 
responsibilities, warranties, late and default charges, insurance, and 
any security interests, if applicable.
    (k) Liability between residual and realized values. A statement of 
the lessee's liability, if any, at early termination or at the end of 
the lease term for the difference between the residual value of the 
leased property and its realized value.
    (l) Right of appraisal. If the lessee's liability at early 
termination or at the end of the lease term is based on the realized 
value of the leased property, a statement that the lessee may obtain, at 
the lessee's expense, a professional appraisal by an independent third 
party (agreed to by the lessee and the lessor) of the value that could 
be realized at sale of the leased property. The appraisal shall be final 
and binding on the parties.
    (m) Liability at end of lease term based on residual value. If the 
lessee is liable at the end of the lease term for the difference between 
the residual value of the leased property and its realized value:
    (1) Rent and other charges. The rent and other charges, paid by the 
lessee and required by the lessor as an incident to the lease 
transaction, with a description such as ``the total amount of rent and 
other charges imposed in connection with your lease [state the 
amount].''
    (2) Excess liability. A statement about a rebuttable presumption 
that, at the end of the lease term, the residual value of the leased 
property is unreasonable and not in good faith to the extent that the 
residual value exceeds the realized value by more than three times the 
base monthly payment (or more than three times the average payment 
allocable to a monthly period, if the lease calls for periodic payments 
other than monthly); and that the lessor cannot collect the excess 
amount unless the lessor brings a successful court action and pays the 
lessee's reasonable attorney's fees, or unless the excess of the 
residual value over the realized value is due to unreasonable or 
excessive wear or use of the leased property (in which case the 
rebuttable presumption does not apply).
    (3) Mutually agreeable final adjustment. A statement that the lessee 
and lessor are permitted, after termination of the lease, to make any 
mutually agreeable final adjustment regarding excess liability.
    (n) Fees and taxes. The total dollar amount for all official and 
license fees,

[[Page 375]]

registration, title, or taxes required to be paid in connection with the 
lease.
    (o) Insurance. A brief identification of insurance in connection 
with the lease including:
    (1) Through the lessor. If the insurance is provided by or paid 
through the lessor, the types and amounts of coverage and the cost to 
the lessee; or
    (2) Through a third party. If the lessee must obtain the insurance, 
the types and amounts of coverage required of the lessee.
    (p) Warranties or guarantees. A statement identifying all express 
warranties and guarantees from the manufacturer or lessor with respect 
to the leased property that apply to the lessee.
    (q) Penalties and other charges for delinquency. The amount or the 
method of determining the amount of any penalty or other charge for 
delinquency, default, or late payments, which must be reasonable.
    (r) Security interest. A description of any security interest, other 
than a security deposit disclosed under paragraph (b) of this section, 
held or to be retained by the lessor; and a clear identification of the 
property to which the security interest relates.
    (s) Limitations on rate information. If a lessor provides a 
percentage rate in an advertisement or in documents evidencing the lease 
transaction, a notice stating that ``this percentage may not measure the 
overall cost of financing this lease'' shall accompany the rate 
disclosure. The lessor shall not use the term ``annual percentage 
rate,'' ``annual lease rate,'' or any equivalent term.
    (t) Non-motor vehicle open-end leases. Non-motor vehicle open-end 
leases remain subject to section 182(10) of the act regarding end of 
term liability.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 62 FR 15367, Apr. 1, 
1997; 63 FR 52109, Sept. 29, 1998]



Sec. 213.5  Renegotiations, extensions, and assumptions.

    (a) Renegotiation. A renegotiation occurs when a consumer lease 
subject to this part is satisfied and replaced by a new lease undertaken 
by the same consumer. A renegotiation requires new disclosures, except 
as provided in paragraph (d) of this section.
    (b) Extension. An extension is a continuation, agreed to by the 
lessor and the lessee, of an existing consumer lease beyond the 
originally scheduled end of the lease term, except when the continuation 
is the result of a renegotiation. An extension that exceeds six months 
requires new disclosures, except as provided in paragraph (d) of this 
section.
    (c) Assumption. New disclosures are not required when a consumer 
lease is assumed by another person, whether or not the lessor charges an 
assumption fee.
    (d) Exceptions. New disclosures are not required for the following, 
even if they meet the definition of a renegotiation or an extension:
    (1) A reduction in the rent charge;
    (2) The deferment of one or more payments, whether or not a fee is 
charged;
    (3) The extension of a lease for not more than six months on a 
month-to-month basis or otherwise;
    (4) A substitution of leased property with property that has a 
substantially equivalent or greater economic value, provided no other 
lease terms are changed;
    (5) The addition, deletion, or substitution of leased property in a 
multiple-item lease, provided the average periodic payment does not 
change by more than 25 percent; or
    (6) An agreement resulting from a court proceeding.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 62 FR 15367, Apr. 1, 
1997]



Sec. 213.6  Electronic communication.

    (a) Definition. ``Electronic communication'' means a message 
transmitted electronically between a lessor and a lessee in a format 
that allows visual text to be displayed on equipment, for example, a 
personal computer monitor.
    (b) General rule. In accordance with the Electronic Signatures in 
Global and National Commerce Act (the E-Sign Act) (15 U.S.C. 7001 et 
seq.) and the rules of this part, a lessor may provide by electronic 
communication any disclosure required by this part to be in writing.
    (c) When consent is required. Under the E-Sign Act, a lessor is 
required to obtain a lessee's affirmative consent

[[Page 376]]

when providing disclosures related to a transaction. For purposes of 
this requirement, the disclosures required under Sec. 213.7 are deemed 
not to be related to a transaction.
    (d) Address or location to receive electronic communication. A 
lessor that uses electronic communication to provide disclosures 
required by this part shall:
    (1) Send the disclosure to the consumer's electronic address; or
    (2) Make the disclosure available at another location such as a web 
site; and
    (i) Alert the lessee of the disclosure's availability by sending a 
notice to the consumer's electronic address (or to a postal address, at 
the lessor's option). The notice shall identify the transaction involved 
and the address of the Internet web site or other location where the 
disclosure is available; and
    (ii) Make the disclosure available for at least 90 days from the 
date the disclosure first becomes available or from the date of the 
notice alerting the lessee of the disclosure, whichever comes later.
    (3) Exceptions. A lessor need not comply with paragraph (d)(2)(i) 
and (ii) of this section for the disclosures required under Sec. 213.7.
    (e) Redelivery. When a disclosure provided by electronic 
communication is returned to a lessor undelivered, the lessor shall take 
reasonable steps to attempt redelivery using information in its files.

[Reg. M, 66 FR 17328, Mar. 30, 2001]



Sec. 213.7  Advertising.

    (a) General rule. An advertisement for a consumer lease may state 
that a specific lease of property at specific amounts or terms is 
available only if the lessor usually and customarily leases or will 
lease the property at those amounts or terms.
    (b) Clear and conspicuous standard. Disclosures required by this 
section shall be made clearly and conspicuously.
    (1) Amount due at lease signing or delivery. Except for the 
statement of a periodic payment, any affirmative or negative reference 
to a charge that is a part of the disclosure required under paragraph 
(d)(2)(ii) of this section shall not be more prominent than that 
disclosure.
    (2) Advertisement of a lease rate. If a lessor provides a percentage 
rate in an advertisement, the rate shall not be more prominent than any 
of the disclosures in Sec. 213.4, with the exception of the notice in 
Sec. 213.4(s) required to accompany the rate; and the lessor shall not 
use the term ``annual percentage rate,'' ``annual lease rate,'' or 
equivalent term.
    (c) Catalogs and multipage advertisements. A catalog or other 
multipage advertisement that provides a table or schedule of the 
required disclosures shall be considered a single advertisement if, for 
lease terms that appear without all the required disclosures, the 
advertisement refers to the page or pages on which the table or schedule 
appears.
    (d) Advertisement of terms that require additional disclosure--(1) 
Triggering terms. An advertisement that states any of the following 
items shall contain the disclosures required by paragraph (d)(2) of this 
section, except as provided in paragraphs (e) and (f) of this section:
    (i) The amount of any payment; or
    (ii) A statement of any capitalized cost reduction or other payment 
(or that no payment is required) prior to or at consummation or by 
delivery, if delivery occurs after consummation.
    (2) Additional terms. An advertisement stating any item listed in 
paragraph (d)(1) of this section shall also state the following items:
    (i) That the transaction advertised is a lease;
    (ii) The total amount due prior to or at consummation or by 
delivery, if delivery occurs after consummation;
    (iii) The number, amounts, and due dates or periods of scheduled 
payments under the lease;
    (iv) A statement of whether or not a security deposit is required; 
and
    (v) A statement that an extra charge may be imposed at the end of 
the lease term where the lessee's liability (if any) is based on the 
difference between the residual value of the leased property and its 
realized value at the end of the lease term.
    (e) Alternative disclosures--merchandise tags. A merchandise tag 
stating any

[[Page 377]]

item listed in paragraph (d)(1) of this section may comply with 
paragraph (d)(2) of this section by referring to a sign or display 
prominently posted in the lessor's place of business that contains a 
table or schedule of the required disclosures.
    (f) Alternative disclosures--television or radio advertisements.--
(1) Toll-free number or print advertisement. An advertisement made 
through television or radio stating any item listed in paragraph (d)(1) 
of this section complies with paragraph (d)(2) of this section if the 
advertisement states the items listed in paragraphs (d)(2)(i) through 
(iii) of this section, and:
    (i) Lists a toll-free telephone number along with a reference that 
such number may be used by consumers to obtain the information required 
by paragraph (d)(2) of this section; or
    (ii) Directs the consumer to a written advertisement in a 
publication of general circulation in the community served by the media 
station, including the name and the date of the publication, with a 
statement that information required by paragraph (d)(2) of this section 
is included in the advertisement. The written advertisement shall be 
published beginning at least three days before and ending at least ten 
days after the broadcast.
    (2) Establishment of toll-free number. (i) The toll-free telephone 
number shall be available for no fewer than ten days, beginning on the 
date of the broadcast.
    (ii) The lessor shall provide the information required by paragraph 
(d)(2) of this section orally, or in writing upon request.

[Reg. M, 61 FR 52258, Oct. 7, 1996, as amended at 62 FR 15368, Apr. 1, 
1997; 63 FR 52109, Sept. 29, 1998]



Sec. 213.8  Record retention.

    A lessor shall retain evidence of compliance with the requirements 
imposed by this part, other than the advertising requirements under 
Sec. 213.7, for a period of not less than two years after the date the 
disclosures are required to be made or an action is required to be 
taken.



Sec. 213.9  Relation to state laws.

    (a) Inconsistent state law. A state law that is inconsistent with 
the requirements of the act and this part is preempted to the extent of 
the inconsistency. If a lessor cannot comply with a state law without 
violating a provision of this part, the state law is inconsistent within 
the meaning of section 186(a) of the act and is preempted, unless the 
state law gives greater protection and benefit to the consumer. A state, 
through an official having primary enforcement or interpretative 
responsibilities for the state consumer leasing law, may apply to the 
Board for a preemption determination.
    (b) Exemptions.--(1) Application. A state may apply to the Board for 
an exemption from the requirements of the act and this part for any 
class of lease transactions within the state. The Board will grant such 
an exemption if the Board determines that:
    (i) The class of leasing transactions is subject to state law 
requirements substantially similar to the act and this part or that 
lessees are afforded greater protection under state law; and
    (ii) There is adequate provision for state enforcement.
    (2) Enforcement and liability. After an exemption has been granted, 
the requirements of the applicable state law (except for additional 
requirements not imposed by federal law) will constitute the 
requirements of the act and this part. No exemption will extend to the 
civil liability provisions of sections 130, 131, and 185 of the act.

                   Appendix A to Part 213--Model Forms

A-1 Model Open-End or Finance Vehicle Lease Disclosures
A-2 Model Closed-End or Net Vehicle Lease Disclosures
A-3 Model Furniture Lease Disclosures

[[Page 378]]

[GRAPHIC] [TIFF OMITTED] TR29SE98.000


[[Page 379]]


[GRAPHIC] [TIFF OMITTED] TR29SE98.001


[Reg. M, 63 FR 52110, Sept. 29, 1998]

[[Page 380]]

[GRAPHIC] [TIFF OMITTED] TR29SE98.002


[[Page 381]]


[GRAPHIC] [TIFF OMITTED] TR29SE98.003


[Reg. M, 63 FR 52112, Sept. 29, 1998]

[[Page 382]]

[GRAPHIC] [TIFF OMITTED] TR29SE98.004


[[Page 383]]


[GRAPHIC] [TIFF OMITTED] TR29SE98.005


[Reg. M, 63 FR 52114, Sept. 29, 1998]

          Appendix B to Part 213--Federal Enforcement Agencies

    The following list indicates which federal agency enforces 
Regulation M (12 CFR Part 213) for particular classes of business. Any 
questions concerning compliance by a particular business should be 
directed to the appropriate enforcement agency. Terms that are not 
defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall 
have the meaning given to them in the International Banking Act of 1978 
(12 U.S.C. 3101).

1. National banks and federal branches and federal agencies of foreign 
          banks
    District office of the Office of the Comptroller of the Currency for 
the district in which the institution is located.
2. State member banks, branches and agencies of foreign banks (other 
          than federal branches, federal agencies, and insured state 
          branches of foreign banks), commercial lending companies owned 
          or controlled by foreign banks, and organizations operating 
          under section 25 or 25A of the Federal Reserve Act
    Federal Reserve Bank serving the District in which the institution 
is located.
3. Nonmember insured banks and insured state branches of foreign banks
    Federal Deposit Insurance Corporation Regional Director for the 
region in which the institution is located.
4. Savings institutions insured under the Savings Association Insurance 
          Fund of the FDIC and federally chartered savings banks insured 
          under the Bank Insurance Fund of the FDIC (but not including 
          state-chartered savings banks insured under the Bank Insurance 
          Fund)
    Office of Thrift Supervision regional director for the region in 
which the institution is located.
5. Federal credit unions
    Regional office of the National Credit Union Administration serving 
the area in which the federal credit union is located.
6. Air carriers
    Assistant General Counsel for Aviation Enforcement and Proceedings, 
Department of Transportation, 400 Seventh Street, S.W., Washington, DC 
20590
7. Those subject to Packers and Stockyards Act
    Nearest Packers and Stockyards Administration area supervisor.
8. Federal Land Banks, Federal Land Bank Associations, Federal 
          Intermediate Credit Banks, and Production Credit Associations
    Farm Credit Administration, 490 L'Enfant Plaza, S.W., Washington, DC 
20578
9. All other lessors (lessors operating on a local or regional basis 
          should use the address of the FTC regional office in which 
          they operate)
    Division of Credit Practices, Bureau of Consumer Protection, Federal 
Trade Commission, Washington, DC 20580

        Appendix C to Part 213--Issuance of Staff Interpretations

    Officials in the Board's Division of Consumer and Community Affairs 
are authorized to issue official staff interpretations of this 
Regulation M (12 CFR Part 213). These interpretations provide the formal 
protection afforded under section 130(f) of the act. Except in unusual 
circumstances, interpretations will not be issued separately but will be 
incorporated in an official commentary to Regulation M (Supplement I of 
this part), which will be amended periodically. No staff interpretations 
will be issued approving lessor's forms, statements, or calculation 
tools or methods.

   Supplement I to Part 213--Official Staff Commentary to Regulation M

                              Introduction

    1. Official status. The commentary in Supplement I is the vehicle by 
which the Division of Consumer and Community Affairs of

[[Page 384]]

the Federal Reserve Board issues official staff interpretations of 
Regulation M (12 CFR part 213). Good faith compliance with this 
commentary affords protection from liability under section 130(f) of the 
Truth in Lending Act (15 U.S.C. 1640(f)). Section 130(f) protects 
lessors from civil liability for any act done or omitted in good faith 
in conformity with any interpretation issued by a duly authorized 
official or employee of the Federal Reserve System.
    2. Procedures for requesting interpretations. Under appendix C of 
Regulation M, anyone may request an official staff interpretation. 
Interpretations that are adopted will be incorporated in this commentary 
following publication in the Federal Register. No official staff 
interpretations are expected to be issued other than by means of this 
commentary.
    3. Comment designations. Each comment in the commentary is 
identified by a number and the regulatory section or paragraph that it 
interprets. The comments are designated with as much specificity as 
possible according to the particular regulatory provision addressed. For 
example, some of the comments to Sec. 213.4(f) are further divided by 
subparagraph, such as comment 4(f)(1)-1 and comment 4(f)(2)-1. In other 
cases, comments have more general application and are designated, for 
example, as comment 4(a)-1. This introduction may be cited as comments 
I-1 through I-4. An appendix may be cited as comment app. A-1.
    4. Illustrations. Lists that appear in the commentary may be 
exhaustive or illustrative; the appropriate construction should be clear 
from the context. Illustrative lists are introduced by phrases such as 
``including,'' ``such as,'' ``to illustrate,'' and ``for example.''

        Section 213.1--Authority, Scope, Purpose, and Enforcement

    1. Foreign applicability. Regulation M applies to all persons 
(including branches of foreign banks or leasing companies located in the 
United States) that offer consumer leases to residents of any state 
(including foreign nationals) as defined in Sec. 213.2(p). The 
regulation does not apply to a foreign branch of a U.S. bank or to a 
leasing company leasing to a U.S. citizen residing or visiting abroad or 
to a foreign national abroad.

                       Section 213.2--Definitions

                           2(b) Advertisement

    1. Coverage. The term advertisement includes messages inviting, 
offering, or otherwise generally announcing to prospective customers the 
availability of consumer leases, whether in visual, oral, print or 
electronic media. Examples include:
    i. Messages in newspapers, magazines, leaflets, catalogs, and 
fliers.
    ii. Messages on radio, television, and public address systems.
    iii. Direct mail literature.
    iv. Printed material on any interior or exterior sign or display, in 
any window display, in any point-of-transaction literature or price tag 
that is delivered or made available to a lessee or prospective lessee in 
any manner whatsoever.
    v. Telephone solicitations.
    vi. On-line messages, such as those on the Internet.
    2. Exclusions. The term does not apply to the following:
    i. Direct personal contacts, including follow-up letters, cost 
estimates for individual lessees, or oral or written communications 
relating to the negotiation of a specific transaction.
    ii. Informational material distributed only to businesses.
    iii. Notices required by federal or state law, if the law mandates 
that specific information be displayed and only the mandated information 
is included in the notice.
    iv. News articles controlled by the news medium.
    v. Market research or educational materials that do not solicit 
business.
    3. Persons covered. See the commentary to Sec. 213.7(a).

                          2(d) Closed-End Lease

    1. General. In closed-end leases, sometimes referred to as ``walk-
away'' leases, the lessee is not responsible for the residual value of 
the leased property at the end of the lease term.

                           2(e) Consumer lease

    1. Primary purposes. A lessor must determine in each case if the 
leased property will be used primarily for personal, family, or 
household purposes. If a question exists as to the primary purpose for a 
lease, the fact that a lessor gives disclosures is not controlling on 
the question of whether the transaction is covered. The primary purpose 
of a lease is determined before or at consummation and a lessor need not 
provide Regulation M disclosures where there is a subsequent change in 
the primary use.
    2. Period of time. To be a consumer lease, the initial term of the 
lease must be more than four months. Thus, a lease of personal property 
for four months, three months or on a month-to-month or week-to-week 
basis (even though the lease actually extends beyond four months) is not 
a consumer lease and is not subject to the disclosure requirements of 
the regulation. However, a lease that imposes a penalty for not 
continuing the lease beyond four months is considered to have a term of 
more than four months. To illustrate:

[[Page 385]]

    i. A three-month lease extended on a month-to-month basis and 
terminated after one year is not subject to the regulation.
    ii. A month-to-month lease with a penalty, such as the forfeiture of 
a security deposit for terminating before one year, is subject to the 
regulation.
    3. Total contractual obligation. The total contractual obligation is 
not necessarily the same as the total of payments disclosed under Sec. 
213.4(e). The total contractual obligation includes nonrefundable 
amounts a lessee is contractually obligated to pay to the lessor, but 
excludes items such as:
    i. Residual value amounts or purchase-option prices;
    ii. Amounts collected by the lessor but paid to a third party, such 
as taxes, licenses, and registration fees.
    4. Credit sale. The regulation does not cover a lease that meets the 
definition of a credit sale in Regulation Z, 12 CFR 226.2(a)(16), which 
is defined, in part, as a bailment or lease (unless terminable without 
penalty at any time by the consumer) under which the consumer:
    i. Agrees to pay as compensation for use a sum substantially 
equivalent to, or in excess of, the total value of the property and 
services involved; and
    ii. Will become (or has the option to become), for no additional 
consideration or for nominal consideration, the owner of the property 
upon compliance with the agreement.
    5. Agricultural purpose. Agricultural purpose means a purpose 
related to the production, harvest, exhibition, marketing, 
transportation, processing, or manufacture of agricultural products by a 
natural person who cultivates, plants, propagates, or nurtures those 
agricultural products, including but not limited to the acquisition of 
personal property and services used primarily in farming. Agricultural 
products include horticultural, viticultural, and dairy products, 
livestock, wildlife, poultry, bees, forest products, fish and shellfish, 
and any products thereof, including processed and manufactured products, 
and any and all products raised or produced on farms and any processed 
or manufactured products thereof.
    6. Organization or other entity. A consumer lease does not include a 
lease made to an organization such as a corporation or a government 
agency or instrumentality. Such a lease is not covered by the regulation 
even if the leased property is used (by an employee, for example) 
primarily for personal, family or household purposes, or is guaranteed 
by or subsequently assigned to a natural person.
    7. Leases of personal property incidental to a service. The 
following leases of personal property are deemed incidental to a service 
and thus are not subject to the regulation:
    i. Home entertainment systems requiring the consumer to lease 
equipment that enables a television to receive the transmitted 
programming.
    ii. Security alarm systems requiring the installation of leased 
equipment intended to monitor unlawful entries into a home and in some 
cases to provide fire protection.
    iii. Propane gas service where the consumer must lease a propane 
tank to receive the service.
    8. Safe deposit boxes. The lease of a safe deposit box is not a 
consumer lease under Sec. 213.2(e).

                               2(g) Lessee

    1. Guarantors. Guarantors are not lessees for purposes of the 
regulation.

                               2(h) Lessor

    1. Arranger of a lease. To ``arrange'' for the lease of personal 
property means to provide or offer to provide a lease that is or will be 
extended by another person under a business or other relationship 
pursuant to which the person arranging the lease (a) receives or will 
receive a fee, compensation, or other consideration for the service or 
(b) has knowledge of the lease terms and participates in the preparation 
of the contract documents required in connection with the lease. To 
illustrate:
    i. An automobile dealer who, pursuant to a business relationship, 
completes the necessary lease agreement before forwarding it for 
execution to the leasing company (to whom the obligation is payable on 
its face) is ``arranging'' for the lease.
    ii. An automobile dealer who, without receiving a fee for the 
service, refers a customer to a leasing company that will prepare all 
relevant contract documents is not ``arranging'' for the lease.
    2. Consideration. The term ``other consideration'' as used in 
comment 2(h)-1 refers to an actual payment corresponding to a fee or 
similar compensation and not to intangible benefits, such as the 
advantage of increased business, which may flow from the relationship 
between the parties.
    3. Assignees. An assignee may be a lessor for purposes of the 
regulation in circumstances where the assignee has substantial 
involvement in the lease transaction. See cf. Ford Motor Credit Co. v. 
Cenance, 452 U.S. 155 (1981) (held that an assignee was a creditor for 
purposes of the pre-1980 Truth in Lending Act and Regulation Z because 
of its substantial involvement in the credit transaction).
    4. Multiple lessors. See the commentary to Sec. 213.3(c).

                            2(j) Organization

    1. Coverage. The term ``organization'' includes joint ventures and 
persons operating under a business name.

[[Page 386]]

                         2(l) Personal Property

    1. Coverage. Whether property is personal property depends on state 
or other applicable law. For example, a mobile home or houseboat may be 
considered personal property in one state but real property in another.

                           2(m) Realized Value

    1. General. Realized value refers to either the retail or wholesale 
value of the leased property at early termination or at the end of the 
lease term. It is not a required disclosure. Realized value is relevant 
only to leases in which the lessee's liability at early termination or 
at the end of the lease term typically is based on the difference 
between the residual value (or the adjusted lease balance) of the leased 
property and its realized value.
    2. Options. Subject to the contract and to state or other applicable 
law, the lessor may calculate the realized value in determining the 
lessee's liability at the end of the lease term or at early termination 
in one of the three ways stated in Sec. 213.2(m). If the lessor sells 
the property prior to making the determination about liability, the 
price received for the property (or the fair market value) is the 
realized value. If the lessor does not sell the property prior to making 
that determination, the highest offer or the fair market value is the 
realized value.
    3. Determination of realized value. Disposition charges are not 
subtracted in determining the realized value but amounts attributable to 
taxes may be subtracted.
    4. Offers. In determining the highest offer for disposition, the 
lessor may disregard offers that an offeror has withdrawn or is unable 
or unwilling to perform.
    5. Lessor's appraisal. See commentary to Sec. 213.4(l).

                   2(o) Security Interest and Security

    1. Disclosable interests. For purposes of disclosure, a security 
interest is an interest taken by the lessor to secure performance of the 
lessee's obligation. For example, if a bank that is not a lessor makes a 
loan to a leasing company and takes assignments of consumer leases 
generated by that company to secure the loan, the bank's security 
interest in the lessor's receivables is not a security interest for 
purposes of this regulation.
    2. General coverage. An interest the lessor may have in leased 
property must be disclosed only if it is considered a security interest 
under state or other applicable law. The term includes, but is not 
limited to, security interests under the Uniform Commercial Code; real 
property mortgages, deeds of trust, and other consensual or confessed 
liens whether or not recorded; mechanic's, materialman's, artisan's, and 
other similar liens; vendor's liens in both real and personal property; 
liens on property arising by operation of law; and any interest in a 
lease when used to secure payment or performance of an obligation.
    3. Insurance exception. The lessor's right to insurance proceeds or 
unearned insurance premiums is not a security interest for purposes of 
this regulation.

             Section 213.3--General Disclosure Requirements

                        3(a) General Requirements

    1. Basis of disclosures. Disclosures must reflect the terms of the 
legal obligation between the parties. For example:
    i. In a three-year lease with no penalty for termination after a 
one-year minimum term, disclosures are based on the full three-year term 
of the lease. The one-year minimum term is only relevant to the early 
termination provisions of Sec. Sec. 213.4 (g)(1), (k) and (l).
    2. Clear and conspicuous standard. The clear and conspicuous 
standard requires that disclosures be reasonably understandable. For 
example, the disclosures must be presented in a way that does not 
obscure the relationship of the terms to each other; appendix A of this 
part contains model forms that meet this standard. In addition, although 
no minimum typesize is required, the disclosures must be legible, 
whether typewritten, handwritten, or printed by computer.
    3. Multipurpose disclosure forms. A lessor may use a multipurpose 
disclosure form provided the lessor is able to designate the specific 
disclosures applicable to a given transaction, consistent with the 
requirement that disclosures be clearly and conspicuously provided.
    4. Number of transactions. Lessors have flexibility in handling 
lease transactions that may be viewed as multiple transactions. For 
example:
    i. When a lessor leases two items to the same lessee on the same 
day, the lessor may disclose the leases as either one or two lease 
transactions.
    ii. When a lessor sells insurance or other incidental services in 
connection with a lease, the lessor may disclose in one of two ways: as 
a single lease transaction (in which case Regulation M, not Regulation 
Z, disclosures are required) or as a lease transaction and a credit 
transaction.
    iii. When a lessor includes an outstanding lease or credit balance 
in a lease transaction, the lessor may disclose the outstanding balance 
as part of a single lease transaction (in which case Regulation M, not 
Regulation Z, disclosures are required) or as a lease transaction and a 
credit transaction.

                       3(a)(1) Form of Disclosures

    1. Cross-references. Lessors may include in the nonsegregated 
disclosures a cross-reference to items in the segregated disclosures 
rather than repeat those items. A lessor may

[[Page 387]]

include in the segregated disclosures numeric or alphabetic designations 
as cross-references to related information so long as such references do 
not obscure or detract from the segregated disclosures.
    2. Identification of parties. While disclosures must be made clearly 
and conspicuously, lessors are not required to use the word ``lessor'' 
and ``lessee'' to identify the parties to the lease transaction.
    3. Lessor's address. The lessor must be identified by name; an 
address (and telephone number) may be provided.
    4. Multiple lessors and lessees. In transactions involving multiple 
lessors and multiple lessees, a single lessor may make all the 
disclosures to a single lessee as long as the disclosure statement 
identifies all the lessors and lessees.
    5. Lessee's signature. The regulation does not require that the 
lessee sign the disclosure statement, whether disclosures are separately 
provided or are part of the lease contract. Nevertheless, to provide 
evidence that disclosures are given before a lessee becomes obligated on 
the lease transaction, the lessor may, for example, ask the lessee to 
sign the disclosure statement or an acknowledgement of receipt, may 
place disclosures that are included in the lease documents above the 
lessee's signature, or include instructions alerting a lessee to read 
the disclosures prior to signing the lease.

               3(a)(2) Segregation of Certain Disclosures

    1. Location. The segregated disclosures referred to in Sec. 
213.3(a)(2) may be provided on a separate document and the other 
required disclosures may be provided in the lease contract, so long as 
all disclosures are given at the same time. Alternatively, all 
disclosures may be provided in a separate document or in the lease 
contract.
    2. Additional information among segregated disclosures. The 
disclosures required to be segregated may contain only the information 
required or permitted to be included among the segregated disclosures.
    3. Substantially similar. See commentary to appendix A of this part.

                      3(a)(3) Timing of Disclosures

    1. Consummation. When a contractual relationship is created between 
the lessor and the lessee is a matter to be determined under state or 
other applicable law.

         3(b) Additional Information; Nonsegregated Disclosures

    1. State law disclosures. A lessor may include in the nonsegregated 
disclosures any state law disclosures that are not inconsistent with the 
act and regulation under Sec. 213.9 as long as, in accordance with the 
standard set forth in Sec. 213.3(b) for additional information, the 
state law disclosures are not used or placed to mislead or confuse or 
detract from any disclosure required by the regulation.

                    3(c) Multiple Lessors or Lessees

    1. Multiple lessors. If a single lessor provides disclosures to a 
lessee on behalf of several lessors, all disclosures for the transaction 
must be given, even if the lessor making the disclosures would not 
otherwise have been obligated to make a particular disclosure.

                          3(d) Use of Estimates

                            3(d)(1) Standard

    1. Time of estimated disclosure. The lessor may, after making a 
reasonable effort to obtain information, use estimates to make 
disclosures if necessary information is unknown or unavailable at the 
time the disclosures are made.
    2. Basis of estimates. Estimates must be made on the basis of the 
best information reasonably available at the time disclosures are made. 
The ``reasonably available'' standard requires that the lessor, acting 
in good faith, exercise due diligence in obtaining information. The 
lessor may rely on the representations of other parties. For example, 
the lessor might look to the consumer to determine the purpose for which 
leased property will be used, to insurance companies for the cost of 
insurance, or to an automobile manufacturer or dealer for the date of 
delivery. See commentary to Sec. 213.4(n) for estimating official fees 
and taxes.
    3. Residual value of leased property at termination. In an open-end 
lease where the lessee's liability at the end of the lease term is based 
on the residual value of the leased property as determined at 
consummation, the estimate of the residual value must be reasonable and 
based on the best information reasonably available to the lessor (see 
Sec. 213.4(m)). A lessor should generally use an accepted trade 
publication listing estimated current or future market prices for the 
leased property unless other information or a reasonable belief based on 
its experience provides the better information. For example:
    i. An automobile lessor offering a three-year open-end lease assigns 
a wholesale value to the vehicle at the end of the lease term. The 
lessor may disclose as an estimate a wholesale value derived from a 
generally accepted trade publication listing current wholesale values.
    ii. Same facts as above, except that the lessor discloses an 
estimated value derived by adjusting the residual value quoted in the 
trade publication because, in its experience, the trade publication 
values either understate or overstate the prices actually received in 
local used-vehicle markets. The lessor may adjust estimated values 
quoted in trade publications if the lessor reasonably

[[Page 388]]

believes based on its experience that the values are understated or 
overstated.
    4. Retail or wholesale value. The lessor may choose either a retail 
or a wholesale value in estimating the value of leased property at 
termination of an open-end lease provided the choice is consistent with 
the lessor's general practice when determining the value of the property 
at the end of the lease term. The lessor should indicate whether the 
value disclosed is a retail or wholesale value.
    5. Labelling estimates. Generally, only the disclosure for which the 
exact information is unknown is labelled as an estimate. Nevertheless, 
when several disclosures are affected because of the unknown 
information, the lessor has the option of labelling as an estimate every 
affected disclosure or only the disclosure primarily affected.

                  3(e) Effect of Subsequent Occurrence

    1. Subsequent occurrences. Examples of subsequent occurrences 
include:
    i. An agreement between the lessee and lessor to change from a 
monthly to a weekly payment schedule.
    ii. An increase in official fees or taxes.
    iii. An increase in insurance premiums or coverage caused by a 
change in the law.
    iv. Late delivery of an automobile caused by a strike.
    2. Redisclosure. When a disclosure becomes inaccurate because of a 
subsequent occurrence, the lessor need not make new disclosures unless 
new disclosures are required under Sec. 213.5.
    3. Lessee's failure to perform. The lessor does not violate the 
regulation if a previously given disclosure becomes inaccurate when a 
lessee fails to perform obligations under the contract and a lessor 
takes actions that are necessary and proper in such circumstances to 
protect its interest. For example, the addition of insurance or a 
security interest by the lessor because the lessee has not performed 
obligations contracted for in the lease is not a violation of the 
regulation.

                  Section 213.4--Content of Disclosures

                      4(a) Description of Property

    1. Placement of description. Although the description of leased 
property may not be included among the segregated disclosures, a lessor 
may choose to place the description directly above the segregated 
disclosures.

              4(b) Amount Due at Lease Signing or Delivery

    1. Consummation. See commentary to Sec. 213.3(a)(3).
    2. Capitalized cost reduction. A capitalized cost reduction is a 
payment in the nature of a downpayment on the leased property that 
reduces the amount to be capitalized over the term of the lease. This 
amount does not include any amounts included in a periodic payment paid 
at lease signing or delivery.
    3. ``Negative'' equity trade-in allowance. If an amount owed on a 
prior lease or credit balance exceeds the agreed upon value of a trade-
in, the difference is not reflected as a negative trade-in allowance 
under Sec. 213.4(b). The lessor may disclose the trade-in allowance as 
zero or not applicable, or may leave a blank line.
    4. Rebates. Only rebates applied toward an amount due at lease 
signing or delivery are required to be disclosed under Sec. 213.4(b).
    5. Balance sheet approach. In motor-vehicle leases, the total for 
the column labeled ``total amount due at lease signing or delivery'' 
must equal the total for the column labeled ``how the amount due at 
lease signing or delivery will be paid.''
    6. Amounts to be paid in cash. The term cash is intended to include 
payments by check or other payment methods in addition to currency; 
however, a lessor may add a line item under the column ``how the amount 
due at lease signing or delivery will be paid'' for non-currency 
payments such as credit cards.

       4(c) Payment Schedule and Total Amount of Periodic Payments

    1. Periodic payments. The phrase ``number, amount, and due dates or 
periods of payments'' requires the disclosure of all payments that are 
made at regular or irregular intervals and generally derived from rent, 
capitalized or amortized amounts such as depreciation, and other amounts 
that are collected by the lessor at the same interval(s), including, for 
example, taxes, maintenance, and insurance charges. Other periodic 
payments may, but need not, be disclosed under Sec. 213.4(c).

                           4(d) Other charges

    1. Coverage. Section 213.4(d) requires the disclosure of charges 
that are anticipated by the parties incident to the normal operation of 
the lease agreement. If a lessor is unsure whether a particular fee is 
an ``other charge,'' the lessor may disclose the fee as such without 
violating Sec. 213.4(d) or the segregation rule under Sec. 
213.3(a)(2).
    2. Excluded charges. This section does not require disclosure of 
charges that are imposed when the lessee terminates early, fails to 
abide by, or modifies the terms of the existing lease agreement, such as 
charges for:
    i. Late payment.
    ii. Default.
    iii. Early termination.
    iv. Deferral of payments.
    v. Extension of the lease.
    3. Third-party fees and charges. Third-party fees or charges 
collected by the lessor on behalf of third parties, such as taxes, are 
not disclosed under Sec. 213.4(d).

[[Page 389]]

    4. Relationship to other provisions. The other charges mentioned in 
this paragraph are charges that are not required to be disclosed under 
some other provision of Sec. 213.4. To illustrate:
    i. The price of a mechanical breakdown protection (MBP) contract is 
sometimes disclosed as an ``other charge.'' Nevertheless, the price of 
MBP is sometimes reflected in the periodic payment disclosure under 
Sec. 213.4(c) or in states where MBP is regarded as insurance, the cost 
is be disclosed in accordance with Sec. 213.4(o).
    5. Lessee's liabilities at the end of the lease term. Liabilities 
that the lessor imposes upon the lessee at the end of the scheduled 
lease term and that must be disclosed under Sec. 213.4(d) include 
disposition and ``pick-up'' charges.
    6. Optional ``disposition'' charges. Disposition and similar charges 
that are anticipated by the parties as an incident to the normal 
operation of the lease agreement must be disclosed under Sec. 213.4(d). 
If, under a lease agreement, a lessee may return leased property to 
various locations, and the lessor charges a disposition fee depending 
upon the location chosen, under Sec. 213.4(d), the lessor must disclose 
the highest amount charged. In such circumstances, the lessor may also 
include a brief explanation of the fee structure in the segregated 
disclosure. For example, if no fee or a lower fee is imposed for 
returning a leased vehicle to the originating dealer as opposed to 
another location, that fact may be disclosed. By contrast, if the terms 
of the lease treat the return of the leased property to a location 
outside the lessor's service area as a default, the fee imposed is not 
disclosed as an ``other charge,'' although it may be required to be 
disclosed under Sec. 213.4(q).

                         4(e) Total of payments

    1. Open-end lease. The additional statement is required under Sec. 
213.4(e) for open-end leases because, with some limitations, a lessee is 
liable at the end of the lease term for the difference between the 
residual and realized values of the leased property.

                        4(f) Payment Calculation

    1. Motor-vehicle lease. Whether leased property is a motor vehicle 
is determined by state or other applicable law.
    2. Multiple-items. If a lease transaction involves multiple items of 
leased property, one of which is not a motor vehicle under state law, at 
their option, lessors may include all items in the disclosures required 
under Sec. 213.4(f). See comment 3(a)-4 regarding disclosure of 
multiple transactions.

                     4(f)(1) Gross Capitalized Cost

    1. Agreed upon value of the vehicle. The agreed upon value of a 
motor vehicle includes the amount of capitalized items such as charges 
for vehicle accessories and options, and delivery or destination 
charges. The lessor may also include taxes and fees for title, licenses, 
and registration that are capitalized. Charges for service or 
maintenance contracts, insurance products, guaranteed automobile 
protection, or an outstanding balance on a prior lease or credit 
transaction are not included in the agreed upon value.
    2. Itemization of the gross capitalized cost. The lessor may choose 
to provide the itemization of the gross capitalized cost only on request 
or may provide the itemization as a matter of course. In the latter 
case, the lessor need not provide a statement of the lessee's option to 
receive an itemization. The gross capitalized cost must be itemized by 
type and amount. The lessor may include in the itemization an 
identification of the items and amounts of some or all of the items 
contained in the agreed upon value of the vehicle. The itemization must 
be provided at the same time as the other disclosures required by Sec. 
213.4, but it may not be included among the segregated disclosures.

                 4(f)(7) Total of Base Periodic Payment

    1. Accuracy of disclosure. If the periodic payment calculation under 
Sec. 213.4(f) has been calculated correctly, the amount disclosed under 
Sec. 213.4(f)(7)--the total of base periodic payments--is correct for 
disclosure purposes even if that amount differs from the base periodic 
payment disclosed under Sec. 213.4(f)(9) multiplied by the number of 
lease payments disclosed under Sec. 213.4(f)(8), when the difference is 
due to rounding.

                          4(f)(8) Lease Payment

    1. Lease Term. The lease term may be disclosed among the segregated 
disclosures.

                         4(g) Early Termination

              4(g)(1) Conditions and Disclosure of Charges

    1. Reasonableness of charges. See the commentary to Sec. 213.4(q).
    2. Description of the method. Section 213.4(g)(1) requires a full 
description of the method of determining an early termination charge. 
The lessor should attempt to provide consumers with clear and 
understandable descriptions of its early termination charges. 
Descriptions that are full, accurate, and not intended to be misleading 
will comply with Sec. 213.4(g)(1), even if the descriptions are 
complex. In providing a full description of an early termination method, 
a lessor may use the name of a generally accepted method of computing 
the unamortized cost portion (also known as the ``adjusted lease 
balance'') of its early termination charges. For example, a lessor may 
state that the ``constant yield'' method will be utilized in obtaining

[[Page 390]]

the adjusted lease balance, but must specify how that figure, and any 
other term or figure, is used in computing the total early termination 
charge imposed upon the consumer. Additionally, if a lessor refers to a 
named method in this manner, the lessor must provide a written 
explanation of that method if requested by the consumer. The lessor has 
the option of providing the explanation as a matter of course in the 
lease documents or on a separate document.
    3. Timing of written explanation of a named method. While a lessor 
may provide an address or telephone number for the consumer to request a 
written explanation of the named method used to calculate the adjusted 
leased balance, if at consummation a consumer requests such an 
explanation, the lessor must provide a written explanation at that time. 
If a consumer requests an explanation after consummation, the lessor 
must provide a written explanation within a reasonable time after the 
request is made.
    4. Default. When default is a condition for early termination of a 
lease, default charges must be disclosed under Sec. 213.4(g)(1). See 
the commentary to Sec. 213.4(q).
    5. Lessee's liability at early termination. When the lessee is 
liable for the difference between the unamortized cost and the realized 
value at early termination, the method of determining the amount of the 
difference must be disclosed under Sec. 213.4(g)(1).

                    4(h) Maintenance Responsibilities

    1. Standards for wear and use. No disclosure is required if a lessor 
does not set standards or impose charges for wear and use (such as 
excess mileage).

                          4(i) Purchase Option

    1. Mandatory disclosure of no purchase option. Generally the lessor 
need only make the specific required disclosures that apply to a 
transaction. In the case of a purchase option disclosure, however, a 
lessor must disclose affirmatively that the lessee has no option to 
purchase the leased property if the purchase option is inapplicable.
    2. Existence of purchase option. Whether a purchase option exists 
under the lease is determined by state or other applicable law. The 
lessee's right to submit a bid to purchase property at termination of 
the lease is not an option to purchase under Sec. 213.4(i) if the 
lessor is not required to accept the lessee's bid and the lessee does 
not receive preferential treatment.
    3. Purchase-option fee. A purchase-option fee is disclosed under 
Sec. 213.4(i), not Sec. 213.4(d). The fee may be separately itemized 
or disclosed as part of the purchase-option price.
    4. Official fees and taxes. Official fees such as those for taxes, 
licenses, and registration charged in connection with the exercise of a 
purchase option may be disclosed under Sec. 213.4(i) as part of the 
purchase-option price (with or without a reference to their inclusion in 
that price) or may be separately disclosed and itemized by category. 
Alternatively, a lessor may provide a statement indicating that the 
purchase-option price does not include fees for tags, taxes, and 
registration.
    5. Purchase-option price. Lessors must disclose the purchase-option 
price as a sum certain or as a sum certain to be determined at a future 
date by reference to a readily available independent source. The 
reference should provide sufficient information so that the lessee will 
be able to determine the actual price when the option becomes available. 
Statements of a purchase price as the ``negotiated price'' or the ``fair 
market value'' do not comply with the requirements of Sec. 213.4(i).

          4(j) Statement referencing nonsegregated disclosures

    1. Content. A lessor may delete inapplicable items from the 
disclosure. For example, if a lease contract does not include a security 
interest, the reference to a security interest may be omitted.

                         4(l) Right of appraisal

    1. Disclosure inapplicable. The lessee does not have the right to an 
independent appraisal merely because the lessee is liable at the end of 
the lease term or at early termination for unreasonable wear or use. 
Thus, the disclosure under Sec. 213.4(l) does not apply. For example:
    i. The automobile lessor might expect a lessee to return an undented 
car with four good tires at the end of the lease term. Even though it 
may hold the lessee liable for the difference between a dented car with 
bald tires and the value of a car in reasonably good repair, the 
disclosure under Sec. 213.4(l) is not required.
    2. Lessor's appraisal. If the lessor obtains an appraisal of the 
leased property to determine its realized value, that appraisal does not 
suffice for purposes of section 183(c) of the act; the lessor must 
disclose the lessee's right to an independent appraisal under Sec. 
213.4(l).
    3. Retail or wholesale. In providing the disclosures in Sec. 
213.4(l), a lessor must indicate whether the wholesale or retail 
appraisal value will be used.
    4. Time restriction on appraisal. The regulation does not specify a 
time period in which the lessee must exercise the appraisal right. The 
lessor may require a lessee to obtain the appraisal within a reasonable 
time after termination of the lease.

[[Page 391]]

       4(m) Liability at end of Lease Term Based on Residual Value

    1. Open-end leases. Section 213.4(m) applies only to open-end 
leases.
    2. Lessor's payment of attorney's fees. Section 183(a) of the act 
requires that the lessor pay the lessee's attorney's fees in all actions 
under Sec. 213.4(m), whether successful or not.

                     4(m)(1) Rent and other charges

    1. General. This disclosure is intended to represent the cost of 
financing an open-end lease based on charges and fees that the lessor 
requires the lessee to pay. Examples of disclosable charges, in addition 
to the rent charge, include acquisition, disposition, or assignment 
fees. Charges imposed by a third party whose services are not required 
by the lessor (such as official fees and voluntary insurance) are not 
included in the Sec. 213.4(m)(1) disclosure.

                        4(m)(2) Excess liability

    1. Coverage. The disclosure limiting the lessee's liability for the 
value of the leased property does not apply in the case of early 
termination.
    2. Leases with a minimum term. If a lease has an alternative minimum 
term, the disclosures governing the liability limitation are not 
applicable for the minimum term.
    3. Charges not subject to rebuttable presumption. The limitation on 
liability applies only to liability at the end of the lease term that is 
based on the difference between the residual value of the leased 
property and its realized value. The regulation does not preclude a 
lessor from recovering other charges from the lessee at the end of the 
lease term. Examples of such charges include:
    i. Disposition charges.
    ii. Excess mileage charges.
    iii. Late payment and default charges.
    iv. In simple-interest accounting leases, amount by which the 
unamortized cost exceeds the residual value because the lessee has not 
made timely payments.

                           4(n) Fees and taxes

    1. Treatment of certain taxes. Taxes paid in connection with the 
lease are generally disclosed under Sec. 213.4(n), but there are 
exceptions. To illustrate:
    i. Taxes paid by lease signing or delivery are disclosed under Sec. 
213.4(b) and Sec. 213.4(n).
    ii. Taxes that are part of the scheduled payments are reflected in 
the disclosure under Sec. 213.4(c), (f), and (n).
    iii. A tax payable by the lessor that is passed on to the consumer 
and is reflected in the lease documentation must be disclosed under 
Sec. 213.4(n). A tax payable by the lessor and absorbed as a cost of 
doing business need not be disclosed.
    iv. Taxes charged in connection with the exercise of a purchase 
option are disclosed under Sec. 213.4(i), not Sec. 213.4(n).
    2. Estimates. In disclosing the total amount of fees and taxes under 
Sec. 213.4(n), lessors may need to base the disclosure on estimated tax 
rates or amounts and are afforded great flexibility in doing so. Where a 
rate is applied to the future value of leased property, lessors have 
flexibility in estimating that value, including, but not limited to, 
using the mathematical average of the agreed upon value and the residual 
value or published valuation guides; or a lessor could prepare estimates 
using the agreed upon value and disclose a reasonable estimate of the 
total fees and taxes. Lessors may include a statement that the actual 
total of fees and taxes may be higher or lower depending on the tax 
rates in effect or the value of the leased property at the time a fee or 
tax is assessed.

                             4(o) Insurance

    1. Coverage. If insurance is obtained through the lessor, 
information on the type and amount of insurance coverage (whether 
voluntary or required) as well as the cost, must be disclosed.
    2. Lessor's insurance. Insurance purchased by the lessor primarily 
for its own benefit, and absorbed as a business expense and not 
separately charged to the lessee, need not be disclosed under Sec. 
213.4(o) even if it provides an incidental benefit to the lessee.
    3. Mechanical breakdown protection and other products. Whether 
products purchased in conjunction with a lease, such as mechanical 
breakdown protection (MBP) or guaranteed automobile protection (GAP), 
should be treated as insurance is determined by state or other 
applicable law. In states that do not treat MBP or GAP as insurance, 
Sec. 213.4(o) disclosures are not required. In such cases the lessor 
may, however, disclose this information in accordance with the 
additional information provision in Sec. 213.3(b). For MBP insurance 
contracts not capped by a dollar amount, lessors may describe coverage 
by referring to a limitation by mileage or time period, for example, by 
indicating that the mechanical breakdown contract insures parts of the 
automobile for up to 100,000 miles.

                      4(p) Warranties or Guarantees

    1. Brief identification. The statement identifying warranties may be 
brief and need not describe or list all warranties applicable to 
specific parts such as for air conditioning, radio, or tires in an 
automobile. For example, manufacturer's warranties may be identified 
simply by a reference to the standard manufacturer's warranty. If a 
lessor provides a comprehensive list of warranties that may not all 
apply, to comply with Sec. 213.4(p) the

[[Page 392]]

lessor must indicate which warranties apply or, alternatively, which 
warranties do not apply.
    2. Warranty disclaimers. Although a disclaimer of warranties is not 
required by the regulation, the lessor may give a disclaimer as 
additional information in accordance with Sec. 213.3(b).
    3. State law. Whether an express warranty or guaranty exists is 
determined by state or other law.

            4(q) Penalties and Other Charges for Delinquency

    1. Collection costs. The automatic imposition of collection costs or 
attorney fees upon default must be disclosed under Sec. 213.4(q). 
Collection costs or attorney fees that are not imposed automatically, 
but are contingent upon expenditures in conjunction with a collection 
proceeding or upon the employment of an attorney to effect collection, 
need not be disclosed.
    2. Charges for early termination. When default is a condition for 
early termination of a lease, default charges must also be disclosed 
under Sec. 213.4(g)(1). The Sec. 213.4(q) and (g)(1) disclosures may, 
but need not, be combined. Examples of combined disclosures are provided 
in the model lease disclosure forms in appendix A.
    3. Simple-interest leases. In a simple-interest accounting lease, 
the additional rent charge that accrues on the lease balance when a 
periodic payment is made after the due date does not constitute a 
penalty or other charge for late payment. Similarly, continued accrual 
of the rent charge after termination of the lease because the lessee 
fails to return the leased property does not constitute a default 
charge. But in either case, if the additional charge accrues at a rate 
higher than the normal rent charge, the lessor must disclose the amount 
of or the method of determining the additional charge under Sec. 
213.4(q).
    4. Extension charges. Extension charges that exceed the rent charge 
in a simple-interest accounting lease or that are added separately are 
disclosed under Sec. 213.4(q).
    5. Reasonableness of charges. Pursuant to section 183(b) of the act, 
penalties or other charges for delinquency, default, or early 
termination may be specified in the lease but only in an amount that is 
reasonable in light of the anticipated or actual harm caused by the 
delinquency, default, or early termination, the difficulties of proof of 
loss, and the inconvenience or nonfeasibility of otherwise obtaining an 
adequate remedy.

                         4(r) Security Interest

    1. Disclosable security interests. See Sec. 213.2(o) and 
accompanying commentary to determine what security interests must be 
disclosed.

                  4(s) Limitations on Rate Information

    1. Segregated disclosures. A lease rate may not be included among 
the segregated disclosures referenced in Sec. 213.3(a)(2).

        Section 213.5--Renegotiations, Extensions and Assumptions

    1. Coverage. Section 213.5 applies only to existing leases that are 
covered by the regulation. It does not apply to the renegotiation or 
extension of leases with an initial term of four months or less, because 
such leases are not covered by the definition of consumer lease in.
    Sec. 213.2(e). Whether and when a lease is satisfied and replaced 
by a new lease is determined by state or other applicable law.

                           5(a) Renegotiations

    1. Basis of disclosures. Lessors have flexibility in making 
disclosures so long as they reflect the legal obligation under the 
renegotiated lease. For example, assume that a 24-month lease is 
replaced by a 36-month lease. The initial lease began on January 1, 
1998, and was renegotiated and replaced on July 1, 1998, so that the new 
lease term ends on January 1, 2001.
    i. If the renegotiated lease covers the 36-month period beginning 
January 1, 1998, the new disclosures would reflect all payments made by 
the lessee on the initial lease and all payments on the renegotiated 
lease. In this example, since the renegotiated lease covers a 36-month 
period beginning January 1, 1998, the disclosures must reflect payments 
made since that date. On the model form, the ``total of base periodic 
payments'' disclosed under Sec. 213.4(f)(7) should reflect periodic 
payments to be made over the entire 36-month term. Payments received 
since January 1, 1998, are added as a new line item disclosed as ``total 
of payments received'' and are subtracted from the ``total of base 
periodic payments'' in calculating a new item disclosed as the ``total 
of base periodic payments remaining.'' For example, if 6 monthly 
payments of $300 were received since January 1, 1998, the disclosure 
form should include a ``total of base periodic payments'' line from 
which $1,800 is subtracted to arrive at the ``total of base periodic 
payments remaining.'' The remainder of the disclosures would not change.
    ii. If the renegotiated lease covers only the remaining 30 months, 
from July 1, 1998, to January 1, 2001, the disclosures would reflect 
only the charges incurred in connection with the renegotiation and the 
payments for the remaining period.

                             5(b) Extensions

    1. Time of extension disclosures. If a consumer lease is extended 
for a specified term greater than six months, new disclosures are 
required at the time the extension is agreed

[[Page 393]]

upon. If the lease is extended on a month-to-month basis and the 
cumulative extensions exceed six months, new disclosures are required at 
the commencement of the seventh month and at the commencement of each 
seventh month thereafter for as long as the extensions continue. If a 
consumer lease is extended for terms of varying durations, one of which 
will exceed six months beyond the originally scheduled termination date 
of the lease, new disclosures are required at the commencement of the 
term that will exceed six months beyond the originally scheduled 
termination date.
    2. Content of disclosures for month-to-month extensions. The 
disclosures for a lease extended on a month-to-month basis for more than 
six months should reflect the month-to-month nature of the transaction.
    3. Basis of disclosures. The disclosures should be based on the 
extension period, including any upfront costs paid in connection with 
the extension. For example, assume that initially a lease ends on March 
1, 1999. In January 1999, agreement is reached to extend the lease until 
October 1, 1999. The disclosure would include any extension fee paid in 
January and the periodic payments for the seven-month extension period 
beginning in March.

                 Section 213.6--Electronic Communication

                            6(b) General rule

    1. Relationship to the E-Sign Act. The E-Sign Act authorizes the use 
of electronic disclosures. It does not affect any requirement imposed 
under this part other than a requirement that disclosures be in paper 
form, and it does not affect the content or timing of disclosures. 
Electronic disclosures are subject to the regulation's format, timing, 
and retainability rules and the clear and conspicuous standard. For 
example, to satisfy the clear and conspicuous standard for disclosures, 
electronic disclosures must use visual text.
    2. Clear and conspicuous standard. A lessor must provide electronic 
disclosures using a clear and conspicuous format. Also in accordance 
with the E-Sign Act:
    i. The lessor must disclose the requirements for accessing and 
retaining disclosures in that format;
    ii. The lessee must demonstrate the ability to access the 
information electronically and affirmatively consent to electronic 
delivery; and
    iii. The lessor must provide the disclosures in accordance with the 
specified requirements.
    3. Timing and effective delivery. When a lessor permits the lessee 
to consummate a lease transaction on-line, the lessee must be required 
to access the required disclosures before becoming obligated. A link to 
the disclosures satisfies the timing rule if the lessee cannot bypass 
the disclosures before becoming obligated. Or the disclosures in this 
example must automatically appear on screen, even if multiple screens 
are required to view the entire disclosure. The lessor is not required 
to confirm that the lessee has read the disclosures.
    4. Retainability of disclosures. A lessor satisfies the requirement 
that disclosures be in a form that the lessee may keep if electronic 
disclosures are delivered in a format that is capable of being retained 
(such as by printing or storing electronically). The format must also be 
consistent with the information required to be provided under section 
101(c)(1)(C)(i) of the E-Sign Act (15 U.S.C. 7001(c)(1)(C)(i)) about the 
hardware and software requirements for accessing and retaining 
electronic disclosures.
    5. Disclosures provided on lessor's equipment. To the extent 
applicable in connection with a lease transaction, a lessor that 
controls the equipment providing electronic disclosures to lessees (for 
example, a computer terminal in a lessor's place of business) must 
ensure that the equipment satisfies the regulation's requirements to 
provide timely disclosures in a clear and conspicuous format and in a 
form that the lessee may keep. For example, if disclosures are required 
at the time of an on-line transaction, the disclosures must be sent to 
the lessee's e-mail address or must be made available at another 
location such as the lessor's Internet web site, unless the lessor 
provides a printer that automatically prints the disclosures.

      6(d) Address or Location to Receive Electronic Communication

                            Paragraph 6(d)(1)

    1. Electronic address. A lessee's electronic address is an e-mail 
address that is not limited to receiving communications transmitted 
solely by the lessor.

                            Paragraph 6(d)(2)

    1. 90-day rule. The actual disclosures provided to a lessee must be 
available for at least 90-days, but the lessor had discretion to 
determine whether they should be available at the same location for the 
entire period.

                            6(e) Redelivery.

    1. E-mail message returned as undeliverable. If an e-mail message to 
the lessee (containing an alert notice or other disclosure) is returned 
as undeliverable, the redelivery requirement is satisfied if, for 
example, the lessor sends the disclosure to a different e-mail address 
or postal address that the lessor has on file for the lessee. Sending 
the disclosures a second time to the same electronic address is not 
sufficient if the lessor has a different address for the lessee on file.

[[Page 394]]

                       Section 213.7--Advertising

                            7(a) General Rule

    1. Persons covered. All ``persons'' must comply with the advertising 
provisions in this section, not just those that meet the definition of a 
lessor in Sec. 213.2(h). Thus, automobile dealers, merchants, and 
others who are not themselves lessors must comply with the advertising 
provisions of the regulation if they advertise consumer lease 
transactions. Pursuant to section 184(b) of the act, however, owners and 
personnel of the media in which an advertisement appears or through 
which it is disseminated are not subject to civil liability for 
violations under section 185(b) of the act.
    2. ``Usually and customarily.'' Section 213.7(a) does not prohibit 
the advertising of a single item or the promotion of a new leasing 
program, but prohibits the advertising of terms that are not and will 
not be available. Thus, an advertisement may state terms that will be 
offered for only a limited period or terms that will become available at 
a future date.

                   7(b) Clear and Conspicuous Standard

    1. Standard. The disclosures in an advertisement in any media must 
be reasonably understandable. For example, very fine print in a 
television advertisement or detailed and very rapidly stated information 
in a radio advertisement does not meet the clear and conspicuous 
standard if consumers cannot see and read or hear, and cannot 
comprehend, the information required to be disclosed.

             7(b)(1) Amount due at Lease Signing or Delivery

    1. Itemization not required. Only a total of amounts due at lease 
signing or delivery is required to be disclosed, not an itemization of 
its component parts. Such an itemization is provided in any transaction-
specific disclosures provided under Sec. 213.4.
    2. Prominence rule. Except for a periodic payment, oral or written 
references to components of the total due at lease signing or delivery 
(for example, a reference to a capitalized cost reduction, where 
permitted) may not be more prominent than the disclosure of the total 
amount due at lease signing or delivery.
    3. Electronic advertisements. For advertisements using electronic 
communication, to satisfy the prominence rule in Sec. 213.7(b)(1), both 
the triggering terms and the required disclosures must appear in the 
same location so that they can be viewed simultaneously.

                  7(b)(2) Advertisement of a Lease Rate

    1. Location of statement. The notice required to accompany a 
percentage rate stated in an advertisement must be placed in close 
proximity to the rate without any other intervening language or symbols. 
For example, a lessor may not place an asterisk next to the rate and 
place the notice elsewhere in the advertisement. In addition, with the 
exception of the notice required by Sec. 213.4(s), the rate cannot be 
more prominent than any other Sec. 213.4 disclosure stated in the 
advertisement. For advertisements using electronic communication, to 
comply with proximity rule in, both the rate and the accompanying notice 
must appear in the same location so that they can be viewed 
simultaneously. The prominent rule in Sec. 213.7(b)(2) is not met if 
the disclosures can be viewed only by use of a link that connects the 
consumer to the information appearing at another location.

      7(c) Catalogs or Other Multi-Page Advertisements; Electronic 
                             Advertisements

    1. General rule. The multiple-page advertisements referred to in 
Sec. 213.7(c) are advertisements consisting of a series of numbered 
pages--for example, a supplement to a newspaper. A mailing comprising 
several separate flyers or pieces of promotional material in a single 
envelope is not a single multiple-page advertisement.
    2. Cross references. A catalog or other multiple-page advertisement 
or an electronic advertisement is a single advertisement (requiring only 
one set of lease disclosures) if it contains a table, chart, or schedule 
with the disclosures required under Sec. 213.7(d)(2)(i) through (v). If 
one of the triggering terms listed in Sec. 213.7(d)(1) appears in a 
catalog, or in a multiple-page or electronic advertisement, it must 
clearly direct the consumer to the page or location where the table, 
chart, or schedule begins. For example, in an electronic advertisement, 
a term triggering additional disclosures may be accompanied by a link 
that directly connects the consumer to the additional information (but 
see comments under Sec. 213.7(b) about rules regarding the prominence 
of disclosures).

                        7(d)(1) Triggering Terms

    1. Typical example. When any triggering term appears in a lease 
advertisement, the additional terms enumerated in Sec. 213.7(d)(2) (i) 
through (v) must also appear. In a multi-lease advertisement, an example 
of one or more typical leases with a statement of all the terms 
applicable to each may be used. The examples must be labeled as such and 
must reflect representative lease terms that are made available by the 
lessor to consumers.

                        7(d)(2) Additional Terms

    1. Third-party fees that vary by state or locality. The disclosure 
of a periodic payment or total amount due at lease signing or delivery 
may:

[[Page 395]]

    i. Exclude third-party fees, such as taxes, licenses, and 
registration fees and disclose that fact; or
    ii. Provide a periodic payment or total that includes third-party 
fees based on a particular state or locality as long as that fact and 
the fact that fees may vary by state or locality are disclosed.

             7(e) Alternative Disclosures--Merchandise Tags

    1. Multiple-item leases. Multiple-item leases that utilize 
merchandise tags requiring additional disclosures may use the alternate 
disclosure rule.

    7(f) Alternative Disclosures--Television or Radio Advertisements

             7(f)(1) Toll-Free Number or Print Advertisement

    1. Publication in general circulation. A reference to a written 
advertisement appearing in a newspaper circulated nationally, for 
example, USA Today or the Wall Street Journal, may satisfy the general 
circulation requirement in Sec. 213.7(f)(1)(ii).
    2. Toll-free number, local or collect calls. In complying with the 
disclosure requirements of Sec. 213.7(f)(1)(i), a lessor must provide a 
toll-free number for nonlocal calls made from an area code other than 
the one used in the lessor's dialing area. Alternatively, a lessor may 
provide any telephone number that allows a consumer to reverse the phone 
charges when calling for information.
    3. Multi-purpose number. When an advertised toll-free number 
responds with a recording, lease disclosures must be provided early in 
the sequence to ensure that the consumer receives the required 
disclosures. For example, in providing several dialing options--such as 
providing directions to the lessor's place of business--the option 
allowing the consumer to request lease disclosures should be provided 
early in the telephone message to ensure that the option to request 
disclosures is not obscured by other information.
    4. Statement accompanying toll free number. Language must accompany 
a telephone and television number indicating that disclosures are 
available by calling the toll-free number, such as ``call 1-800-000-0000 
for details about costs and terms.''

                     Section 213.8--Record Retention

    1. Manner of retaining evidence. A lessor must retain evidence of 
having performed required actions and of having made required 
disclosures. Such records may be retained in paper form, on microfilm, 
microfiche, or computer, or by any other method designed to reproduce 
records accurately. The lessor need retain only enough information to 
reconstruct the required disclosures or other records.

                  Section 213.9--Relation to State Laws

    1. Exemptions granted. Effective October 1, 1982, the Board granted 
the following exemptions from portions of the Consumer Leasing Act:
    i. Maine. Lease transactions subject to the Maine Consumer Credit 
Code and its implementing regulations are exempt from chapters 2, 4, and 
5 of the federal act. (The exemption does not apply to transactions in 
which a federally chartered institution is a lessor.)
    ii. Oklahoma. Lease transactions subject to the Oklahoma Consumer 
Credit Code are exempt from chapters 2 and 5 of the federal act. (The 
exemption does not apply to sections 132 through 135 of the federal act, 
nor does it apply to transactions in which a federally chartered 
institution is a lessor.)

                         Appendix A--Model Forms

    1. Permissible changes. Although use of the model forms is not 
required, lessors using them properly will be deemed to be in compliance 
with the regulation. Generally, lessors may make certain changes in the 
format or content of the forms and may delete any disclosures that are 
inapplicable to a transaction without losing the act's protection from 
liability. For example, the model form based on monthly periodic 
payments may be modified for single-payment lease transactions or for 
quarterly or other regular or irregular periodic payments. The model 
form may also be modified to reflect that a transaction is an extension. 
The content, format, and headings for the segregated disclosures must be 
substantially similar to those contained in the model forms; therefore, 
any changes should be minimal. The changes to the model forms should not 
be so extensive as to affect the substance and the clarity of the 
disclosures.
    2. Examples of acceptable changes.
    i. Using the first person, instead of the second person, in 
referring to the lessee.
    ii. Using ``lessee,'' ``lessor,'' or names instead of pronouns.
    iii. Rearranging the sequence of the nonsegregated disclosures.
    iv. Incorporating certain state ``plain English'' requirements.
    v. Deleting or blocking out inapplicable disclosures, filling in 
``N/A'' (not applicable) or ``0,'' crossing out, leaving blanks, 
checking a box for applicable items, or circling applicable items (this 
should facilitate use of multipurpose standard forms).
    vi. Adding language or symbols to indicate estimates.
    vii. Adding numeric or alphabetic designations.

[[Page 396]]

    viii. Rearranging the disclosures into vertical columns, except for 
Sec. 213.4 (b) through (e) disclosures.
    ix. Using icons and other graphics.
    3. Model closed-end or net vehicle lease disclosure. Model A-2 is 
designed for a closed-end or net vehicle lease. Under the ``Early 
Termination and Default'' provision a reference to the lessee's right to 
an independent appraisal of the leased vehicle under Sec. 213.4(l) is 
included for those closed-end leases in which the lessee's liability at 
early termination is based on the vehicle's realized value.
    4. Model furniture lease disclosures. Model A-3 is a closed-end 
lease disclosure statement designed for a typical furniture lease. It 
does not include a disclosure of the appraisal right at early 
termination required under Sec. 213.4(l) because few closed-end 
furniture leases base the lessee's liability at early termination on the 
realized value of the leased property. The disclosure should be added if 
it is applicable.

[Reg. M, 62 FR 16058, Apr. 4, 1997, as amended at 63 FR 52115, Sept. 29, 
1998; 64 FR 16613, 16614, Apr. 6, 1999; 66 FR 17328, Mar. 30, 2001]



PART 214_RELATIONS WITH FOREIGN BANKS AND BANKERS (REGULATION N)--Table 
of Contents




                               Regulations

Sec.
214.1 Scope of part.
214.2 Information to be furnished to the Board.
214.3 Conferences and negotiations with foreign banks, bankers, or 
          States.
214.4 Agreements with foreign banks, bankers, or States, and 
          participation in foreign accounts.
214.5 Accounts with foreign banks.
214.6 Amendments.

    Authority: 12 U.S.C. 248, 348a, 358, 632.

    Source: Reg. N, 8 FR 17290, Dec. 24, 1943, unless otherwise noted.

                               Regulations



Sec. 214.1  Scope of part.

    Pursuant to the authority conferred upon it by section 14 of the 
Federal Reserve Act, as amended (40 Stat. 235, 48 Stat. 181; 12 U.S.C. 
358, 348a), and by other provisions of law, the Board of Governors of 
the Federal Reserve System prescribes the following regulations 
governing relationships and transactions between Federal Reserve Banks 
and foreign banks or bankers or groups of foreign banks, or bankers, or 
a foreign State as defined in section 25(b) of the Federal Reserve Act 
(55 Stat. 131; 12 U.S.C. 632).



Sec. 214.2  Information to be furnished to the Board.

    In order that the Board of Governors of the Federal Reserve System 
may perform its statutory duty of exercising special supervision over 
all relationships and transactions of any kind entered into by any 
Federal Reserve Bank with any foreign bank or banker or with any group 
of foreign banks or bankers or with any foreign State, each Federal 
Reserve Bank shall promptly submit to the Board of Governors of the 
Federal Reserve System in writing full information concerning all 
existing relationships and transactions of any kind heretofore entered 
into by such Federal Reserve Bank with any foreign bank or banker or 
with any group of foreign banks or bankers or with any foreign State and 
copies of all written agreements between it and any foreign bank or 
banker or any group of foreign banks or bankers or any foreign State 
which are now in force, unless copies have heretofore been furnished to 
the Board. Each Federal Reserve Bank shall also keep the Board of 
Governors of the Federal Reserve System promptly and fully advised of 
all transactions with any foreign bank or banker or with any group of 
foreign banks or bankers or with any foreign State, except transactions 
of a routine character.



Sec. 214.3  Conferences and negotiations with foreign banks, bankers, 
or States.

    (a) Without first obtaining the permission of the Board of Governors 
of the Federal Reserve System, no officer or other representative of any 
Federal Reserve Bank shall conduct negotiations of any kind with the 
officers or representatives of any foreign bank or banker or any group 
of foreign banks or bankers of any foreign State, except communications 
in the ordinary course of business in connection with transactions 
pursuant to agreements previously approved by the Board of Governors of 
the Federal Reserve System. Any request for the Board's permission to 
conduct any such negotiations shall

[[Page 397]]

be submitted in writting and shall include a full statement of the 
occasion and objects of the proposed negotiations.
    (b) The Board of Governors of the Federal Reserve System reserves 
the right, in its discretion, to be represented by such representatives 
as it may designate in any negotiations between any officer or other 
representative of any Federal Reserve Bank and any officers or 
representatives of any foreign bank or banker or any group of foreign 
banks or bankers or any foreign State; and the Board shall be given 
reasonable notice in advance of the time and place of any such 
negotiations; and may itself designate the time and place of any such 
negotiations.
    (c) A full report of all such conferences or negotiations and all 
understandings or agreements arrived at or transactions agreed upon and 
all other material facts appertaining to such conferences or 
negotiations shall be filed with the Board of Governors of the Federal 
Reserve System in writing by a duly authorized officer of each Federal 
Reserve Bank which shall have participated in such conferences or 
negotiations, including copies of all correspondence appertaining 
thereto.



Sec. 214.4  Agreements with foreign banks, bankers, or States, and 
participation in foreign accounts.

    (a) No Federal Reserve Bank shall enter into any agreement, 
contract, or understanding with any foreign bank or banker or with any 
group of foreign banks or bankers or with any foreign State without 
first obtaining the permission of the Board of Governors of the Federal 
Reserve System.
    (b) When any Federal Reserve Bank, with the approval of the Board of 
Governors of the Federal Reserve System, has opened an account for any 
foreign bank or banker or group of foreign banks or bankers or for any 
foreign State, or has entered into any agreement, contract, or 
understanding with reference to opening or maintaining such an account, 
or with reference to any other matter or matters, any other Federal 
Reserve Bank may participate in such account, or in such agreement, 
contract, or understanding, and in operations and transactions performed 
therein or pursuant thereto, with the approval of the Board of Governors 
of the Federal Reserve System.



Sec. 214.5  Accounts with foreign banks.

    (a) Any Federal Reserve Bank, with the consent of the Board, may 
open and maintain accounts payable in foreign currencies with such 
foreign banks as may be designated by the Board.
    (b) Notwithstanding other provisions of this part, any officer or 
other representatives of the Federal Reserve Bank which maintains an 
account with a foreign bank may conduct such negotiations and enter into 
such agreements, contracts, or understandings with such foreign bank as 
may be authorized or directed by the Federal Open Market Committee in 
order to effectuate the conduct of open market transactions of the 
Federal Reserve Banks incident to the opening, maintenance, operation, 
increase, reduction, or discontinuance of such account; and, in any such 
case, such negotiations, agreements, contracts, or understandings shall 
be subject to such authorizations, directions, regulations, and 
limitations as may be prescribed by, or pursuant to authority of, the 
Federal Open Market Committee.
    (c) Any Federal Reserve Bank may, when authorized or directed so to 
do by, or under the authority of, the Federal Open Market Committee, 
carry on or conduct, through any other Federal Reserve Bank which 
maintains an account with a foreign bank, any open market transactions 
authorized by section 14 of the Federal Reserve Act. Transactions 
authorized by section 14 which are not open market transactions may be 
carried on or conducted through such other Federal Reserve Bank only 
with the approval of the Board.
    (d) Notwithstanding other provisions of this part, reports with 
respect to any accounts opened and maintained, and negotiations, 
agreements, contracts, and understandings entered into, pursuant to this 
section shall be made to the Board at least quarterly, and more 
frequently if so requested by the Board, by a duly authorized officer of 
the Federal Reserve Bank involved.

[Reg. N, 27 FR 1719, Feb. 22, 1962]

[[Page 398]]



Sec. 214.6  Amendments.

    The Board of Governors of the Federal Reserve System reserves the 
right, in its discretion, to alter, amend or repeal these regulations 
and to prescribe such additional regulations, conditions, and 
limitations as it may deem desirable, respecting relationships and 
transactions of any kind entered into by any Federal Reserve Bank with 
any foreign bank or banker or with any group of foreign banks or bankers 
or with any foreign State.

[Reg. N, 8 FR 17290, Dec. 24, 1943. Redesignated at 27 FR 1719, Feb. 22, 
1962]



PART 215_LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS 
OF MEMBER BANKS (REGULATION O)--Table of Contents




Subpart A_Loans by Member Banks to Their Executive Officers, Directors, 
                       and Principal Shareholders

Sec.
215.1 Authority, purpose, and scope.
215.2 Definitions.
215.3 Extension of credit.
215.4 General prohibitions.
215.5 Additional restrictions on loans to executive officers of member 
          banks.
215.6 Prohibition on knowingly receiving unauthorized extension of 
          credit.
215.7 Extensions of credit outstanding on March 10, 1979.
215.8 Records of member banks.
215.9 Reports by executive officers.
215.10 Report on credit to executive officers.
215.11 Disclosure of credit from member banks to executive officers and 
          principal shareholders.
215.12 Reporting requirement for credit secured by certain bank stock.
215.13 Civil penalties.

Appendix to Subpart A--Section 5200 of the Revised Statutes Total Loans 
          and Extensions of Credit

 Subpart B_Reports on Indebtedness of Executive Officers and Principal 
                   Shareholders to Correspondent Banks

215.20 Authority, purpose, and scope.
215.21 Definitions.
215.22 Report by executive officers and principal shareholders.
215.23 Disclosure of credit from correspondent banks to executive 
          officers and principal shareholders.

    Authority: 12 U.S.C. 248(i), 375a(10), 375b(9) and (10), 1817(k)(3) 
and 1972(2)(G)(ii); Pub. L. 102-242, 105 Stat. 2236.

    Source: 44 FR 12964, Mar. 9, 1979, unless otherwise noted.



Subpart A_Loans by Member Banks to Their Executive Officers, Directors, 
                       and Principal Shareholders

    Source: Reg. O, 59 FR 8837, Feb. 24, 1994, unless otherwise noted.



Sec. 215.1  Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to sections 11(i), 
22(g), and 22(h) of the Federal Reserve Act (12 U.S.C. 248(i), 375a, and 
375b), 12 U.S.C. 1817(k), and section 306 of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 
Stat. 2236 (1991)).
    (b) Purpose and scope. This subpart A governs any extension of 
credit by a member bank to an executive officer, director, or principal 
shareholder of: The member bank; a bank holding company of which the 
member bank is a subsidiary; and any other subsidiary of that bank 
holding company. It also applies to any extension of credit by a member 
bank to: A company controlled by such a person; and a political or 
campaign committee that benefits or is controlled by such a person. This 
subpart A also implements the reporting requirements of 12 U.S.C. 375a 
concerning extensions of credit by a member bank to its executive 
officers and of 12 U.S.C. 1817(k) concerning extensions of credit by a 
member bank to its executive officers or principal shareholders, or the 
related interests of such persons.



Sec. 215.2  Definitions.

    For the purposes of this subpart A, the following definitions apply 
unless otherwise specified:
    (a) Affiliate means any company of which a member bank is a 
subsidiary or any other subsidiary of that company.
    (b) Company means any corporation, partnership, trust (business or 
otherwise), association, joint venture, pool syndicate, sole 
proprietorship, unincorporated organization, or any other

[[Page 399]]

form of business entity not specifically listed herein. However, the 
term does not include:
    (1) An insured depository institution (as defined in 12 U.S.C. 
1813); or
    (2) A corporation the majority of the shares of which are owned by 
the United States or by any State.
    (c)(1) Control of a company or bank means that a person directly or 
indirectly, or acting through or in concert with one or more persons:
    (i) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of the company or bank;
    (ii) Controls in any manner the election of a majority of the 
directors of the company or bank; or
    (iii) Has the power to exercise a controlling influence over the 
management or policies of the company or bank.
    (2) A person is presumed to have control, including the power to 
exercise a controlling influence over the management or policies, of a 
company or bank if:
    (i) The person is:
    (A) An executive officer or director of the company or bank; and
    (B) Directly or indirectly owns, controls, or has the power to vote 
more than 10 percent of any class of voting securities of the company or 
bank; or
    (ii)(A) The person directly or indirectly owns, controls, or has the 
power to vote more than 10 percent of any class of voting securities of 
the company or bank; and
    (B) No other person owns, controls, or has the power to vote a 
greater percentage of that class of voting securities.
    (3) An individual is not considered to have control, including the 
power to exercise a controlling influence over the management or 
policies, of a company or bank solely by virtue of the individual's 
position as an officer or director of the company or bank.
    (4) A person may rebut a presumption established by paragraph (c)(2) 
of this section by submitting to the appropriate Federal banking agency 
(as defined in 12 U.S.C. 1813(q)) written materials that, in the 
agency's judgment, demonstrate an absence of control.
    (d)(1) Director of a company or bank means any director of the 
company or bank, whether or not receiving compensation. An advisory 
director is not considered a director if the advisory director:
    (i) Is not elected by the shareholders of the company or bank;
    (ii) Is not authorized to vote on matters before the board of 
directors; and
    (iii) Provides solely general policy advice to the board of 
directors.
    (2) Extensions of credit to a director of an affiliate of a bank are 
not subject to Sec. Sec. 215.4, 215.6, and 215.8 if--
    (i) The director of the affiliate is excluded, by resolution of the 
board of directors or by the bylaws of the bank, from participation in 
major policymaking functions of the bank, and the director does not 
actually participate in such functions;
    (ii) The affiliate does not control the bank;
    (iii) As determined annually, the assets of the affiliate do not 
constitute more than 10 percent of the consolidated assets of the 
company that--
    (A) Controls the bank; and
    (B) Is not controlled by any other company; and
    (iv) The director of the affiliate is not otherwise subject to 
Sec. Sec. 215.4, 215.6, and 215.8.
    (3) For purposes of paragraph (d)(2)(i) of this section, a 
resolution of the board of directors or a corporate bylaw may--
    (i) Include the director (by name or by title) in a list of persons 
excluded from participation in such functions; or
    (ii) Not include the director in a list of persons authorized (by 
name or by title) to participate in such functions.
    (e)(1) Executive officer of a company or bank means a person who 
participates or has authority to participate (other than in the capacity 
of a director) in major policymaking functions of the company or bank, 
whether or not: the officer has an official title; the title designates 
the officer an assistant; or the officer is serving without salary or 
other compensation.\1\ The chairman of

[[Page 400]]

the board, the president, every vice president, the cashier, the 
secretary, and the treasurer of a company or bank are considered 
executive officers, unless the officer is excluded, by resolution of the 
board of directors or by the bylaws of the bank or company, from 
participation (other than in the capacity of a director) in major 
policymaking functions of the bank or company, and the officer does not 
actually participate therein.
---------------------------------------------------------------------------

    \1\ The term is not intended to include persons who may have 
official titles and may exercise a certain measure of discretion in the 
performance of their duties, including discretion in the making of 
loans, but who do not participate in the determination of major policies 
of the bank or company and whose decisions are limited by policy 
standards fixed by the senior management of the bank or company. For 
example, the term does not include a manager or assistant manager of a 
branch of a bank unless that individual participates, or is authorized 
to participate, in major policymaking functions of the bank or company.
---------------------------------------------------------------------------

    (2) Extensions of credit to an executive officer of an affiliate of 
a bank are not subject to Sec. Sec. 215.4, 215.6, and 215.8 if--
    (i) The executive officer is excluded, by resolution of the board of 
directors or by the bylaws of the bank, from participation in major 
policymaking functions of the bank, and the executive officer does not 
actually participate in such functions;
    (ii) The affiliate does not control the bank;
    (iii) As determined annually, the assets of the affiliate do not 
constitute more than 10 percent of the consolidated assets of the 
company that--
    (A) Controls the bank; and
    (B) Is not controlled by any other company; and
    (iv) The executive officer of the affiliate is not otherwise subject 
to Sec. Sec. 215.4, 215.6, and 215.8.
    (3) For purposes of paragraphs (e)(1) and (e)(2)(i) of this section, 
a resolution of the board of directors or a corporate bylaw may--
    (i) Include the executive officer (by name or by title) in a list of 
persons excluded from participation in such functions; or
    (ii) Not include the executive officer in a list of persons 
authorized (by name or by title) to participate in such functions.
    (f) Foreign bank has the meaning given in 12 U.S.C. 3101(7).
    (g) Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    (h) Insider means an executive officer, director, or principal 
shareholder, and includes any related interest of such a person.
    (i) Lending limit. The lending limit for a member bank is an amount 
equal to the limit of loans to a single borrower established by section 
5200 of the Revised Statutes,\2\ 12 U.S.C. 84. This amount is 15 percent 
of the bank's unimpaired capital and unimpaired surplus in the case of 
loans that are not fully secured, and an additional 10 percent of the 
bank's unimpaired capital and unimpaired surplus in the case of loans 
that are fully secured by readily marketable collateral having a market 
value, as determined by reliable and continuously available price 
quotations, at least equal to the amount of the loan. The lending limit 
also includes any higher amounts that are permitted by section 5200 of 
the Revised Statutes for the types of obligations listed therein as 
exceptions to the limit. A member bank's unimpaired capital and 
unimpaired surplus equals:
---------------------------------------------------------------------------

    \2\ Where State law establishes a lending limit for a State member 
bank that is lower than the amount permitted in section 5200 of the 
Revised Statutes, the lending limit established by applicable State laws 
shall be the lending limit for the State member bank.
---------------------------------------------------------------------------

    (1) The bank's Tier 1 and Tier 2 capital included in the bank's 
risk-based capital under the capital guidelines of the appropriate 
Federal banking agency, based on the bank's most recent consolidated 
report of condition filed under 12 USC 1817(a)(3); and
    (2) The balance of the bank's allowance for loan and lease losses 
not included in the bank's Tier 2 capital for purposes of the 
calculation of risk-based capital by the appropriate Federal banking 
agency, based on the bank's most recent consolidated report of condition 
filed under 12 U.S.C. 1817(a)(3)

[[Page 401]]

    (j) Member bank means any banking institution that is a member of 
the Federal Reserve System, including any subsidiary of a member bank. 
The term does not include any foreign bank that maintains a branch in 
the United States, whether or not the branch is insured (within the 
meaning of 12 U.S.C. 1813(s)) and regardless of the operation of 12 
U.S.C. 1813(h) and 12 U.S.C. 1828(j)(3)(B).
    (k) Pay an overdraft on an account means to pay an amount upon the 
order of an account holder in excess of funds on deposit in the account.
    (l) Person means an individual or a company.
    (m)(1) Principal shareholder means a person (other than an insured 
bank) that directly or indirectly, or acting through or in concert with 
one or more persons, owns, controls, or has the power to vote more than 
10 percent of any class of voting securities of a member bank or 
company. Shares owned or controlled by a member of an individual's 
immediate family are considered to be held by the individual.
    (2) A principal shareholder of a member bank does not include a 
company of which a member bank is a subsidiary.
    (n) Related interest of a person means:
    (1) A company that is controlled by that person; or
    (2) A political or campaign committee that is controlled by that 
person or the funds or services of which will benefit that person.
    (o) Subsidiary has the meaning given in 12 U.S.C. 1841(d), but does 
not include a subsidiary of a member bank.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930, July 26, 1994, as 
amended at 60 FR 31054, June 13, 1995; 61 FR 57770, Nov. 8, 1996; 62 FR 
13298, Mar. 20, 1997]



Sec. 215.3  Extension of credit.

    (a) An extension of credit is a making or renewal of any loan, a 
granting of a line of credit, or an extending of credit in any manner 
whatsoever, and includes:
    (1) A purchase under repurchase agreement of securities, other 
assets, or obligations;
    (2) An advance by means of an overdraft, cash item, or otherwise;
    (3) Issuance of a standby letter of credit (or other similar 
arrangement regardless of name or description) or an ineligible 
acceptance, as those terms are defined in Sec. 208.24 of this chapter;
    (4) An acquisition by discount, purchase, exchange, or otherwise of 
any note, draft, bill of exchange, or other evidence of indebtedness 
upon which an insider may be liable as maker, drawer, endorser, 
guarantor, or surety;
    (5) An increase of an existing indebtedness, but not if the 
additional funds are advanced by the bank for its own protection for:
    (i) Accrued interest; or
    (ii) Taxes, insurance, or other expenses incidental to the existing 
indebtedness;
    (6) An advance of unearned salary or other unearned compensation for 
a period in excess of 30 days; and
    (7) Any other similar transaction as a result of which a person 
becomes obligated to pay money (or its equivalent) to a bank, whether 
the obligation arises directly or indirectly, or because of an 
endorsement on an obligation or otherwise, or by any means whatsoever.
    (b) An extension of credit does not include:
    (1) An advance against accrued salary or other accrued compensation, 
or an advance for the payment of authorized travel or other expenses 
incurred or to be incurred on behalf of the bank;
    (2) A receipt by a bank of a check deposited in or delivered to the 
bank in the usual course of business unless it results in the carrying 
of a cash item for or the granting of an overdraft (other than an 
inadvertent overdraft in a limited amount that is promptly repaid, as 
described in Sec. 215.4(e) of this part);
    (3) An acquisition of a note, draft, bill of exchange, or other 
evidence of indebtedness through:
    (i) A merger or consolidation of banks or a similar transaction by 
which a bank acquires assets and assumes liabilities of another bank or 
similar organization; or
    (ii) Foreclosure on collateral or similar proceeding for the 
protection of the bank, provided that such indebtedness is not held for 
a period of more than

[[Page 402]]

three years from the date of the acquisition, subject to extension by 
the appropriate Federal banking agency for good cause;
    (4)(i) An endorsement or guarantee for the protection of a bank of 
any loan or other asset previously acquired by the bank in good faith; 
or
    (ii) Any indebtedness to a bank for the purpose of protecting the 
bank against loss or of giving financial assistance to it;
    (5) Indebtedness of $15,000 or less arising by reason of any general 
arrangement by which a bank:
    (i) Acquires charge or time credit accounts; or
    (ii) Makes payments to or on behalf of participants in a bank credit 
card plan, check credit plan, or similar open-end credit plan, provided:
    (A) The indebtedness does not involve prior individual clearance or 
approval by the bank other than for the purposes of determining 
authority to participate in the arrangement and compliance with any 
dollar limit under the arrangement; and
    (B) The indebtedness is incurred under terms that are not more 
favorable than those offered to the general public;
    (6) Indebtedness of $5,000 or less arising by reason of an interest-
bearing overdraft credit plan of the type specified in Sec. 215.4(e) of 
this part; or
    (7) A discount of promissory notes, bills of exchange, conditional 
sales contracts, or similar paper, without recourse.
    (c) Non-interest-bearing deposits to the credit of a bank are not 
considered loans, advances, or extensions of credit to the bank of 
deposit; nor is the giving of immediate credit to a bank upon 
uncollected items received in the ordinary course of business considered 
to be a loan, advance or extension of credit to the depositing bank.
    (d) For purposes of Sec. 215.4 of this part, an extension of credit 
by a member bank is considered to have been made at the time the bank 
enters into a binding commitment to make the extension of credit.
    (e) A participation without recourse is considered to be an 
extension of credit by the participating bank, not by the originating 
bank.
    (f) Tangible economic benefit rule--(1) In general. An extension of 
credit is considered made to an insider to the extent that the proceeds 
are transferred to the insider or are used for the tangible economic 
benefit of the insider.
    (2) Exception. An extension of credit is not considered made to an 
insider under paragraph (f)(1) of this section if:
    (i) The credit is extended on terms that would satisfy the standard 
set forth in Sec. 215.4(a) of this part for extensions of credit to 
insiders; and
    (ii) The proceeds of the extension of credit are used in a bona fide 
transaction to acquire property, goods, or services from the insider.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930, July 26, 1994; 63 FR 
58621, Nov. 2, 1998]



Sec. 215.4  General prohibitions.

    (a) Terms and creditworthiness--(1) In general. No member bank may 
extend credit to any insider of the bank or insider of its affiliates 
unless the extension of credit:
    (i) Is made on substantially the same terms (including interest 
rates and collateral) as, and following credit underwriting procedures 
that are not less stringent than, those prevailing at the time for 
comparable transactions by the bank with other persons that are not 
covered by this part and who are not employed by the bank; and
    (ii) Does not involve more than the normal risk of repayment or 
present other unfavorable features.
    (2) Exception. Nothing in this paragraph (a) or paragraph (e)(2)(ii) 
of this section shall prohibit any extension of credit made pursuant to 
a benefit or compensation program--
    (i) That is widely available to employees of the member bank and, in 
the case of extensions of credit to an insider of its affiliates, is 
widely available to employees of the affiliates at which that person is 
an insider; and
    (ii) That does not give preference to any insider of the member bank 
over other employees of the member bank and, in the case of extensions 
of credit to an insider of its affiliates, does not give preference to 
any insider of its affiliates over other employees of the affiliates at 
which that person is an insider.

[[Page 403]]

    (b) Prior approval. (1) No member bank may extend credit (which term 
includes granting a line of credit) to any insider of the bank or 
insider of its affiliates in an amount that, when aggregated with the 
amount of all other extensions of credit to that person and to all 
related interests of that person, exceeds the higher of $25,000 or 5 
percent of the member bank's unimpaired capital and unimpaired surplus, 
unless:
    (i) The extension of credit has been approved in advance by a 
majority of the entire board of directors of that bank; and
    (ii) The interested party has abstained from participating directly 
or indirectly in the voting.
    (2) In no event may a member bank extend credit to any insider of 
the bank or insider of its affiliates in an amount that, when aggregated 
with all other extensions of credit to that person, and all related 
interests of that person, exceeds $500,000, except by complying with the 
requirements of this paragraph (b).
    (3) Approval by the board of directors under paragraphs (b)(1) and 
(b)(2) of this section is not required for an extension of credit that 
is made pursuant to a line of credit that was approved under paragraph 
(b)(1) of this section within 14 months of the date of the extension of 
credit. The extension of credit must also be in compliance with the 
requirements of Sec. 215.4(a) of this part.
    (4) Participation in the discussion, or any attempt to influence the 
voting, by the board of directors regarding an extension of credit 
constitutes indirect participation in the voting by the board of 
directors on an extension of credit.
    (c) Individual lending limit-- No member bank may extend credit to 
any insider of the bank or insider of its affiliates in an amount that, 
when aggregated with the amount of all other extensions of credit by the 
member bank to that person and to all related interests of that person, 
exceeds the lending limit of the member bank specified in Sec. 215.2(i) 
of this part. This prohibition does not apply to an extension of credit 
by a member bank to a company of which the member bank is a subsidiary 
or to any other subsidiary of that company.
    (d) Aggregate lending limit --(1) General limit. A member bank may 
not extend credit to any insider of the bank or insider of its 
affiliates unless the extension of credit is in an amount that, when 
aggregated with the amount of all outstanding extensions of credit by 
that bank to all such insiders, does not exceed the bank's unimpaired 
capital and unimpaired surplus (as defined in Sec. 215.2(i) of this 
part).
    (2) Member banks with deposits of less than $100,000,000. (i) A 
member bank with deposits of less than $100,000,000 may by an annual 
resolution of its board of directors increase the general limit 
specified in paragraph (d)(1) of this section to a level not to exceed 
two times the bank's unimpaired capital and unimpaired surplus, if:
    (A) The board of directors determines that such higher limit is 
consistent with prudent, safe, and sound banking practices in light of 
the bank's experience in lending to its insiders and is necessary to 
attract or retain directors or to prevent restricting the availability 
of credit in small communities;
    (B) The resolution sets forth the facts and reasoning on which the 
board of directors bases the finding, including the amount of the bank's 
lending to its insiders as a percentage of the bank's unimpaired capital 
and unimpaired surplus as of the date of the resolution;
    (C) The bank meets or exceeds, on a fully-phased in basis, all 
applicable capital requirements established by the appropriate Federal 
banking agency; and
    (D) The bank received a satisfactory composite rating in its most 
recent report of examination.
    (ii) If a member bank has adopted a resolution authorizing a higher 
limit pursuant to paragraph (d)(2)(i) of this section and subsequently 
fails to meet the requirements of paragraph (d)(2)(i)(C) or (d)(2)(i)(D) 
of this section, the member bank shall not extend any additional credit 
(including a renewal of any existing extension of credit) to any insider 
of the bank or its affiliates unless such extension or renewal is 
consistent with the general limit in paragraph (d)(1) of this section.

[[Page 404]]

    (3) Exceptions. (i) The general limit specified in paragraph (d)(1) 
of this section does not apply to the following:
    (A) Extensions of credit secured by a perfected security interest in 
bonds, notes, certificates of indebtedness, or Treasury bills of the 
United States or in other such obligations fully guaranteed as to 
principal and interest by the United States;
    (B) Extensions of credit to or secured by unconditional takeout 
commitments or guarantees of any department, agency, bureau, board, 
commission or establishment of the United States or any corporation 
wholly owned directly or indirectly by the United States;
    (C) Extensions of credit secured by a perfected security interest in 
a segregated deposit account in the lending bank; or
    (D) Extensions of credit arising from the discount of negotiable or 
nonnegotiable installment consumer paper that is acquired from an 
insider and carries a full or partial recourse endorsement or guarantee 
by the insider, provided that:
    (1) The financial condition of each maker of such consumer paper is 
reasonably documented in the bank's files or known to its officers;
    (2) An officer of the bank designated for that purpose by the board 
of directors of the bank certifies in writing that the bank is relying 
primarily upon the responsibility of each maker for payment of the 
obligation and not upon any endorsement or guarantee by the insider; and
    (3) The maker of the instrument is not an insider.
    (ii) The exceptions in paragraphs (d)(3)(i)(A) through (d)(3)(i)(C) 
of this section apply only to the amounts of such extensions of credit 
that are secured in the manner described therein.
    (e) Overdrafts. (1) No member bank may pay an overdraft of an 
executive officer or director of the bank or executive officer or 
director of its affiliates \3\ on an account at the bank, unless the 
payment of funds is made in accordance with:
---------------------------------------------------------------------------

    \3\ This prohibition does not apply to the payment by a member bank 
of an overdraft of a principal shareholder of the member bank, unless 
the principal shareholder is also an executive officer or director. This 
prohibition also does not apply to the payment by a member bank of an 
overdraft of a related interest of an executive officer, director, or 
principal shareholder of the member bank or executive officer, director, 
or principal shareholder of its affiliates.
---------------------------------------------------------------------------

    (i) A written, preauthorized, interest-bearing extension of credit 
plan that specifies a method of repayment; or
    (ii) A written, preauthorized transfer of funds from another account 
of the account holder at the bank.
    (2) The prohibition in paragraph (e)(1) of this section does not 
apply to payment of inadvertent overdrafts on an account in an aggregate 
amount of $1,000 or less, provided:
    (i) The account is not overdrawn for more than 5 business days; and
    (ii) The member bank charges the executive officer or director the 
same fee charged any other customer of the bank in similar 
circumstances.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930, July 26, 1994, as 
amended at 61 FR 57770, Nov. 8, 1996; 62 FR 13298, Mar. 20, 1997]



Sec. 215.5  Additional restrictions on loans to executive officers of 
member banks.

    The following restrictions on extensions of credit by a member bank 
to any of its executive officers apply in addition to any restrictions 
on extensions of credit by a member bank to insiders of itself or its 
affiliates set forth elsewhere in this part. The restrictions of this 
section apply only to executive officers of the member bank and not to 
executive officers of its affiliates.
    (a) No member bank may extend credit to any of its executive 
officers, and no executive officer of a member bank shall borrow from or 
otherwise become indebted to the bank, except in the amounts, for the 
purposes, and upon the conditions specified in paragraphs (c) and (d) of 
this section.
    (b) No member bank may extend credit in an aggregate amount greater 
than the amount permitted in paragraph (c)(4) of this section to a 
partnership in which one or more of the bank's executive officers are 
partners and, either individually or together, hold a majority interest. 
For the purposes of paragraph (c)(4) of this section, the

[[Page 405]]

total amount of credit extended by a member bank to such partnership is 
considered to be extended to each executive officer of the member bank 
who is a member of the partnership.
    (c) A member bank is authorized to extend credit to any executive 
officer of the bank:
    (1) In any amount to finance the education of the executive 
officer's children;
    (2) In any amount to finance or refinance the purchase, 
construction, maintenance, or improvement of a residence of the 
executive officer, provided:
    (i) The extension of credit is secured by a first lien on the 
residence and the residence is owned (or expected to be owned after the 
extension of credit) by the executive officer; and
    (ii) In the case of a refinancing, that only the amount thereof used 
to repay the original extension of credit, together with the closing 
costs of the refinancing, and any additional amount thereof used for any 
of the purposes enumerated in this paragraph (c)(2), are included within 
this category of credit;
    (3) In any amount, if the extension of credit is secured in a manner 
described in Sec. 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this part; 
and
    (4) For any other purpose not specified in paragraphs (c)(1) through 
(c)(3) of this section, if the aggregate amount of extensions of credit 
to that executive officer under this paragraph does not exceed at any 
one time the higher of 2.5 per cent of the bank's unimpaired capital and 
unimpaired surplus or $25,000, but in no event more than $100,000.
    (d) Any extension of credit by a member bank to any of its executive 
officers shall be:
    (1) Promptly reported to the member bank's board of directors;
    (2) In compliance with the requirements of Sec. 215.4(a) of this 
part;
    (3) Preceded by the submission of a detailed current financial 
statement of the executive officer; and
    (4) Made subject to the condition in writing that the extension of 
credit will, at the option of the member bank, become due and payable at 
any time that the officer is indebted to any other bank or banks in an 
aggregate amount greater than the amount specified for a category of 
credit in paragraph (c) of this section.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930, July 26, 1994; 60 FR 
17636, Apr. 7, 1995]



Sec. 215.6  Prohibition on knowingly receiving unauthorized extension 
of credit.

    No executive officer, director, or principal shareholder of a member 
bank or any of its affiliates shall knowingly receive (or knowingly 
permit any of that person's related interests to receive) from a member 
bank, directly or indirectly, any extension of credit not authorized 
under this part.



Sec. 215.7  Extensions of credit outstanding on March 10, 1979.

    (a) Any extension of credit that was outstanding on March 10, 1979, 
and that would, if made on or after March 10, 1979, violate Sec. 
215.4(c) of this part, shall be reduced in amount by March 10, 1980, to 
be in compliance with the lending limit in Sec. 215.4(c) of this part. 
Any renewal or extension of such an extension of credit on or after 
March 10, 1979, shall be made only on terms that will bring the 
extension of credit into compliance with the lending limit of Sec. 
215.4(c) of this part by March 10, 1980. However, any extension of 
credit made before March 10, 1979, that bears a specific maturity date 
of March 10, 1980, or later, shall be repaid in accordance with its 
repayment schedule in existence on or before March 10, 1979.
    (b) If a member bank is unable to bring all extensions of credit 
outstanding on March 10, 1979, into compliance as required by paragraph 
(a) of this section, the member bank shall promptly report that fact to 
the Comptroller of the Currency, in the case of a national bank, or to 
the appropriate Federal Reserve Bank, in the case of a State member 
bank, and explain the reasons why all the extensions of credit cannot be 
brought into compliance. The Comptroller or the Reserve Bank, as the 
case may be, is authorized, on the basis of good cause shown, to extend 
the March 10, 1980, date for compliance for any extension of credit for 
not more than two additional one-year periods.

[[Page 406]]



Sec. 215.8  Records of member banks.

    (a) In general. Each member bank shall maintain records necessary 
for compliance with the requirements of this part.
    (b) Recordkeeping for insiders of the member bank. Any recordkeeping 
method adopted by a member bank shall:
    (1) Identify, through an annual survey, all insiders of the bank 
itself; and
    (2) Maintain records of all extensions of credit to insiders of the 
bank itself, including the amount and terms of each such extension of 
credit.
    (c) Recordkeeping for insiders of the member bank's affiliates. Any 
recordkeeping method adopted by a member bank shall maintain records of 
extensions of credit to insiders of the member bank's affiliates by:
    (1) Survey method. (i) Identifying, through an annual survey, each 
insider of the member bank's affiliates; and
    (ii) Maintaining records of the amount and terms of each extension 
of credit by the member bank to such insiders; or
    (2) Borrower inquiry method. (i) Requiring as part of each extension 
of credit that the borrower indicate whether the borrower is an insider 
of an affiliate of the member bank; and
    (ii) Maintaining records that identify the amount and terms of each 
extension of credit by the member bank to borrowers so identifying 
themselves.
    (3) Alternative recordkeeping methods for insiders of affiliates. A 
member bank may employ a recordkeeping method other than those 
identified in paragraphs (c)(1) and (c)(2) of this section if the 
appropriate Federal banking agency determines that the bank's method is 
at least as effective as the identified methods.
    (d) Special rule for non-commercial lenders. A member bank that is 
prohibited by law or by an express resolution of the board of directors 
of the bank from making an extension of credit to any company or other 
entity that is covered by this part as a company is not required to 
maintain any records of the related interests of the insiders of the 
bank or its affiliates or to inquire of borrowers whether they are 
related interests of the insiders of the bank or its affiliates.



Sec. 215.9  Reports by executive officers.

    Each executive officer of a member bank who becomes indebted to any 
other bank or banks in an aggregate amount greater than the amount 
specified for a category of credit in Sec. 215.5(c) of this part, 
shall, within 10 days of the date the indebtedness reaches such a level, 
make a written report to the board of directors of the officer's bank. 
The report shall state the lender's name, the date and amount of each 
extension of credit, any security for it, and the purposes for which the 
proceeds have been or are to be used.



Sec. 215.10  Reports on credit to executive officers.

    Each member bank shall include with (but not as part of) each report 
of condition (and copy thereof) filed pursuant to 12 U.S.C. 1817(a)(3) a 
report of all extensions of credit made by the member bank to its 
executive officers since the date of the bank's previous report of 
condition.



Sec. 215.11  Disclosure of credit from member banks to executive 
officers and principal shareholders.

    (a) Definitions. For the purposes of this section, the following 
definitions apply:
    (1) Principal shareholder of a member bank means any person \4\ 
other than an insured bank, or a foreign bank as defined in 12 U.S.C. 
3101(7), that, directly or indirectly, owns, controls, or has power to 
vote more than 10 percent of any class of voting securities of the 
member bank. The term includes a person that controls a principal 
shareholder (e.g., a person that controls a bank holding company). 
Shares of a bank (including a foreign bank), bank holding company, or 
other company owned or controlled by a member of an individual's 
immediate family are presumed to be owned or controlled by the 
individual for the purposes of determining principal shareholder status.
---------------------------------------------------------------------------

    \4\ The term ``stockholder of record'' appearing in 12 U.S.C. 
1972(2)(G) is synonymous with the term ``person.''
---------------------------------------------------------------------------

    (2) Related interest means:
    (i) Any company controlled by a person; or

[[Page 407]]

    (ii) Any political or campaign committee the funds or services of 
which will benefit a person or that is controlled by a person. For the 
purpose of this section and subpart B of this part, a related interest 
does not include a bank or a foreign bank (as defined in 12 U.S.C. 
3101(7)).
    (b) Public disclosure. (1) Upon receipt of a written request from 
the public, a member bank shall make available the names of each of its 
executive officers and each of its principal shareholders to whom, or to 
whose related interests, the member bank had outstanding as of the end 
of the latest previous quarter of the year, an extension of credit that, 
when aggregated with all other outstanding extensions of credit at such 
time from the member bank to such person and to all related interests of 
such person, equaled or exceeded 5 percent of the member bank's capital 
and unimpaired surplus or $500,000, whichever amount is less. No 
disclosure under this paragraph is required if the aggregate amount of 
all extensions of credit outstanding at such time from the member bank 
to the executive officer or principal shareholder of the member bank and 
to all related interests of such a person does not exceed $25,000.
    (2) A member bank is not required to disclose the specific amounts 
of individual extensions of credit.
    (c) Maintaining records. Each member bank shall maintain records of 
all requests for the information described in paragraph (b) of this 
section and the disposition of such requests. These records may be 
disposed of after two years from the date of the request.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930, July 26, 1994]



Sec. 215.12  Reporting requirement for credit secured by certain bank 
stock.

    Each executive officer or director of a member bank the shares of 
which are not publicly traded shall report annually to the board of 
directors of the member bank the outstanding amount of any credit that 
was extended to the executive officer or director and that is secured by 
shares of the member bank.



Sec. 215.13  Civil penalties.

    Any member bank, or any officer, director, employee, agent, or other 
person participating in the conduct of the affairs of the bank, that 
violates any provision of this part (other than Sec. 215.11 of this 
part) is subject to civil penalties as specified in section 29 of the 
Federal Reserve Act (12 U.S.C. 504).

Appendix to Subpart A of Part 215--Section 5200 of the Revised Statutes 
                  Total Loans and Extensions of Credit

    (a)(1) The total loans and extensions of credit by a national 
banking association to a person outstanding at one time and not fully 
secured, as determined in a manner consistent with paragraph (2) of this 
subsection, by collateral having a market value at least equal to the 
amount of the loan or extension of credit shall not exceed 15 per centum 
of the unimpaired capital and unimpaired surplus of the association.
    (2) The total loans and extensions of credit by a national banking 
association to a person outstanding at one time and fully secured by 
readily marketable collateral having a market value, as determined by 
reliable and continuously available price quotations, at least equal to 
the amount of the funds outstanding shall not exceed 10 per centum of 
the unimpaired capital and unimpaired surplus of the association. This 
limitation shall be separate from and in addition to the limitations 
contained in paragraph (1) of this subsection.

                               Definitions

    (b) For the purposes of this section--
    (1) The term loans and extensions of credit shall include all direct 
or indirect advances of funds to a person made on the basis of any 
obligation of that person to repay the funds or repayable from specific 
property pledged by or on behalf of the person, and to the extent 
specified by the Comptroller of the Currency, such term shall also 
include any liability of a national banking association to advance funds 
to or on behalf of a person pursuant to a contractual commitment; and
    (2) The term person shall include an individual, sole 
proprietorship, partnership, joint venture, association, trust, estate, 
business trust, corporation, sovereign government, or agency, 
instrumentality, or political subdivision thereof, or any similar entity 
or organization.

                               Exceptions

    (c) The limitations contained in subsection (a) of this section 
shall be subject to the following exceptions:

[[Page 408]]

    (1) Loans or extensions of credit arising from the discount of 
commercial or business paper evidencing an obligation to the person 
negotiating it with recourse shall not be subject to any limitation 
based on capital and surplus.
    (2) The purchase of bankers' acceptances of the kind described in 
section 372 of this title and issued by other banks shall not be subject 
to any limitation based on capital and surplus.
    (3) Loans and extensions of credit secured by bills of lading, 
warehouse receipts, or similar documents transferring or securing title 
to readily marketable staples shall be subject to a limitation of 35 per 
centum of capital and surplus in addition to the general limitations if 
the market value of the staples securing each additional loan or 
extension of credit at all times equals or exceeds 115 per centum of the 
outstanding amount of such loan or extension of credit. The staples 
shall be fully covered by insurance whenever it is customary to insure 
such staples.
    (4) Loans or extensions of credit secured by bonds, notes, 
certificates of indebtedness, or Treasury bills of the United States or 
by other such obligations fully guaranteed as to principal and interest 
by the United States shall not be subject to any limitation based on 
capital and surplus.
    (5) Loans or extensions of credit to or secured by unconditional 
takeout commitments or guarantees of any department, agency, bureau, 
board, commission, or establishment of the United States or any 
corporation wholly owned directly or indirectly by the United States 
shall not be subject to any limitation based on capital and surplus.
    (6) Loans or extensions of credit secured by a segregated deposit 
account in the lending bank shall not be subject to any limitation based 
on capital and surplus.
    (7) Loans or extensions of credit to any financial institution or to 
any receiver, conservator, superintendent of banks, or other agent in 
charge of the business and property of such financial institution, when 
such loans or extensions of credit are approved by the Comptroller of 
the Currency, shall not be subject to any limitation based on capital 
and surplus.
    (8)(A) Loans and extensions of credit arising from the discount of 
negotiable or nonnegotiable installment consumer paper which carries a 
full recourse endorsement or unconditional guarantee by the person 
transferring the paper shall be subject under this section to a maximum 
limitation equal to 25 per centum of such capital and surplus, 
notwithstanding the collateral requirements set forth in subsection 
(a)(2) of this section.
    (B) If the bank's files or the knowledge of its officers of the 
financial condition of each maker of such consumer paper is reasonably 
adequate, and an officer of the bank designated for that purpose by the 
board of directors of the bank certifies in writing that the bank is 
relying primarily upon the responsibility of each maker for payment of 
such loans or extensions of credit and not upon any full or partial 
recourse endorsement or guarantee by the transferor, the limitations of 
this section as to the loans or extensions of credit of each such maker 
shall be the sole applicable loan limitations.
    (9)(A) Loans and extensions of credit secured by shipping documents 
or instruments transferring or securing title covering livestock or 
giving a lien on livestock when the market value of the livestock 
securing the obligation is not at any time less than 115 per centum of 
the face amount of the note covered, shall be subject under this section 
notwithstanding the collateral requirements set forth in subsection 
(a)(2) of this section, to a maximum limitation equal to 25 per centum 
of such capital and surplus.
    (B) Loans and extensions of credit which arise from the discount by 
dealers in dairy cattle of paper given in payment for dairy cattle, 
which paper carries a full recourse endorsement or unconditional 
guarantee of the seller, and which are secured by the cattle being sold, 
shall be subject under this section, notwithstanding the collateral 
requirements set forth in paragraph (a)(2) of this section, to a 
limitation of 25 per centum of such capital and surplus.
    (10) Loans or extensions of credit to the Student Loan Marketing 
Association shall not be subject to any limitation based on capital and 
surplus.

                Authority of Comptroller of the Currency

    (d)(1) The Comptroller of the Currency may prescribe rules and 
regulations to administer and carry out the purposes of this section, 
including rules or regulations to define or further define terms used in 
this section and to establish limits or requirements other than those 
specified in this section for particular classes or categories of loans 
or extensions of credit.
    (2) The Comptroller of the Currency also shall have authority to 
determine when a loan putatively made to a person shall for purposes of 
this section be attributed to another person.

[48 FR 42806, Sept. 20, 1983]



 Subpart B_Reports on Indebtedness of Executive Officers and Principal 
                   Shareholders to Correspondent Banks



Sec. 215.20  Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to section 11(i) of 
the Federal

[[Page 409]]

Reserve Act (12 U.S.C. 248(i)) and 12 U.S.C. 1972(2)(F)(vi).
    (b) Purpose and scope. This subpart implements the reporting 
requirements of Title VIII of the Financial Institutions Regulatory and 
Interest Rate Control Act of 1978 (FIRA) (Pub. L. 95-630) as amended by 
the Garn-St Germain Depository Institutions Act of 1982 (Pub. L. 97-
320), 12 U.S.C. 1972 (2)(g). Title VIII prohibits (1) preferential 
lending by a bank to executive officers, directors, and principal 
shareholders of another bank when there is a correspondent account 
relationship between the banks, and (2) the opening of a correspondent 
account relationship between banks where there is a preferential 
extension of credit by one of the banks to an executive officer, 
director, or principal shareholder of the other bank.

[44 FR 67979, Nov. 28, 1979, as amended at 48 FR 56936, Dec. 27, 1983]



Sec. 215.21  Definitions.

    For the purposes of this subpart, the following definitions apply 
unless otherwise specified:
    (a) Bank has the meaning given in 12 U.S.C. 1971 and 1972, and 
includes a branch or agency of a foreign bank, or a commercial lending 
company controlled by a foreign bank or by a company that controls a 
foreign bank, where the branch or agency is maintained in a State of the 
United States or in the District of Columbia or the commercial lending 
company is organized under State law.
    (b) Company, control of a company or bank, executive officer, 
extension of credit, immediate family, and person have the meanings 
provided in subpart A.
    (c) Correspondent account is an account that is maintained by a bank 
with another bank for the deposit or placement of funds. A correspondent 
account does not include:
    (1) Time deposits at prevailing market rates, and
    (2) An account maintained in the ordinary course of business solely 
for the purpose of effecting federal funds transactions at prevailing 
market rates or making Eurodollar placements at prevailing market rates.
    (d) Correspondent bank means a bank that maintains one or more 
correspondent accounts for a member bank during a calendar year that in 
the aggregate exceed an average daily balance during that year of 
$100,000 or 0.5 per cent of such member bank's total deposits (as 
reported in its first consolidated report of condition during that 
calendar year), which ever amount is smaller.
    (e) Principal shareholder and related interest have the meanings 
provided in Sec. 215.10 of Subpart A.

[Reg. O, 44 FR 67979, Nov. 28, 1979, as amended at 48 FR 42805, Sept. 
20, 1983; 59 FR 8842, Feb. 24, 1994]



Sec. 215.22  Report by executive officers and principal shareholders.

    (a) Annual report. If during any calendar year an executive officer 
or principal shareholder of a member bank or a related interest of such 
a person has outstanding an extension of credit from a correspondent 
bank of the member bank, the executive officer or principal shareholder 
shall, on or before January 31 of the following year, make a written 
report to the board of directors of the member bank.\5\
---------------------------------------------------------------------------

    \5\ Persons reporting under this section are not required to include 
information on extensions of credit that are fully described in a report 
by a person they control or a person that controls them, provided they 
identify their relationships with such other person.
---------------------------------------------------------------------------

    (b) Contents of report. The report required by this section shall 
include the following information:
    (1) The maximum amount of indebtedness of the executive officer or 
principal shareholder and of each of that person's related interests to 
each of the member bank's correspondent banks during the calendar year;
    (2) The amount of indebtedness of the executive officer or principal 
shareholder and of each of that person's related interests outstanding 
to each of the member bank's correspondent banks as of ten business days 
before the report required by this section is filed;\6\ and
---------------------------------------------------------------------------

    \6\ If the amount of indebtedness outstanding to a correspondent 
bank ten days before the filing of the report is not available or cannot 
be readily ascertained, an estimate of the amount of indebtedness may be 
filed with the report, provided that the report is supplemented within 
the next 30 days with the actual amount of indebtedness.

---------------------------------------------------------------------------

[[Page 410]]

    (3) A description of the terms and conditions (including the range 
of interest rates, the original amount and date, maturity date, payment 
terms, security, if any, and any other unusual terms or conditions) of 
each extension of credit included in the indebtedness reported under 
paragraph (b)(1) of this section.
    (c) Definitions. For the purposes of this section:
    (1) Indebtedness means an extension of credit, but does not include:
    (i) Commercial paper, bonds, and debentures issued in the ordinary 
course of business; and
    (ii) Consumer credit (as defined in 12 CFR 226.2(a)(12) in an 
aggregate amount of $5,000 or less from each of the member bank's 
correspondent banks, provided the indebtedness is incurred under terms 
that are not more favorable than those offered to the general public.
    (2) Maximum amount of indebtedness means, at the option of the 
reporting person, either (i) the highest outstanding indebtedness during 
the calendar year for which the report is made, or (ii) the highest end 
of the month indebtedness outstanding during the calendar year for which 
the report is made.
    (d) Retention of reports at member banks. The reports required by 
this section shall be retained at the member bank for a period of three 
years. The Reserve Bank or the Comptroller, as the case may be, may 
require these reports to be retained by the bank for an additional 
period of time. The reports filed under this section are not required by 
this regulation to be made available to the public and shall not be 
filed with the Reserve Bank or the Comptroller unless specifically 
requested.
    (e) Member bank's responsibility. Each member bank shall advise each 
of its executive officers and each of its principal shareholders (to the 
extent known by the bank) of the reports required by this section and 
make available to each of these persons a list of the names and 
addresses of the member bank's correspondent banks.

[Reg. O, 44 FR 67979, Nov. 28, 1979, as amended at 48 FR 42805, Sept. 
20, 1983; 59 FR 8842, Feb. 24, 1994]



Sec. 215.23  Disclosure of credit from correspondent banks to executive 
officers and principal shareholders.

    (a) Public disclosure. (1) Upon receipt of a written request from 
the public, a member bank shall make available the names of each of its 
executive officers and each of its principal shareholders to whom, or to 
whose related interests, any correspondent bank of the member bank had 
outstanding, at any time during the previous calendar year, an extension 
of credit that, when aggregated with all other outstanding extensions of 
credit at such time from all correspondent banks of the member bank to 
such person and to all related interests of such person, equaled or 
exceeded 5 percent of the member bank's capital and unimpaired surplus 
or $500,000, whichever amount is less. No disclosure under this 
paragraph is required if the aggregate amount of all extensions of 
credit outstanding from all correspondent banks of the member bank to 
the executive officer or principal shareholder of the member bank and to 
all related interests of such a person does not exceed $25,000 at any 
time during the previous calendar year.
    (2) A member bank is not required to disclose the specific amounts 
of individual extensions of credit.
    (b) Maintaining records. Each member bank shall maintain records of 
all requests for the information described in paragraph (a) of this 
section and the disposition of such requests. These records may be 
disposed of after two years from the date of the request.

[48 FR 56936, Dec. 27, 1983]



PART 216_PRIVACY OF CONSUMER FINANCIAL INFORMATION (REGULATION P)
--Table of Contents




Sec.
216.1 Purpose and scope.
216.2 Rule of construction.
216.3 Definitions.

[[Page 411]]

                  Subpart A_Privacy and Opt Out Notices

216.4 Initial privacy notice to consumers required.
216.5 Annual privacy notice to customers required.
216.6 Information to be included in privacy notices.
216.7 Form of opt out notice to consumers; opt out methods.
216.8 Revised privacy notices.
216.9 Delivering privacy and opt out notices.

                     Subpart B_Limits on Disclosures

216.10 Limitation on disclosure of nonpublic personal information to 
          nonaffiliated third parties.
216.11 Limits on redisclosure and reuse of information.
216.12 Limits on sharing account number information for marketing 
          purposes.

                          Subpart C_Exceptions

216.13 Exception to opt out requirements for service providers and joint 
          marketing.
216.14 Exceptions to notice and opt out requirements for processing and 
          servicing transactions.
216.15 Other exceptions to notice and opt out requirements.

            Subpart D_Relation to Other Laws; Effective Date

216.16 Protection of Fair Credit Reporting Act.
216.17 Relation to State laws.
216.18 Effective date; transition rule.

Appendix A to Part 216--Sample Clauses

    Authority: 15 U.S.C. 6801 et seq.

    Source: 65 FR 35206, June 1, 2000, unless otherwise noted.



Sec. 216.1  Purpose and scope.

    (a) Purpose. This part governs the treatment of nonpublic personal 
information about consumers by the financial institutions listed in 
paragraph (b) of this section. This part:
    (1) Requires a financial institution to provide notice to customers 
about its privacy policies and practices;
    (2) Describes the conditions under which a financial institution may 
disclose nonpublic personal information about consumers to nonaffiliated 
third parties; and
    (3) Provides a method for consumers to prevent a financial 
institution from disclosing that information to most nonaffiliated third 
parties by ``opting out'' of that disclosure, subject to the exceptions 
in Sec. Sec. 216.13, 216.14, and 216.15.
    (b) Scope. (1) This part applies only to nonpublic personal 
information about individuals who obtain financial products or services 
primarily for personal, family, or household purposes from the 
institutions listed below. This part does not apply to information about 
companies or about individuals who obtain financial products or services 
for business, commercial, or agricultural purposes. This part applies to 
the U. S. offices of entities for which the Board has primary 
supervisory authority. They are referred to in this part as ``you.'' 
These are: State member banks, bank holding companies and certain of 
their nonbank subsidiaries or affiliates, State uninsured branches and 
agencies of foreign banks, commercial lending companies owned or 
controlled by foreign banks, and Edge and Agreement corporations.
    (2) Nothing in this part modifies, limits, or supersedes the 
standards governing individually identifiable health information 
promulgated by the Secretary of Health and Human Services under the 
authority of sections 262 and 264 of the Health Insurance Portability 
and Accountability Act of 1996 (42 U.S.C. 1320d-1320d-8).



Sec. 216.2  Rule of construction.

    The examples in this part and the sample clauses in appendix A of 
this part are not exclusive. Compliance with an example or use of a 
sample clause, to the extent applicable, constitutes compliance with 
this part.



Sec. 216.3  Definitions.

    As used in this part, unless the context requires otherwise:
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with another company.
    (b) (1) Clear and conspicuous means that a notice is reasonably 
understandable and designed to call attention to the nature and 
significance of the information in the notice.
    (2) Examples--(i) Reasonably understandable. You make your notice 
reasonably understandable if you:

[[Page 412]]

    (A) Present the information in the notice in clear, concise 
sentences, paragraphs, and sections;
    (B) Use short explanatory sentences or bullet lists whenever 
possible;
    (C) Use definite, concrete, everyday words and active voice whenever 
possible;
    (D) Avoid multiple negatives;
    (E) Avoid legal and highly technical business terminology whenever 
possible; and
    (F) Avoid explanations that are imprecise and readily subject to 
different interpretations.
    (ii) Designed to call attention. You design your notice to call 
attention to the nature and significance of the information in it if 
you:
    (A) Use a plain-language heading to call attention to the notice;
    (B) Use a typeface and type size that are easy to read;
    (C) Provide wide margins and ample line spacing;
    (D) Use boldface or italics for key words; and
    (E) In a form that combines your notice with other information, use 
distinctive type size, style, and graphic devices, such as shading or 
sidebars, when you combine your notice with other information.
    (iii) Notices on web sites. If you provide a notice on a web page, 
you design your notice to call attention to the nature and significance 
of the information in it if you use text or visual cues to encourage 
scrolling down the page if necessary to view the entire notice and 
ensure that other elements on the web site (such as text, graphics, 
hyperlinks, or sound) do not distract attention from the notice, and you 
either:
    (A) Place the notice on a screen that consumers frequently access, 
such as a page on which transactions are conducted; or
    (B) Place a link on a screen that consumers frequently access, such 
as a page on which transactions are conducted, that connects directly to 
the notice and is labeled appropriately to convey the importance, 
nature, and relevance of the notice.
    (c) Collect means to obtain information that you organize or can 
retrieve by the name of an individual or by identifying number, symbol, 
or other identifying particular assigned to the individual, irrespective 
of the source of the underlying information.
    (d) Company means any corporation, limited liability company, 
business trust, general or limited partnership, association, or similar 
organization.
    (e)(1) Consumer means an individual who obtains or has obtained a 
financial product or service from you that is to be used primarily for 
personal, family, or household purposes, or that individual's legal 
representative.
    (2) Examples--(i) An individual who applies to you for credit for 
personal, family, or household purposes is a consumer of a financial 
service, regardless of whether the credit is extended.
    (ii) An individual who provides nonpublic personal information to 
you in order to obtain a determination about whether he or she may 
qualify for a loan to be used primarily for personal, family, or 
household purposes is a consumer of a financial service, regardless of 
whether the loan is extended.
    (iii) An individual who provides nonpublic personal information to 
you in connection with obtaining or seeking to obtain financial, 
investment, or economic advisory services is a consumer regardless of 
whether you establish a continuing advisory relationship.
    (iv) If you hold ownership or servicing rights to an individual's 
loan that is used primarily for personal, family, or household purposes, 
the individual is your consumer, even if you hold those rights in 
conjunction with one or more other institutions. (The individual is also 
a consumer with respect to the other financial institutions involved.) 
An individual who has a loan in which you have ownership or servicing 
rights is your consumer, even if you, or another institution with those 
rights, hire an agent to collect on the loan.
    (v) An individual who is a consumer of another financial institution 
is not your consumer solely because you act as agent for, or provide 
processing or other services to, that financial institution.
    (vi) An individual is not your consumer solely because he or she has 
designated you as trustee for a trust.

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    (vii) An individual is not your consumer solely because he or she is 
a beneficiary of a trust for which you are a trustee.
    (viii) An individual is not your consumer solely because he or she 
is a participant or a beneficiary of an employee benefit plan that you 
sponsor or for which you act as a trustee or fiduciary.
    (f) Consumer reporting agency has the same meaning as in section 
603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)).
    (g) Control of a company means:
    (1) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting security of the company, 
directly or indirectly, or acting through one or more other persons;
    (2) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the company; or
    (3) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of the company, as the Board 
determines.
    (h) Customer means a consumer who has a customer relationship with 
you.
    (i)(1) Customer relationship means a continuing relationship between 
a consumer and you under which you provide one or more financial 
products or services to the consumer that are to be used primarily for 
personal, family, or household purposes.
    (2) Examples--(i) Continuing relationship. A consumer has a 
continuing relationship with you if the consumer:
    (A) Has a deposit or investment account with you;
    (B) Obtains a loan from you;
    (C) Has a loan for which you own the servicing rights;
    (D) Purchases an insurance product from you;
    (E) Holds an investment product through you, such as when you act as 
a custodian for securities or for assets in an Individual Retirement 
Arrangement;
    (F) Enters into an agreement or understanding with you whereby you 
undertake to arrange or broker a home mortgage loan for the consumer;
    (G) Enters into a lease of personal property with you; or
    (H) Obtains financial, investment, or economic advisory services 
from you for a fee.
    (ii) No continuing relationship. A consumer does not, however, have 
a continuing relationship with you if:
    (A) The consumer obtains a financial product or service only in 
isolated transactions, such as using your ATM to withdraw cash from an 
account at another financial institution or purchasing a cashier's check 
or money order;
    (B) You sell the consumer's loan and do not retain the rights to 
service that loan; or
    (C) You sell the consumer airline tickets, travel insurance, or 
traveler's checks in isolated transactions.
    (j) Federal functional regulator means:
    (1) The Board of Governors of the Federal Reserve System;
    (2) The Office of the Comptroller of the Currency;
    (3) The Board of Directors of the Federal Deposit Insurance 
Corporation;
    (4) The Director of the Office of Thrift Supervision;
    (5) The National Credit Union Administration Board; and
    (6) The Securities and Exchange Commission.
    (k)(1) Financial institution means any institution the business of 
which is engaging in activities that are financial in nature or 
incidental to such financial activities as described in section 4(k) of 
the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
    (2) Financial institution does not include:
    (i) Any person or entity with respect to any financial activity that 
is subject to the jurisdiction of the Commodity Futures Trading 
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
    (ii) The Federal Agricultural Mortgage Corporation or any entity 
chartered and operating under the Farm Credit Act of 1971 (12 U.S.C. 
2001 et seq.); or
    (iii) Institutions chartered by Congress specifically to engage in 
securitizations, secondary market sales (including sales of servicing 
rights), or

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similar transactions related to a transaction of a consumer, as long as 
such institutions do not sell or transfer nonpublic personal information 
to a nonaffiliated third party.
    (l)(1) Financial product or service means any product or service 
that a financial holding company could offer by engaging in an activity 
that is financial in nature or incidental to such a financial activity 
under section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 
1843(k)).
    (2) Financial service includes your evaluation or brokerage of 
information that you collect in connection with a request or an 
application from a consumer for a financial product or service.
    (m)(1) Nonaffiliated third party means any person except:
    (i) Your affiliate; or
    (ii) A person employed jointly by you and any company that is not 
your affiliate (but nonaffiliated third party includes the other company 
that jointly employs the person).
    (2) Nonaffiliated third party includes any company that is an 
affiliate solely by virtue of your or your affiliate's direct or 
indirect ownership or control of the company in conducting merchant 
banking or investment banking activities of the type described in 
section 4(k)(4)(H) or insurance company investment activities of the 
type described in section 4(k)(4)(I) of the Bank Holding Company Act of 
1956 (12 U.S.C. 1843(k)(4)(H) and (I)).
    (n)(1) Nonpublic personal information means:
    (i) Personally identifiable financial information; and
    (ii) Any list, description, or other grouping of consumers (and 
publicly available information pertaining to them) that is derived using 
any personally identifiable financial information that is not publicly 
available.
    (2) Nonpublic personal information does not include:
    (i) Publicly available information, except as included on a list 
described in paragraph (n)(1)(ii) of this section; or
    (ii) Any list, description, or other grouping of consumers (and 
publicly available information pertaining to them) that is derived 
without using any personally identifiable financial information that is 
not publicly available.
    (3) Examples of lists--(i) Nonpublic personal information includes 
any list of individuals' names and street addresses that is derived in 
whole or in part using personally identifiable financial information 
that is not publicly available, such as account numbers.
    (ii) Nonpublic personal information does not include any list of 
individuals' names and addresses that contains only publicly available 
information, is not derived in whole or in part using personally 
identifiable financial information that is not publicly available, and 
is not disclosed in a manner that indicates that any of the individuals 
on the list is a consumer of a financial institution.
    (o)(1) Personally identifiable financial information means any 
information:
    (i) A consumer provides to you to obtain a financial product or 
service from you;
    (ii) About a consumer resulting from any transaction involving a 
financial product or service between you and a consumer; or
    (iii) You otherwise obtain about a consumer in connection with 
providing a financial product or service to that consumer.
    (2) Examples--(i) Information included. Personally identifiable 
financial information includes:
    (A) Information a consumer provides to you on an application to 
obtain a loan, credit card, or other financial product or service;
    (B) Account balance information, payment history, overdraft history, 
and credit or debit card purchase information;
    (C) The fact that an individual is or has been one of your customers 
or has obtained a financial product or service from you;
    (D) Any information about your consumer if it is disclosed in a 
manner that indicates that the individual is or has been your consumer;
    (E) Any information that a consumer provides to you or that you or 
your agent otherwise obtain in connection with collecting on a loan or 
servicing a loan;

[[Page 415]]

    (F) Any information you collect through an Internet ``cookie'' (an 
information collecting device from a web server); and
    (G) Information from a consumer report.
    (ii) Information not included. Personally identifiable financial 
information does not include:
    (A) A list of names and addresses of customers of an entity that is 
not a financial institution; and
    (B) Information that does not identify a consumer, such as aggregate 
information or blind data that does not contain personal identifiers 
such as account numbers, names, or addresses.
    (p)(1) Publicly available information means any information that you 
have a reasonable basis to believe is lawfully made available to the 
general public from:
    (i) Federal, State, or local government records;
    (ii) Widely distributed media; or
    (iii) Disclosures to the general public that are required to be made 
by Federal, State, or local law.
    (2) Reasonable basis. You have a reasonable basis to believe that 
information is lawfully made available to the general public if you have 
taken steps to determine:
    (i) That the information is of the type that is available to the 
general public; and
    (ii) Whether an individual can direct that the information not be 
made available to the general public and, if so, that your consumer has 
not done so.
    (3) Examples--(i) Government records. Publicly available information 
in government records includes information in government real estate 
records and security interest filings.
    (ii) Widely distributed media. Publicly available information from 
widely distributed media includes information from a telephone book, a 
television or radio program, a newspaper, or a web site that is 
available to the general public on an unrestricted basis. A web site is 
not restricted merely because an Internet service provider or a site 
operator requires a fee or a password, so long as access is available to 
the general public.
    (iii) Reasonable basis--(A) You have a reasonable basis to believe 
that mortgage information is lawfully made available to the general 
public if you have determined that the information is of the type 
included on the public record in the jurisdiction where the mortgage 
would be recorded.
    (B) You have a reasonable basis to believe that an individual's 
telephone number is lawfully made available to the general public if you 
have located the telephone number in the telephone book or the consumer 
has informed you that the telephone number is not unlisted.
    (q) You means:
    (1) A State member bank, as defined in 12 CFR 208.3(g);
    (2) A bank holding company, as defined in 12 CFR 225.2(c);
    (3) A subsidiary (as defined in 12 CFR 225.2(o)) or affiliate of a 
bank holding company and a subsidiary of a State member bank, except 
for:
    (i) A national bank or a State bank that is not a member of the 
Federal Reserve System;
    (ii) A broker or dealer that is registered under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.);
    (iii) A registered investment adviser, properly registered by or on 
behalf of either the Securities Exchange Commission or any State, with 
respect to its investment advisory activities and its activities 
incidental to those investment advisory activities;
    (iv) An investment company that is registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or
    (v) An insurance company, with respect to its insurance activities 
and its activities incidental to those insurance activities, that is 
subject to supervision by a State insurance regulator;
    (4) A State agency or State branch of a foreign bank, as those terms 
are defined in 12 U.S.C. 3101(b) (11) and (12), the deposits of which 
agency or branch are not insured by the Federal Deposit Insurance 
Corporation;
    (5) A commercial lending company, as defined in 12 CFR 211.21(f), 
that is owned or controlled by a foreign bank, as defined in 12 CFR 
211.21(m); or
    (6) A corporation organized under section 25A of the Federal Reserve 
Act

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(12 U.S.C. 611-631) or a corporation having an agreement or undertaking 
with the Board under section 25 of the Federal Reserve Act (12 U.S.C. 
601-604a).



                  Subpart A_Privacy and Opt Out Notices



Sec. 216.4  Initial privacy notice to consumers required.

    (a) Initial notice requirement. You must provide a clear and 
conspicuous notice that accurately reflects your privacy policies and 
practices to:
    (1) Customer. An individual who becomes your customer, not later 
than when you establish a customer relationship, except as provided in 
paragraph (e) of this section; and
    (2) Consumer. A consumer, before you disclose any nonpublic personal 
information about the consumer to any nonaffiliated third party, if you 
make such a disclosure other than as authorized by Sec. Sec. 216.14 and 
216.15.
    (b) When initial notice to a consumer is not required. You are not 
required to provide an initial notice to a consumer under paragraph (a) 
of this section if:
    (1) You do not disclose any nonpublic personal information about the 
consumer to any nonaffiliated third party, other than as authorized by 
Sec. Sec. 216.14 and 216.15; and
    (2) You do not have a customer relationship with the consumer.
    (c) When you establish a customer relationship--(1) General rule. 
You establish a customer relationship when you and the consumer enter 
into a continuing relationship.
    (2) Special rule for loans--You establish a customer relationship 
with a consumer when you originate a loan to the consumer for personal, 
family, or household purposes. If you subsequently transfer the 
servicing rights to that loan to another financial institution, the 
customer relationship transfers with the servicing rights.
    (3)(i) Examples of establishing customer relationship. You establish 
a customer relationship when the consumer:
    (A) Opens a credit card account with you;
    (B) Executes the contract to open a deposit account with you, 
obtains credit from you, or purchases insurance from you;
    (C) Agrees to obtain financial, economic, or investment advisory 
services from you for a fee; or
    (D) Becomes your client for the purpose of your providing credit 
counseling or tax preparation services.
    (ii) Examples of loan rule. You establish a customer relationship 
with a consumer who obtains a loan for personal, family, or household 
purposes when you:
    (A) Originate the loan to the consumer; or
    (B) Purchase the servicing rights to the consumer's loan.
    (d) Existing customers. When an existing customer obtains a new 
financial product or service from you that is to be used primarily for 
personal, family, or household purposes, you satisfy the initial notice 
requirements of paragraph (a) of this section as follows:
    (1) You may provide a revised privacy notice, under Sec. 216.8, 
that covers the customer's new financial product or service; or
    (2) If the initial, revised, or annual notice that you most recently 
provided to that customer was accurate with respect to the new financial 
product or service, you do not need to provide a new privacy notice 
under paragraph (a) of this section.
    (e) Exceptions to allow subsequent delivery of notice. (1) You may 
provide the initial notice required by paragraph (a)(1) of this section 
within a reasonable time after you establish a customer relationship if:
    (i) Establishing the customer relationship is not at the customer's 
election; or
    (ii) Providing notice not later than when you establish a customer 
relationship would substantially delay the customer's transaction and 
the customer agrees to receive the notice at a later time.
    (2) Examples of exceptions--(i) Not at customer's election. 
Establishing a customer relationship is not at the customer's election 
if you acquire a customer's deposit liability or the servicing rights to 
a customer's loan from another financial institution and the customer 
does not have a choice about your acquisition.
    (ii) Substantial delay of customer's transaction. Providing notice 
not later

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than when you establish a customer relationship would substantially 
delay the customer's transaction when:
    (A) You and the individual agree over the telephone to enter into a 
customer relationship involving prompt delivery of the financial product 
or service; or
    (B) You establish a customer relationship with an individual under a 
program authorized by Title IV of the Higher Education Act of 1965 (20 
U.S.C. 1070 et seq.) or similar student loan programs where loan 
proceeds are disbursed promptly without prior communication between you 
and the customer.
    (iii) No substantial delay of customer's transaction. Providing 
notice not later than when you establish a customer relationship would 
not substantially delay the customer's transaction when the relationship 
is initiated in person at your office or through other means by which 
the customer may view the notice, such as on a web site.
    (f) Delivery. When you are required to deliver an initial privacy 
notice by this section, you must deliver it according to Sec. 216.9. If 
you use a short-form initial notice for non-customers according to Sec. 
216.6(d), you may deliver your privacy notice according to Sec. 
216.6(d)(3).



Sec. 216.5  Annual privacy notice to customers required.

    (a)(1) General rule. You must provide a clear and conspicuous notice 
to customers that accurately reflects your privacy policies and 
practices not less than annually during the continuation of the customer 
relationship. Annually means at least once in any period of 12 
consecutive months during which that relationship exists. You may define 
the 12-consecutive-month period, but you must apply it to the customer 
on a consistent basis.
    (2) Example. You provide a notice annually if you define the 12-
consecutive-month period as a calendar year and provide the annual 
notice to the customer once in each calendar year following the calendar 
year in which you provided the initial notice. For example, if a 
customer opens an account on any day of year 1, you must provide an 
annual notice to that customer by December 31 of year 2.
    (b)(1) Termination of customer relationship. You are not required to 
provide an annual notice to a former customer.
    (2) Examples. Your customer becomes a former customer when:
    (i) In the case of a deposit account, the account is inactive under 
your policies;
    (ii) In the case of a closed-end loan, the customer pays the loan in 
full, you charge off the loan, or you sell the loan without retaining 
servicing rights;
    (iii) In the case of a credit card relationship or other open-end 
credit relationship, you no longer provide any statements or notices to 
the customer concerning that relationship or you sell the credit card 
receivables without retaining servicing rights; or
    (iv) You have not communicated with the customer about the 
relationship for a period of 12 consecutive months, other than to 
provide annual privacy notices or promotional material.
    (c) Special rule for loans. If you do not have a customer 
relationship with a consumer under the special rule for loans in Sec. 
216.4(c)(2), then you need not provide an annual notice to that consumer 
under this section.
    (d) Delivery. When you are required to deliver an annual privacy 
notice by this section, you must deliver it according to Sec. 216.9.



Sec. 216.6  Information to be included in privacy notices.

    (a) General rule. The initial, annual, and revised privacy notices 
that you provide under Sec. Sec. 216.4, 216.5, and 216.8 must include 
each of the following items of information, in addition to any other 
information you wish to provide, that applies to you and to the 
consumers to whom you send your privacy notice:
    (1) The categories of nonpublic personal information that you 
collect;
    (2) The categories of nonpublic personal information that you 
disclose;
    (3) The categories of affiliates and nonaffiliated third parties to 
whom you disclose nonpublic personal information, other than those 
parties to whom you disclose information under Sec. Sec. 216.14 and 
216.15;
    (4) The categories of nonpublic personal information about your 
former customers that you disclose and the

[[Page 418]]

categories of affiliates and nonaffiliated third parties to whom you 
disclose nonpublic personal information about your former customers, 
other than those parties to whom you disclose information under 
Sec. Sec. 216.14 and 216.15;
    (5) If you disclose nonpublic personal information to a 
nonaffiliated third party under Sec. 216.13 (and no other exception in 
Sec. 216.14 or 216.15 applies to that disclosure), a separate statement 
of the categories of information you disclose and the categories of 
third parties with whom you have contracted;
    (6) An explanation of the consumer's right under Sec. 216.10(a) to 
opt out of the disclosure of nonpublic personal information to 
nonaffiliated third parties, including the method(s) by which the 
consumer may exercise that right at that time;
    (7) Any disclosures that you make under section 603(d)(2)(A)(iii) of 
the Fair Credit Reporting Act (15 U.S.C. 1681a(d)(2)(A)(iii)) (that is, 
notices regarding the ability to opt out of disclosures of information 
among affiliates);
    (8) Your policies and practices with respect to protecting the 
confidentiality and security of nonpublic personal information; and
    (9) Any disclosure that you make under paragraph (b) of this 
section.
    (b) Description of nonaffiliated third parties subject to 
exceptions. If you disclose nonpublic personal information to third 
parties as authorized under Sec. Sec. 216.14 and 216.15, you are not 
required to list those exceptions in the initial or annual privacy 
notices required by Sec. Sec. 216.4 and 216.5. When describing the 
categories with respect to those parties, you are required to state only 
that you make disclosures to other nonaffiliated third parties as 
permitted by law.
    (c) Examples--(1) Categories of nonpublic personal information that 
you collect. You satisfy the requirement to categorize the nonpublic 
personal information that you collect if you list the following 
categories, as applicable:
    (i) Information from the consumer;
    (ii) Information about the consumer's transactions with you or your 
affiliates;
    (iii) Information about the consumer's transactions with 
nonaffiliated third parties; and
    (iv) Information from a consumer reporting agency.
    (2) Categories of nonpublic personal information you disclose--(i) 
You satisfy the requirement to categorize the nonpublic personal 
information that you disclose if you list the categories described in 
paragraph (c)(1) of this section, as applicable, and a few examples to 
illustrate the types of information in each category.
    (ii) If you reserve the right to disclose all of the nonpublic 
personal information about consumers that you collect, you may simply 
state that fact without describing the categories or examples of the 
nonpublic personal information you disclose.
    (3) Categories of affiliates and nonaffiliated third parties to whom 
you disclose. You satisfy the requirement to categorize the affiliates 
and nonaffiliated third parties to whom you disclose nonpublic personal 
information if you list the following categories, as applicable, and a 
few examples to illustrate the types of third parties in each category.
    (i) Financial service providers;
    (ii) Non-financial companies; and
    (iii) Others.
    (4) Disclosures under exception for service providers and joint 
marketers. If you disclose nonpublic personal information under the 
exception in Sec. 216.13 to a nonaffiliated third party to market 
products or services that you offer alone or jointly with another 
financial institution, you satisfy the disclosure requirement of 
paragraph (a)(5) of this section if you:
    (i) List the categories of nonpublic personal information you 
disclose, using the same categories and examples you used to meet the 
requirements of paragraph (a)(2) of this section, as applicable; and
    (ii) State whether the third party is:
    (A) A service provider that performs marketing services on your 
behalf or on behalf of you and another financial institution; or
    (B) A financial institution with whom you have a joint marketing 
agreement.

[[Page 419]]

    (5) Simplified notices. If you do not disclose, and do not wish to 
reserve the right to disclose, nonpublic personal information about 
customers or former customers to affiliates or nonaffiliated third 
parties except as authorized under Sec. Sec. 216.14 and 216.15, you may 
simply state that fact, in addition to the information you must provide 
under paragraphs (a)(1), (a)(8), (a)(9), and (b) of this section.
    (6) Confidentiality and security. You describe your policies and 
practices with respect to protecting the confidentiality and security of 
nonpublic personal information if you do both of the following:
    (i) Describe in general terms who is authorized to have access to 
the information; and
    (ii) State whether you have security practices and procedures in 
place to ensure the confidentiality of the information in accordance 
with your policy. You are not required to describe technical information 
about the safeguards you use.
    (d) Short-form initial notice with opt out notice for non-
customers--(1) You may satisfy the initial notice requirements in 
Sec. Sec. 216.4(a)(2), 216.7(b), and 216.7(c) for a consumer who is not 
a customer by providing a short-form initial notice at the same time as 
you deliver an opt out notice as required in Sec. 216.7.
    (2) A short-form initial notice must:
    (i) Be clear and conspicuous;
    (ii) State that your privacy notice is available upon request; and
    (iii) Explain a reasonable means by which the consumer may obtain 
that notice.
    (3) You must deliver your short-form initial notice according to 
Sec. 216.9. You are not required to deliver your privacy notice with 
your short-form initial notice. You instead may simply provide the 
consumer a reasonable means to obtain your privacy notice. If a consumer 
who receives your short-form notice requests your privacy notice, you 
must deliver your privacy notice according to Sec. 216.9.
    (4) Examples of obtaining privacy notice. You provide a reasonable 
means by which a consumer may obtain a copy of your privacy notice if 
you:
    (i) Provide a toll-free telephone number that the consumer may call 
to request the notice; or
    (ii) For a consumer who conducts business in person at your office, 
maintain copies of the notice on hand that you provide to the consumer 
immediately upon request.
    (e) Future disclosures. Your notice may include:
    (1) Categories of nonpublic personal information that you reserve 
the right to disclose in the future, but do not currently disclose; and
    (2) Categories of affiliates or nonaffiliated third parties to whom 
you reserve the right in the future to disclose, but to whom you do not 
currently disclose, nonpublic personal information.
    (f) Sample clauses. Sample clauses illustrating some of the notice 
content required by this section are included in appendix A of this 
part.



Sec. 216.7  Form of opt out notice to consumers; opt out methods.

    (a)(1) Form of opt out notice. If you are required to provide an opt 
out notice under Sec. 216.10(a), you must provide a clear and 
conspicuous notice to each of your consumers that accurately explains 
the right to opt out under that section. The notice must state:
    (i) That you disclose or reserve the right to disclose nonpublic 
personal information about your consumer to a nonaffiliated third party;
    (ii) That the consumer has the right to opt out of that disclosure; 
and
    (iii) A reasonable means by which the consumer may exercise the opt 
out right.
    (2) Examples--(i) Adequate opt out notice. You provide adequate 
notice that the consumer can opt out of the disclosure of nonpublic 
personal information to a nonaffiliated third party if you:
    (A) Identify all of the categories of nonpublic personal information 
that you disclose or reserve the right to disclose, and all of the 
categories of nonaffiliated third parties to which you disclose the 
information, as described in Sec. 216.6(a)(2) and (3), and state that 
the consumer can opt out of the disclosure of that information; and
    (B) Identify the financial products or services that the consumer 
obtains

[[Page 420]]

from you, either singly or jointly, to which the opt out direction would 
apply.
    (ii) Reasonable opt out means. You provide a reasonable means to 
exercise an opt out right if you:
    (A) Designate check-off boxes in a prominent position on the 
relevant forms with the opt out notice;
    (B) Include a reply form together with the opt out notice;
    (C) Provide an electronic means to opt out, such as a form that can 
be sent via electronic mail or a process at your web site, if the 
consumer agrees to the electronic delivery of information; or
    (D) Provide a toll-free telephone number that consumers may call to 
opt out.
    (iii) Unreasonable opt out means. You do not provide a reasonable 
means of opting out if:
    (A) The only means of opting out is for the consumer to write his or 
her own letter to exercise that opt out right; or
    (B) The only means of opting out as described in any notice 
subsequent to the initial notice is to use a check-off box that you 
provided with the initial notice but did not include with the subsequent 
notice.
    (iv) Specific opt out means. You may require each consumer to opt 
out through a specific means, as long as that means is reasonable for 
that consumer.
    (b) Same form as initial notice permitted. You may provide the opt 
out notice together with or on the same written or electronic form as 
the initial notice you provide in accordance with Sec. 216.4.
    (c) Initial notice required when opt out notice delivered subsequent 
to initial notice. If you provide the opt out notice later than required 
for the initial notice in accordance with Sec. 216.4, you must also 
include a copy of the initial notice with the opt out notice in writing 
or, if the consumer agrees, electronically.
    (d) Joint relationships--(1) If two or more consumers jointly obtain 
a financial product or service from you, you may provide a single opt 
out notice. Your opt out notice must explain how you will treat an opt 
out direction by a joint consumer (as explained in paragraph (d)(5) of 
this section).
    (2) Any of the joint consumers may exercise the right to opt out. 
You may either:
    (i) Treat an opt out direction by a joint consumer as applying to 
all of the associated joint consumers; or
    (ii) Permit each joint consumer to opt out separately.
    (3) If you permit each joint consumer to opt out separately, you 
must permit one of the joint consumers to opt out on behalf of all of 
the joint consumers.
    (4) You may not require all joint consumers to opt out before you 
implement any opt out direction.
    (5) Example. If John and Mary have a joint checking account with you 
and arrange for you to send statements to John's address, you may do any 
of the following, but you must explain in your opt out notice which opt 
out policy you will follow:
    (i) Send a single opt out notice to John's address, but you must 
accept an opt out direction from either John or Mary.
    (ii) Treat an opt out direction by either John or Mary as applying 
to the entire account. If you do so, and John opts out, you may not 
require Mary to opt out as well before implementing John's opt out 
direction.
    (iii) Permit John and Mary to make different opt out directions. If 
you do so:
    (A) You must permit John and Mary to opt out for each other;
    (B) If both opt out, you must permit both to notify you in a single 
response (such as on a form or through a telephone call); and
    (C) If John opts out and Mary does not, you may only disclose 
nonpublic personal information about Mary, but not about John and not 
about John and Mary jointly.
    (e) Time to comply with opt out. You must comply with a consumer's 
opt out direction as soon as reasonably practicable after you receive 
it.
    (f) Continuing right to opt out. A consumer may exercise the right 
to opt out at any time.
    (g) Duration of consumer's opt out direction--(1) A consumer's 
direction to opt out under this section is effective

[[Page 421]]

until the consumer revokes it in writing or, if the consumer agrees, 
electronically.
    (2) When a customer relationship terminates, the customer's opt out 
direction continues to apply to the nonpublic personal information that 
you collected during or related to that relationship. If the individual 
subsequently establishes a new customer relationship with you, the opt 
out direction that applied to the former relationship does not apply to 
the new relationship.
    (h) Delivery. When you are required to deliver an opt out notice by 
this section, you must deliver it according to Sec. 216.9.



Sec. 216.8  Revised privacy notices.

    (a) General rule. Except as otherwise authorized in this part, you 
must not, directly or through any affiliate, disclose any nonpublic 
personal information about a consumer to a nonaffiliated third party 
other than as described in the initial notice that you provided to that 
consumer under Sec. 216.4, unless:
    (1) You have provided to the consumer a clear and conspicuous 
revised notice that accurately describes your policies and practices;
    (2) You have provided to the consumer a new opt out notice;
    (3) You have given the consumer a reasonable opportunity, before you 
disclose the information to the nonaffiliated third party, to opt out of 
the disclosure; and
    (4) The consumer does not opt out.
    (b) Examples--(1) Except as otherwise permitted by Sec. Sec. 
216.13, 216.14, and 216.15, you must provide a revised notice before 
you:
    (i) Disclose a new category of nonpublic personal information to any 
nonaffiliated third party;
    (ii) Disclose nonpublic personal information to a new category of 
nonaffiliated third party; or
    (iii) Disclose nonpublic personal information about a former 
customer to a nonaffiliated third party, if that former customer has not 
had the opportunity to exercise an opt out right regarding that 
disclosure.
    (2) A revised notice is not required if you disclose nonpublic 
personal information to a new nonaffiliated third party that you 
adequately described in your prior notice.
    (c) Delivery. When you are required to deliver a revised privacy 
notice by this section, you must deliver it according to Sec. 216.9.



Sec. 216.9  Delivering privacy and opt out notices.

    (a) How to provide notices. You must provide any privacy notices and 
opt out notices, including short-form initial notices, that this part 
requires so that each consumer can reasonably be expected to receive 
actual notice in writing or, if the consumer agrees, electronically.
    (b) (1) Examples of reasonable expectation of actual notice. You may 
reasonably expect that a consumer will receive actual notice if you:
    (i) Hand-deliver a printed copy of the notice to the consumer;
    (ii) Mail a printed copy of the notice to the last known address of 
the consumer;
    (iii) For the consumer who conducts transactions electronically, 
post the notice on the electronic site and require the consumer to 
acknowledge receipt of the notice as a necessary step to obtaining a 
particular financial product or service; or
    (iv) For an isolated transaction with the consumer, such as an ATM 
transaction, post the notice on the ATM screen and require the consumer 
to acknowledge receipt of the notice as a necessary step to obtaining 
the particular financial product or service.
    (2) Examples of unreasonable expectation of actual notice. You may 
not, however, reasonably expect that a consumer will receive actual 
notice of your privacy policies and practices if you:
    (i) Only post a sign in your branch or office or generally publish 
advertisements of your privacy policies and practices; or
    (ii) Send the notice via electronic mail to a consumer who does not 
obtain a financial product or service from you electronically.
    (c) Annual notices only. You may reasonably expect that a customer 
will receive actual notice of your annual privacy notice if:

[[Page 422]]

    (1) The customer uses your web site to access financial products and 
services electronically and agrees to receive notices at the web site, 
and you post your current privacy notice continuously in a clear and 
conspicuous manner on the web site; or
    (2) The customer has requested that you refrain from sending any 
information regarding the customer relationship, and your current 
privacy notice remains available to the customer upon request.
    (d) Oral description of notice insufficient. You may not provide any 
notice required by this part solely by orally explaining the notice, 
either in person or over the telephone.
    (e) Retention or accessibility of notices for customers-(1) For 
customers only, you must provide the initial notice required by Sec. 
216.4(a)(1), the annual notice required by Sec. 216.5(a), and the 
revised notice required by Sec. 216.8 so that the customer can retain 
them or obtain them later in writing or, if the customer agrees, 
electronically.
    (2) Examples of retention or accessibility. You provide a privacy 
notice to the customer so that the customer can retain it or obtain it 
later if you:
    (i) Hand-deliver a printed copy of the notice to the customer;
    (ii) Mail a printed copy of the notice to the last known address of 
the customer; or
    (iii) Make your current privacy notice available on a web site (or a 
link to another web site) for the customer who obtains a financial 
product or service electronically and agrees to receive the notice at 
the web site.
    (f) Joint notice with other financial institutions. You may provide 
a joint notice from you and one or more of your affiliates or other 
financial institutions, as identified in the notice, as long as the 
notice is accurate with respect to you and the other institutions.
    (g) Joint relationships. If two or more consumers jointly obtain a 
financial product or service from you, you may satisfy the initial, 
annual, and revised notice requirements of Sec. Sec. 216.4(a), 
216.5(a), and 216.8(a), respectively, by providing one notice to those 
consumers jointly.



                     Subpart B_Limits on Disclosures



Sec. 216.10  Limits on disclosure of non-public personal information to 
nonaffiliated third parties.

    (a) (1) Conditions for disclosure. Except as otherwise authorized in 
this part, you may not, directly or through any affiliate, disclose any 
nonpublic personal information about a consumer to a nonaffiliated third 
party unless:
    (i) You have provided to the consumer an initial notice as required 
under Sec. 216.4;
    (ii) You have provided to the consumer an opt out notice as required 
in Sec. 216.7;
    (iii) You have given the consumer a reasonable opportunity, before 
you disclose the information to the nonaffiliated third party, to opt 
out of the disclosure; and
    (iv) The consumer does not opt out.
    (2) Opt out definition. Opt out means a direction by the consumer 
that you not disclose nonpublic personal information about that consumer 
to a nonaffiliated third party, other than as permitted by Sec. Sec. 
216.13, 216.14, and 216.15.
    (3) Examples of reasonable opportunity to opt out. You provide a 
consumer with a reasonable opportunity to opt out if:
    (i) By mail. You mail the notices required in paragraph (a)(1) of 
this section to the consumer and allow the consumer to opt out by 
mailing a form, calling a toll-free telephone number, or any other 
reasonable means within 30 days from the date you mailed the notices.
    (ii) By electronic means. A customer opens an on-line account with 
you and agrees to receive the notices required in paragraph (a)(1) of 
this section electronically, and you allow the customer to opt out by 
any reasonable means within 30 days after the date that the customer 
acknowledges receipt of the notices in conjunction with opening the 
account.
    (iii) Isolated transaction with consumer. For an isolated 
transaction, such as the purchase of a cashier's check by a consumer, 
you provide the consumer with a reasonable opportunity to opt out if you 
provide the notices required in paragraph (a)(1) of this section at the 
time of the transaction and request that the consumer

[[Page 423]]

decide, as a necessary part of the transaction, whether to opt out 
before completing the transaction.
    (b) Application of opt out to all consumers and all nonpublic 
personal information--(1) You must comply with this section, regardless 
of whether you and the consumer have established a customer 
relationship.
    (2) Unless you comply with this section, you may not, directly or 
through any affiliate, disclose any nonpublic personal information about 
a consumer that you have collected, regardless of whether you collected 
it before or after receiving the direction to opt out from the consumer.
    (c) Partial opt out. You may allow a consumer to select certain 
nonpublic personal information or certain nonaffiliated third parties 
with respect to which the consumer wishes to opt out.



Sec. 216.11  Limits on redisclosure and reuse of information.

    (a)(1) Information you receive under an exception. If you receive 
nonpublic personal information from a nonaffiliated financial 
institution under an exception in Sec. 216.14 or 216.15 of this part, 
your disclosure and use of that information is limited as follows:
    (i) You may disclose the information to the affiliates of the 
financial institution from which you received the information;
    (ii) You may disclose the information to your affiliates, but your 
affiliates may, in turn, disclose and use the information only to the 
extent that you may disclose and use the information; and
    (iii) You may disclose and use the information pursuant to an 
exception in Sec. 216.14 or 216.15 in the ordinary course of business 
to carry out the activity covered by the exception under which you 
received the information.
    (2) Example. If you receive a customer list from a nonaffiliated 
financial institution in order to provide account processing services 
under the exception in Sec. 216.14(a), you may disclose that 
information under any exception in Sec. 216.14 or 216.15 in the 
ordinary course of business in order to provide those services. For 
example, you could disclose the information in response to a properly 
authorized subpoena or to your attorneys, accountants, and auditors. You 
could not disclose that information to a third party for marketing 
purposes or use that information for your own marketing purposes.
    (b)(1) Information you receive outside of an exception. If you 
receive nonpublic personal information from a nonaffiliated financial 
institution other than under an exception in Sec. 216.14 or 216.15 of 
this part, you may disclose the information only:
    (i) To the affiliates of the financial institution from which you 
received the information;
    (ii) To your affiliates, but your affiliates may, in turn, disclose 
the information only to the extent that you can disclose the 
information; and
    (iii) To any other person, if the disclosure would be lawful if made 
directly to that person by the financial institution from which you 
received the information.
    (2) Example. If you obtain a customer list from a nonaffiliated 
financial institution outside of the exceptions in Sec. 216.14 and 
216.15:
    (i) You may use that list for your own purposes; and
    (ii) You may disclose that list to another nonaffiliated third party 
only if the financial institution from which you purchased the list 
could have lawfully disclosed the list to that third party. That is, you 
may disclose the list in accordance with the privacy policy of the 
financial institution from which you received the list, as limited by 
the opt out direction of each consumer whose nonpublic personal 
information you intend to disclose, and you may disclose the list in 
accordance with an exception in Sec. 216.14 or 216.15, such as to your 
attorneys or accountants.
    (c) Information you disclose under an exception. If you disclose 
nonpublic personal information to a nonaffiliated third party under an 
exception in Sec. 216.14 or 216.15 of this part, the third party may 
disclose and use that information only as follows:
    (1) The third party may disclose the information to your affiliates;
    (2) The third party may disclose the information to its affiliates, 
but its affiliates may, in turn, disclose and use the information only 
to the extent that

[[Page 424]]

the third party may disclose and use the information; and
    (3) The third party may disclose and use the information pursuant to 
an exception in Sec. 216.14 or 216.15 in the ordinary course of 
business to carry out the activity covered by the exception under which 
it received the information.
    (d) Information you disclose outside of an exception. If you 
disclose nonpublic personal information to a nonaffiliated third party 
other than under an exception in Sec. 216.14 or 216.15 of this part, 
the third party may disclose the information only:
    (1) To your affiliates;
    (2) To its affiliates, but its affiliates, in turn, may disclose the 
information only to the extent the third party can disclose the 
information; and
    (3) To any other person, if the disclosure would be lawful if you 
made it directly to that person.



Sec. 216.12  Limits on sharing account number information for marketing 
purposes.

    (a) General prohibition on disclosure of account numbers. You must 
not, directly or through an affiliate, disclose, other than to a 
consumer reporting agency, an account number or similar form of access 
number or access code for a consumer's credit card account, deposit 
account, or transaction account to any nonaffiliated third party for use 
in telemarketing, direct mail marketing, or other marketing through 
electronic mail to the consumer.
    (b) Exceptions. Paragraph (a) of this section does not apply if you 
disclose an account number or similar form of access number or access 
code:
    (1) To your agent or service provider solely in order to perform 
marketing for your own products or services, as long as the agent or 
service provider is not authorized to directly initiate charges to the 
account; or
    (2) To a participant in a private label credit card program or an 
affinity or similar program where the participants in the program are 
identified to the customer when the customer enters into the program.
    (c) Examples--(1) Account number. An account number, or similar form 
of access number or access code, does not include a number or code in an 
encrypted form, as long as you do not provide the recipient with a means 
to decode the number or code.
    (2) Transaction account. A transaction account is an account other 
than a deposit account or a credit card account. A transaction account 
does not include an account to which third parties cannot initiate 
charges.



                          Subpart C_Exceptions



Sec. 216.13  Exception to opt out requirements for service providers 
and joint marketing.

    (a) General rule. (1) The opt out requirements in Sec. Sec. 216.7 
and 216.10 do not apply when you provide nonpublic personal information 
to a nonaffiliated third party to perform services for you or functions 
on your behalf, if you:
    (i) Provide the initial notice in accordance with Sec. 216.4; and
    (ii) Enter into a contractual agreement with the third party that 
prohibits the third party from disclosing or using the information other 
than to carry out the purposes for which you disclosed the information, 
including use under an exception in Sec. 216.14 or 216.15 in the 
ordinary course of business to carry out those purposes.
    (2) Example. If you disclose nonpublic personal information under 
this section to a financial institution with which you perform joint 
marketing, your contractual agreement with that institution meets the 
requirements of paragraph (a)(1)(ii) of this section if it prohibits the 
institution from disclosing or using the nonpublic personal information 
except as necessary to carry out the joint marketing or under an 
exception in Sec. 216.14 or 216.15 in the ordinary course of business 
to carry out that joint marketing.
    (b) Service may include joint marketing. The services a 
nonaffiliated third party performs for you under paragraph (a) of this 
section may include marketing of your own products or services or 
marketing of financial products or services offered pursuant to joint 
agreements between you and one or more financial institutions.

[[Page 425]]

    (c) Definition of joint agreement. For purposes of this section, 
joint agreement means a written contract pursuant to which you and one 
or more financial institutions jointly offer, endorse, or sponsor a 
financial product or service.



Sec. 216.14  Exceptions to notice and opt out requirements for 
processing and servicing transactions.

    (a) Exceptions for processing transactions at consumer's request. 
The requirements for initial notice in Sec. 216.4(a)(2), for the opt 
out in Sec. Sec. 216.7 and 216.10, and for service providers and joint 
marketing in Sec. 216.13 do not apply if you disclose nonpublic 
personal information as necessary to effect, administer, or enforce a 
transaction that a consumer requests or authorizes, or in connection 
with:
    (1) Servicing or processing a financial product or service that a 
consumer requests or authorizes;
    (2) Maintaining or servicing the consumer's account with you, or 
with another entity as part of a private label credit card program or 
other extension of credit on behalf of such entity; or
    (3) A proposed or actual securitization, secondary market sale 
(including sales of servicing rights), or similar transaction related to 
a transaction of the consumer.
    (b) Necessary to effect, administer, or enforce a transaction means 
that the disclosure is:
    (1) Required, or is one of the lawful or appropriate methods, to 
enforce your rights or the rights of other persons engaged in carrying 
out the financial transaction or providing the product or service; or
    (2) Required, or is a usual, appropriate or acceptable method:
    (i) To carry out the transaction or the product or service business 
of which the transaction is a part, and record, service, or maintain the 
consumer's account in the ordinary course of providing the financial 
service or financial product;
    (ii) To administer or service benefits or claims relating to the 
transaction or the product or service business of which it is a part;
    (iii) To provide a confirmation, statement, or other record of the 
transaction, or information on the status or value of the financial 
service or financial product to the consumer or the consumer's agent or 
broker;
    (iv) To accrue or recognize incentives or bonuses associated with 
the transaction that are provided by you or any other party;
    (v) To underwrite insurance at the consumer's request or for 
reinsurance purposes, or for any of the following purposes as they 
relate to a consumer's insurance: account administration, reporting, 
investigating, or preventing fraud or material misrepresentation, 
processing premium payments, processing insurance claims, administering 
insurance benefits (including utilization review activities), 
participating in research projects, or as otherwise required or 
specifically permitted by Federal or State law; or
    (vi) In connection with:
    (A) The authorization, settlement, billing, processing, clearing, 
transferring, reconciling or collection of amounts charged, debited, or 
otherwise paid using a debit, credit, or other payment card, check, or 
account number, or by other payment means;
    (B) The transfer of receivables, accounts, or interests therein; or
    (C) The audit of debit, credit, or other payment information.



Sec. 216.15  Other exceptions to notice and opt out requirements.

    (a) Exceptions to opt out requirements. The requirements for initial 
notice in Sec. 216.4(a)(2), for the opt out in Sec. Sec. 216.7 and 
216.10, and for service providers and joint marketing in Sec. 216.13 do 
not apply when you disclose nonpublic personal information:
    (1) With the consent or at the direction of the consumer, provided 
that the consumer has not revoked the consent or direction;
    (2)(i) To protect the confidentiality or security of your records 
pertaining to the consumer, service, product, or transaction;
    (ii) To protect against or prevent actual or potential fraud, 
unauthorized transactions, claims, or other liability;
    (iii) For required institutional risk control or for resolving 
consumer disputes or inquiries;

[[Page 426]]

    (iv) To persons holding a legal or beneficial interest relating to 
the consumer; or
    (v) To persons acting in a fiduciary or representative capacity on 
behalf of the consumer;
    (3) To provide information to insurance rate advisory organizations, 
guaranty funds or agencies, agencies that are rating you, persons that 
are assessing your compliance with industry standards, and your 
attorneys, accountants, and auditors;
    (4) To the extent specifically permitted or required under other 
provisions of law and in accordance with the Right to Financial Privacy 
Act of 1978 (12 U.S.C. 3401 et seq.), to law enforcement agencies 
(including a federal functional regulator, the Secretary of the 
Treasury, with respect to 31 U.S.C. Chapter 53, Subchapter II (Records 
and Reports on Monetary Instruments and Transactions) and 12 U.S.C. 
Chapter 21 (Financial Recordkeeping), a State insurance authority, with 
respect to any person domiciled in that insurance authority's State that 
is engaged in providing insurance, and the Federal Trade Commission), 
self-regulatory organizations, or for an investigation on a matter 
related to public safety;
    (5)(i) To a consumer reporting agency in accordance with the Fair 
Credit Reporting Act (15 U.S.C. 1681 et seq.), or
    (ii) From a consumer report reported by a consumer reporting agency;
    (6) In connection with a proposed or actual sale, merger, transfer, 
or exchange of all or a portion of a business or operating unit if the 
disclosure of nonpublic personal information concerns solely consumers 
of such business or unit; or
    (7)(i) To comply with Federal, State, or local laws, rules and other 
applicable legal requirements;
    (ii) To comply with a properly authorized civil, criminal, or 
regulatory investigation, or subpoena or summons by Federal, State, or 
local authorities; or
    (iii) To respond to judicial process or government regulatory 
authorities having jurisdiction over you for examination, compliance, or 
other purposes as authorized by law.
    (b) Examples of consent and revocation of consent. (1) A consumer 
may specifically consent to your disclosure to a nonaffiliated insurance 
company of the fact that the consumer has applied to you for a mortgage 
so that the insurance company can offer homeowner's insurance to the 
consumer.
    (2) A consumer may revoke consent by subsequently exercising the 
right to opt out of future disclosures of nonpublic personal information 
as permitted under Sec. 216.7(f).



            Subpart D_Relation to Other Laws; Effective Date



Sec. 216.16  Protection of Fair Credit Reporting Act.

    Nothing in this part shall be construed to modify, limit, or 
supersede the operation of the Fair Credit Reporting Act (15 U.S.C. 1681 
et seq.), and no inference shall be drawn on the basis of the provisions 
of this part regarding whether information is transaction or experience 
information under section 603 of that Act.



Sec. 216.17  Relation to State laws.

    (a) In general. This part shall not be construed as superseding, 
altering, or affecting any statute, regulation, order, or interpretation 
in effect in any State, except to the extent that such State statute, 
regulation, order, or interpretation is inconsistent with the provisions 
of this part, and then only to the extent of the inconsistency.
    (b) Greater protection under State law. For purposes of this 
section, a State statute, regulation, order, or interpretation is not 
inconsistent with the provisions of this part if the protection such 
statute, regulation, order, or interpretation affords any consumer is 
greater than the protection provided under this part, as determined by 
the Federal Trade Commission, after consultation with the Board, on the 
Federal Trade Commission's own motion, or upon the petition of any 
interested party.



Sec. 216.18  Effective date; transition rule.

    (a) Effective date. This part is effective November 13, 2000. In 
order to provide sufficient time for you to establish policies and 
systems to comply with the requirements of this part, the

[[Page 427]]

Board has extended the time for compliance with this part until July 1, 
2001.
    (b)(1) Notice requirement for consumers who are your customers on 
the compliance date. By July 1, 2001, you must have provided an initial 
notice, as required by Sec. 216.4, to consumers who are your customers 
on July 1, 2001.
    (2) Example. You provide an initial notice to consumers who are your 
customers on July 1, 2001, if, by that date, you have established a 
system for providing an initial notice to all new customers and have 
mailed the initial notice to all your existing customers.
    (c) Two-year grandfathering of service agreements. Until July 1, 
2002, a contract that you have entered into with a nonaffiliated third 
party to perform services for you or functions on your behalf satisfies 
the provisions of Sec. 216.13(a)(1)(ii) of this part, even if the 
contract does not include a requirement that the third party maintain 
the confidentiality of nonpublic personal information, as long as you 
entered into the contract on or before July 1, 2000.

                 Appendix A to Part 216--Sample Clauses

    Financial institutions, including a group of financial holding 
company affiliates that use a common privacy notice, may use the 
following sample clauses, if the clause is accurate for each institution 
that uses the notice. (Note that disclosure of certain information, such 
as assets, income, and information from a consumer reporting agency, may 
give rise to obligations under the Fair Credit Reporting Act, such as a 
requirement to permit a consumer to opt out of disclosures to affiliates 
or designation as a consumer reporting agency if disclosures are made to 
nonaffiliated third parties.)

      A-1--Categories of information you collect (all institutions)

    You may use this clause, as applicable, to meet the requirement of 
Sec. 216.6(a)(1) to describe the categories of nonpublic personal 
information you collect.
    Sample Clause A-1:
    We collect nonpublic personal information about you from the 
following sources:
     Information we receive from you on applications 
or other forms;
     Information about your transactions with us, our 
affiliates, or others; and
     Information we receive from a consumer reporting 
agency.

A-2--Categories of information you disclose (institutions that disclose 
                       outside of the exceptions)

    You may use one of these clauses, as applicable, to meet the 
requirement of Sec. 216.6(a)(2) to describe the categories of nonpublic 
personal information you disclose. You may use these clauses if you 
disclose nonpublic personal information other than as permitted by the 
exceptions in Sec. Sec. 216.13, 216.14, and 216.15.
    Sample Clause A-2, Alternative 1:
    We may disclose the following kinds of nonpublic personal 
information about you:
     Information we receive from you on applications 
or other forms, such as [provide illustrative examples, such as ``your 
name, address, social security number, assets, and income''];
     Information about your transactions with us, our 
affiliates, or others, such as [provide illustrative examples, such as 
``your account balance, payment history, parties to transactions, and 
credit card usage'']; and
     Information we receive from a consumer reporting 
agency, such as [provide illustrative examples, such as ``your 
creditworthiness and credit history''].
    Sample Clause A-2, Alternative 2:
    We may disclose all of the information that we collect, as described 
[describe location in the notice, such as ``above'' or ``below''].

  A-3--Categories of information you disclose and parties to whom you 
 disclose (institutions that do not disclose outside of the exceptions)

    You may use this clause, as applicable, to meet the requirements of 
Sec. Sec. 216.6(a)(2), (3), and (4) to describe the categories of 
nonpublic personal information about customers and former customers that 
you disclose and the categories of affiliates and nonaffiliated third 
parties to whom you disclose. You may use this clause if you do not 
disclose nonpublic personal information to any party, other than as 
permitted by the exceptions in Sec. Sec. 216.14, and 216.15.
    Sample Clause A-3:
    We do not disclose any nonpublic personal information about our 
customers or former customers to anyone, except as permitted by law.

   A-4--Categories of parties to whom you disclose (institutions that 
                   disclose outside of the exceptions)

    You may use this clause, as applicable, to meet the requirement of 
Sec. 216.6(a)(3) to describe the categories of affiliates and 
nonaffiliated third parties to whom you disclose nonpublic personal 
information. You may use this clause if you disclose nonpublic personal 
information other than as permitted by the exceptions in Sec. Sec. 
216.13, 216.14, and

[[Page 428]]

216.15, as well as when permitted by the exceptions in Sec. Sec. 
216.14, and 216.15.
    Sample Clause A-4:
    We may disclose nonpublic personal information about you to the 
following types of third parties:
     Financial service providers, such as [provide 
illustrative examples, such as ``mortgage bankers, securities broker-
dealers, and insurance agents''];
     Non-financial companies, such as [provide 
illustrative examples, such as ``retailers, direct marketers, airlines, 
and publishers'']; and
     Others, such as [provide illustrative examples, 
such as ``non-profit organizations''].
    We may also disclose nonpublic personal information about you to 
nonaffiliated third parties as permitted by law.

             A-5--Service provider/joint marketing exception

    You may use one of these clauses, as applicable, to meet the 
requirements of Sec. 216.6(a)(5) related to the exception for service 
providers and joint marketers in Sec. 216.13. If you disclose nonpublic 
personal information under this exception, you must describe the 
categories of nonpublic personal information you disclose and the 
categories of third parties with whom you have contracted.
    Sample Clause A-5, Alternative 1:
    We may disclose the following information to companies that perform 
marketing services on our behalf or to other financial institutions with 
whom we have joint marketing agreements:
     Information we receive from you on applications 
or other forms, such as [provide illustrative examples, such as ``your 
name, address, social security number, assets, and income''];
     Information about your transactions with us, our 
affiliates, or others, such as [provide illustrative examples, such as 
``your account balance, payment history, parties to transactions, and 
credit card usage'']; and
     Information we receive from a consumer reporting 
agency, such as [provide illustrative examples, such as ``your 
creditworthiness and credit history''].
    Sample Clause A-5, Alternative 2:
    We may disclose all of the information we collect, as described 
[describe location in the notice, such as ``above'' or ``below''] to 
companies that perform marketing services on our behalf or to other 
financial institutions with whom we have joint marketing agreements.

A-6--Explanation of opt out right (institutions that disclose outside of 
                             the exceptions)

    You may use this clause, as applicable, to meet the requirement of 
Sec. 216.6(a)(6) to provide an explanation of the consumer's right to 
opt out of the disclosure of nonpublic personal information to 
nonaffiliated third parties, including the method(s) by which the 
consumer may exercise that right. You may use this clause if you 
disclose nonpublic personal information other than as permitted by the 
exceptions in Sec. Sec. 216.13, 216.14, and 216.15.
    Sample Clause A-6:
    If you prefer that we not disclose nonpublic personal information 
about you to nonaffiliated third parties, you may opt out of those 
disclosures, that is, you may direct us not to make those disclosures 
(other than disclosures permitted by law). If you wish to opt out of 
disclosures to nonaffiliated third parties, you may [describe a 
reasonable means of opting out, such as ``call the following toll-free 
number: (insert number)''].

          A-7--Confidentiality and security (all institutions)

    You may use this clause, as applicable, to meet the requirement of 
Sec. 216.6(a)(8) to describe your policies and practices with respect 
to protecting the confidentiality and security of nonpublic personal 
information.
    Sample Clause A-7:
    We restrict access to nonpublic personal information about you to 
[provide an appropriate description, such as ``those employees who need 
to know that information to provide products or services to you'']. We 
maintain physical, electronic, and procedural safeguards that comply 
with federal standards to guard your nonpublic personal information.



PART 217_PROHIBITION AGAINST THE PAYMENT OF INTEREST ON DEMAND DEPOSITS 
(REGULATION Q)--Table of Contents




                               Regulations

Sec.
217.1 Authority, purpose, and scope.
217.2 Definitions.
217.3 Interest on demand deposits.

                             Interpretations

217.101 Premiums on deposits.

    Authority: 12 U.S.C. 248, 371a, 461, 505, 1818, and 3105.

                               Regulations

    Source: Sections 217.1 through 217.6 appear at Reg. Q, 51 FR 9637, 
Mar. 20, 1986, unless otherwise noted.



Sec. 217.1  Authority, purpose, and scope.

    (a) Authority. This part is issued under the authority of section 19 
of the Federal Reserve Act (12 U.S.C. 371a, 461, 505), section 7 of the 
International

[[Page 429]]

Banking Act of 1978 (12 U.S.C. 3105), section 11 of the Federal Reserve 
Act (12 U.S.C. 248), and section 8 of the Federal Deposit Insurance Act 
(12 U.S.C. 1818), unless otherwise noted.
    (b) Purpose. This part prohibits the payment of interest on demand 
deposits by member banks and other depository institutions within the 
scope of this part.
    (c) Scope. (1) This regulation applies to state chartered banks that 
are members of the Federal Reserve under section 9 of the Federal 
Reserve Act (12 U.S.C. 321, et seq.) and to all national banks. The 
regulation also applies to any Federal branch or agency of a foreign 
bank and to a State uninsured branch or agency of a foreign bank in the 
same manner and to the same extent as if the branch or agency were a 
member bank, except as may be otherwise provided by the Board, if:
    (i) Its parent foreign bank has total worldwide consolidated bank 
assets in excess of $1 billion;
    (ii) Its parent foreign bank is controlled by a foreign company 
which owns or controls foreign banks that in the aggregate have total 
worldwide consolidated bank assets in excess of $1 billion; or
    (iii) Its parent foreign bank is controlled by a group of foreign 
companies that own or control foreign banks that in the aggregate have 
total worldwide consolidated bank assets in excess of $1 billion.
    (2) For deposits held by a member bank or a foreign bank, this 
regulation does not apply to ``any deposit that is payable only at an 
office located outside of the United States'' (i.e., the States of the 
United States and the District of Columbia) as defined in Sec. 204.2(t) 
of the Board's Regulation D-- Reserve Requirements of Depository 
Institutions (12 CFR 20.4).

[Reg. Q, 51 FR 9637, Mar. 20, 1986, as amended at 57 FR 43336, Sept. 21, 
1992]



Sec. 217.2  Definitions.

    For purposes of this part, the following definitions apply unless 
otherwise specified;
    (a) Demand deposit means any deposit that is considered to be a 
demand deposit under Sec. 204.2(b) of the Board's Regulation D--Reserve 
Requirements of Depository Institutions (12 CFR part 204).
    (b) Deposit means any liability of a member bank that is considered 
to be a deposit under Sec. 204.2(a) of the Board's Regulation D--
Reserve Requirements of Depository Institutions (12 CFR part 204).
    (c) Foreign bank means any bank that is considered to be a foreign 
bank under Sec. 204.2(o) of the Board's Regulation D--Reserve 
Requirements of Depository Institutions (12 CFR part 204).
    (d) Interest means any payment to or for the account of any 
depositor as compensation for the use of funds constituting a deposit. A 
member bank's absorption of expenses incident to providing a normal 
banking function or its forbearance from charging a fee in connection 
with such a service is not considered a payment of interest.

[Reg. Q, 51 FR 9637, Mar. 20, 1986]



Sec. 217.3  Interest on demand deposits.

    No member bank of the Federal Reserve System shall, directly or 
indirectly, by any device whatsoever, pay any interest on any demand 
deposit.\1\
---------------------------------------------------------------------------

    \1\ A member bank may continue to pay interest on a time deposit for 
not more than ten calendar days; (1) Where the member bank has provided 
in the time deposit contract that, if the deposit or any portion thereof 
is withdrawn not more than ten calendar days after a maturity date (one 
business day for ``IBF time deposits'' as defined in Sec. 204.8(a)(2) 
of Regulation D), interest will continue to be paid for such period; or 
(2) for a period between a maturity date and the date of renewal of the 
deposit, provided that such certificate is renewed within ten calendar 
days after maturity.

[Reg. Q, 51 FR 9637, Mar. 20, 1986]

                             Interpretations



Sec. 217.101  Premiums on deposits.

    (a) Section 19(i) of the Federal Reserve Act and Sec. 217.3 of 
Regulation Q prohibits a member bank from paying interest on a demand 
deposit. Premiums, whether in the form of merchandise, credit, or cash, 
given by a member bank to a depositor will be regarded as an advertising 
or promotional expense rather than a payment of interest if:

[[Page 430]]

    (1) The premium is given to a depositor only at the time of the 
opening of a new account or an addition to an existing account;
    (2) No more than two premiums per account are given within a 12-
month period; and
    (3) The value of the premium or, in the case, of articles of 
merchandise, the total cost (including taxes, shipping, warehousing, 
packaging, and handling costs) does not exceed $10 for deposits of less 
than $5,000 or $20 for deposits of $5,000 or more.

The costs of premiums may not be averaged. The member bank should retain 
sufficient supporting documentation showing that the total cost of a 
premium, including shipping, warehousing, packaging, and handling costs, 
does not exceed the applicable $10/$20 limitations and that no portion 
of the total cost of any premium has been attributed to development, 
advertising, promotional, or other expenses. A member bank is not 
permitted directly or indirectly to solicit or promote deposits from 
customers on the basis that the funds will be divided into more than one 
account by the institution for the purpose of providing more than two 
premiums per deposit within a 12-month period.
    (b) Notwithstanding paragraph (a) of this section, any premium that 
is not, directly or indirectly, related to or dependent on the balance 
in a demand deposit account and the duration of the account balance 
shall not be considered the payment of interest on a demand deposit 
account and shall not be subject to the limitations in paragraph (a) of 
this section.

[52 FR 47698, Dec. 16, 1987. Redesignated at 57 FR 43336, Sept. 21, 
1992; 62 FR 26737, May 15, 1997]



PART 219_REIMBURSEMENT FOR PROVIDING FINANCIAL RECORDS; RECORDKEEPING 

REQUIREMENTS FOR CERTAIN FINANCIAL RECORDS (REGULATION S)--Table of 
Contents




    Subpart A_Reimbursement to Financial Institutions for Providing 
                            Financial Records

Sec.
219.1 Authority, purpose and scope.
219.2 Definitions.
219.3 Cost reimbursement.
219.4 Exceptions.
219.5 Conditions for payment.
219.6 Payment procedures.

 Subpart B_Recordkeeping and Reporting Requirements for Funds Transfers 
                        and Transmittals of Funds

219.21 Authority, purpose and scope.
219.22 Definitions.
219.23 Recordkeeping and reporting requirements.
219.24 Retention period.

    Authority: 12 U.S.C. 3415.

    Source: 44 FR 55813, Sept. 28, 1979, unless otherwise noted.



    Subpart A_Reimbursement to Financial Institutions for Providing 
                            Financial Records



Sec. 219.1  Authority, purpose and scope.

    This subpart of Regulation S (12 CFR part 219, subpart A) is issued 
by the Board of Governors of the Federal Reserve System (the Board) 
under section 1115 of the Right to Financial Privacy Act (the Act) (12 
U.S.C. 3415). It establishes the rates and conditions for reimbursement 
of reasonably necessary costs directly incurred by financial 
institutions in assembling or providing customer financial records to a 
government authority pursuant to the Act.

[60 FR 233, Jan. 3, 1995]



Sec. 219.2  Definitions.

    For the purposes of this subpart, the following definitions shall 
apply:
    Customer means any person or authorized representative of that 
person who uses any service of a financial institution, or for whom a 
financial institution acts or has acted as a fiduciary in relation to an 
account maintained in the person's name. Customer does not include 
corporations or partnerships comprised of more than five persons.
    Financial institution means any office of a bank, savings bank, card 
issuer as defined in section 103 of the Consumers Credit Protection Act 
(15 U.S.C. 1602(n)), industrial loan company, trust company, savings 
association, building and loan, or homestead association (including 
cooperative banks), credit union, or consumer finance institution,

[[Page 431]]

located in any State or territory of the United States, the District of 
Columbia, Puerto Rico, Guam, American Samoa, or the Virgin Islands.
    Financial record means an original or copy of, or information known 
to have been derived from, any record held by a financial institution 
pertaining to a customer's relationship with the financial institution.
    Government authority means any agency or department of the United 
States, or any officer, employee or agent thereof.
    Person means an individual or a partnership of five or fewer 
individuals.

[Reg. S, 61 FR 29640, June 12, 1996]



Sec. 219.3  Cost reimbursement.

    (a) Fees payable. Except as provided in Sec. 219.4, a government 
authority, or a court issuing an order or subpoena in connection with 
grand jury proceedings, seeking access to financial records pertaining 
to a customer shall reimburse the financial institution for reasonably 
necessary costs directly incurred in searching for, reproducing or 
transporting books, papers, records, or other data as set forth in this 
section. The reimbursement schedule for a financial institution is set 
forth in Appendix A to this section. If a financial institution has 
financial records that are stored at an independent storage facility 
that charges a fee to search for, reproduce, or transport particular 
records requested, these costs are considered to be directly incurred by 
the financial institution and may be included in the reimbursement.
    (b) Search and processing costs. (1) Reimbursement of search and 
processing costs shall cover the total amount of personnel time spent in 
locating, retrieving, reproducing, and preparing financial records for 
shipment. Search and processing costs shall not cover analysis of 
material or legal advice.
    (2) If itemized separately, search and processing costs may include 
the actual cost of extracting information stored by computer in the 
format in which it is normally produced, based on computer time and 
necessary supplies; however, personnel time for computer search may be 
paid for only at the rates specified in Appendix A to this section.
    (c) Reproduction costs. The reimbursement rates for reproduction 
costs for requested documents are set forth in Appendix A to this 
section. Copies of photographs, films, computer tapes, and other 
materials not listed in Appendix A to this section are reimbursed at 
actual cost.
    (d) Transportation costs. Reimbursement for transportation costs 
shall be for the reasonably necessary costs directly incurred to 
transport personnel to locate and retrieve the requested information, 
and to convey such material to the place of examination.

            Appendix A to Sec. 219.3--Reimbursement Schedule

Reproduction:
    Photocopy, per page--$.25
    Paper copies of microfiche, per frame--$.25
    Duplicate microfiche, per microfiche--$.50
    Computer diskette--$5.00
Search and Processing:
    Clerical/Technical, hourly rate--$11.00
    Manager/Supervisory, hourly rate--$17.00

[Reg. S, 61 FR 29640, June 12, 1996]



Sec. 219.4  Exceptions.

    A financial institution is not entitled to reimbursement under this 
subpart for costs incurred in assembling or providing financial records 
or information related to:
    (a) Security interests, bankruptcy claims, debt collection. Any 
financial records provided as an incident to perfecting a security 
interest, proving a claim in bankruptcy, or otherwise collecting on a 
debt owing either to the financial institution itself or in its role as 
a fiduciary.
    (b) Government loan programs. Financial records that are necessary 
to permit the appropriate government authority to carry out its 
responsibilities under a government loan, loan guaranty or loan 
insurance program.
    (c) Nonidentifiable information. Financial records that are not 
identified with or identifiable as being derived from the financial 
records of a particular customer.
    (d) Financial supervisory agencies. Financial records disclosed to a 
financial supervisory agency in the exercise of its supervisory, 
regulatory, or monetary functions with respect to a financial 
institution.

[[Page 432]]

    (e) Internal Revenue summons. Financial records disclosed in 
accordance with procedures authorized by the Internal Revenue Code.
    (f) Federally required reports. Financial records required to be 
reported in accordance with any federal statute or rule promulgated 
thereunder.
    (g) Government civil or criminal litigation. Financial records 
sought by a government authority under the Federal Rules of Civil or 
Criminal Procedure or comparable rules of other courts in connection 
with litigation to which the government authority and the customer are 
parties.
    (h) Administrative agency subpoenas. Financial records sought by a 
government authority pursuant to an administrative subpoena issued by an 
administrative law judge in an adjudicatory proceeding subject to 5 
U.S.C. 554, and to which the government authority and the customer are 
parties.
    (i) Investigation of financial institution or its noncustomer. 
Financial records sought by a government authority in connection with a 
lawful proceeding, investigation, examination, or inspection directed at 
the financial institution in possession of such records, or at an entity 
that is not a customer as defined in Sec. 219.2 of this part.
    (j) General Accounting Office requests. Financial records sought by 
the General Accounting Office pursuant to an authorized proceeding, 
investigation, examination, or audit directed at a government authority.
    (k) Federal Housing Finance Board requests. Financial records or 
information sought by the Federal Housing Finance Board (FHFB) or any of 
the Federal home loan banks in the exercise of the FHFB's authority to 
extend credit to financial institutions or others.
    (l) Department of Veterans Affairs. The disclosure of the name and 
address of any customer to the Department of Veterans Affairs where such 
disclosure is necessary to, and used solely for, the proper 
administration of benefits programs under laws administered by that 
Department.

[Reg. S, 61 FR 29640, June 12, 1996]



Sec. 219.5  Conditions for payment.

    (a) Direct costs. Payment shall be made only for costs that are both 
directly incurred and reasonably necessary to provide requested 
material. Search and processing, reproduction, and transportation costs 
shall be considered separately when determining whether the costs are 
reasonably necessary.
    (b) Compliance with legal process, request, or authorization. No 
payment may be made to a financial institution until it satisfactorily 
complies with the legal process, the formal written request, or the 
customer authorization. When the legal process or formal written request 
is withdrawn, or the customer authorization is revoked, or where the 
customer successfully challenges disclosure to a grand jury or 
government authority, the financial institution shall be reimbursed for 
the reasonably necessary costs incurred in assembling the requested 
financial records prior to the time the financial institution is 
notified of such event.
    (c) Itemized bill or invoice. No reimbursement is required unless a 
financial institution submits an itemized bill or invoice specifically 
detailing its search and processing, reproduction, and transportation 
costs. Search and processing time should be billed in 15-minute 
increments.

[Reg. S, 61 FR 29641, June 12, 1996]



Sec. 219.6  Payment procedures.

    (a) Notice to submit invoice. Promptly following a service of legal 
process or request, the court or government authority shall notify the 
financial institution that it must submit an itemized bill or invoice in 
order to obtain payment and shall furnish an address for this purpose.
    (b) Special notice. If a grand jury or government authority 
withdraws the legal process or formal written request, or if the 
customer revokes the authorization, or if the legal process or request 
has been successfully challenged by the customer, the grand jury or 
government authority shall promptly notify the financial institution of 
these facts, and shall also notify the financial institution that it 
must submit an itemized bill or invoice in order to obtain payment of 
costs incurred prior to

[[Page 433]]

the time the financial institution receives this notice.

[Reg. S, 61 FR 29641, June 12, 1996; 61 FR 32317, June 24, 1996]



 Subpart B_Recordkeeping and Reporting Requirements for Funds Transfers 
                        and Transmittals of Funds

    Authority: 12 U.S.C. 1829b(b)(2) and (3).

    Source: 60 FR 233, Jan. 3, 1995, unless otherwise noted.



Sec. 219.21  Authority, purpose and scope.

    This subpart of Regulation S (12 CFR part 219, subpart B) is issued 
by the Board under the authority of section 21(b) of the Federal Deposit 
Insurance Act (12 U.S.C. 1829b), as amended by the Annunzio-Wylie Anti-
Money Laundering Act of 1992 (Pub. L. 102-550, Title XV; 106 Stat. 3672, 
4044), which authorizes the Board and the Secretary of the Treasury 
jointly to prescribe recordkeeping and reporting requirements for 
domestic wire transfers by insured depository institutions; and which 
also requires the Board and the Treasury jointly to prescribe 
recordkeeping and reporting requirements for international wire 
transfers by insured depository institutions and by nonbank financial 
institutions. The definitions and recordkeeping and reporting 
requirements referenced in this subpart are promulgated and administered 
jointly by the Board and the Treasury and are codified in 31 CFR 103.11 
and 103.33(e) and (f). This subpart does not apply to a particular 
person or class of persons or a particular transaction or class of 
transactions to the extent that the Treasury has determined that 31 CFR 
103.33(e) or (f) do not apply to that person, transaction, or class of 
persons or transactions. These recordkeeping and reporting requirements 
will assist in the prosecution of money laundering activities and are 
determined to have a high degree of usefulness in criminal, tax or 
regulatory investigations or proceedings.

[60 FR 233, Jan. 3, 1995, as amended by Reg. S, 61 FR 58975, Nov. 20, 
1996]



Sec. 219.22  Definitions.

    The following terms are defined in 31 CFR 103.11 under the joint 
authority of the Board and the Treasury:

    Accept.
    Beneficiary.
    Beneficiary's bank.
    Established customer.
    Execution date.
    Funds transfer.
    Intermediary bank.
    Intermediary financial institution.
    Originator.
    Originator's bank.
    Payment date.
    Payment order.
    Receiving bank.
    Receiving financial institution.
    Recipient.
    Recipient's financial institution.
    Sender.
    Transmittal of funds.
    Transmittal order.
    Transmittor.
    Transmittor's financial institution.



Sec. 219.23  Recordkeeping and reporting requirements.

    (a) Domestic and international funds transfers by insured depository 
institutions. The Board and the Treasury are authorized to promulgate 
jointly recordkeeping and reporting requirements for domestic and 
international funds transfers by insured depository institutions 
whenever the agencies determine that the maintenance of such records has 
a high degree of usefulness in criminal, tax, or regulatory 
investigations or proceedings. These regulations are codified at 31 CFR 
103.33(e). For the purposes of this subpart, the provisions of 31 CFR 
103.33(e) apply only to funds transfers by insured depository 
institutions.
    (b) International transmittals of funds by financial institutions 
other than insured depository institutions. The Board and the Treasury 
are required to promulgate jointly reporting and recordkeeping 
requirements for international transmittals of funds by financial 
institutions, including brokers and dealers in securities and businesses 
that provide money transmitting services. In prescribing these 
requirements, the Board and the Treasury take into account the 
usefulness of these records in criminal, tax, or regulatory 
investigations or proceedings and the effect the recordkeeping will have 
on the cost

[[Page 434]]

and efficiency of the payment system. These regulations are codified at 
31 CFR 103.33(f). For the purposes of this subpart, the provisions of 31 
CFR 103.33(f) apply only to international transmittals of funds.



Sec. 219.24  Retention period.

    All records that are required to be retained by this subpart shall 
be retained for a period of five years. All these records shall be filed 
or stored in such a way as to be accessible within a reasonable period 
of time, taking into consideration the nature of the record and the 
amount of time that has expired since the record was made. Any records 
required to be retained by this subpart shall be made available to the 
Board upon request.

[[Page 435]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  List of CFR Sections Affected

[[Page 437]]



                    Table of CFR Titles and Chapters




                     (Revised as of January 1, 2005)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
        IV  Miscellaneous Agencies (Parts 400--500)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  [Reserved]
        II  Office of Management and Budget Circulars and Guidance
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements [Reserved]


                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  General Accounting Office (Parts 1--99)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Part 2100)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)

[[Page 438]]

        XV  Office of Administration, Executive Office of the 
                President (Parts 2500--2599)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Part 3201)
     XXIII  Department of Energy (Part 3301)
      XXIV  Federal Energy Regulatory Commission (Part 3401)
       XXV  Department of the Interior (Part 3501)
      XXVI  Department of Defense (Part 3601)
    XXVIII  Department of Justice (Part 3801)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Part 4301)
      XXXV  Office of Personnel Management (Part 4501)
        XL  Interstate Commerce Commission (Part 5001)
       XLI  Commodity Futures Trading Commission (Part 5101)
      XLII  Department of Labor (Part 5201)
     XLIII  National Science Foundation (Part 5301)
       XLV  Department of Health and Human Services (Part 5501)
      XLVI  Postal Rate Commission (Part 5601)
     XLVII  Federal Trade Commission (Part 5701)
    XLVIII  Nuclear Regulatory Commission (Part 5801)
         L  Department of Transportation (Part 6001)
       LII  Export-Import Bank of the United States (Part 6201)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Part 6401)
        LV  National Endowment for the Arts (Part 6501)
       LVI  National Endowment for the Humanities (Part 6601)
      LVII  General Services Administration (Part 6701)
     LVIII  Board of Governors of the Federal Reserve System (Part 
                6801)
       LIX  National Aeronautics and Space Administration (Part 
                6901)
        LX  United States Postal Service (Part 7001)
       LXI  National Labor Relations Board (Part 7101)
      LXII  Equal Employment Opportunity Commission (Part 7201)
     LXIII  Inter-American Foundation (Part 7301)
       LXV  Department of Housing and Urban Development (Part 
                7501)
      LXVI  National Archives and Records Administration (Part 
                7601)
     LXVII  Institute of Museum and Library Services (Part 7701)
      LXIX  Tennessee Valley Authority (Part 7901)
      LXXI  Consumer Product Safety Commission (Part 8101)
    LXXIII  Department of Agriculture (Part 8301)
     LXXIV  Federal Mine Safety and Health Review Commission (Part 
                8401)

[[Page 439]]

     LXXVI  Federal Retirement Thrift Investment Board (Part 8601)
    LXXVII  Office of Management and Budget (Part 8701)

                      Title 6--Homeland Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 0--99)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)

[[Page 440]]

      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy, Department of Agriculture (Parts 
                2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  Cooperative State Research, Education, and Extension 
                Service, Department of Agriculture (Parts 3400--
                3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)

[[Page 441]]

       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Part 1800)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board, Department of 
                Commerce (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board, 
                Department of Commerce (Parts 500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)

[[Page 442]]

       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--499)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

[[Page 443]]

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  Bureau of Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Bureau of Immigration and Customs Enforcement, 
                Department of Homeland Security (Parts 400--599)

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Employment Standards Administration, Department of 
                Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training, Department of Labor 
                (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)

[[Page 444]]

        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board Regulations (Parts 
                900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]

[[Page 445]]

       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Part 1200)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--899)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

[[Page 446]]

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)
        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Minerals Management Service, Department of the 
                Interior (Parts 200--299)
       III  Board of Surface Mining and Reclamation Appeals, 
                Department of the Interior (Parts 300--399)

[[Page 447]]

        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)

[[Page 448]]

        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Vocational and Adult Education, Department 
                of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599)
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
        XI  National Institute for Literacy (Parts 1100--1199)
            Subtitle C--Regulations Relating to Education
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Part 1501)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)

[[Page 449]]

        II  Copyright Office, Library of Congress (Parts 200--299)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--499)
         V  Under Secretary for Technology, Department of Commerce 
                (Parts 500--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--99)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Rate Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)

          Title 41--Public Contracts and Property Management

            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)

[[Page 450]]

            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System
       201  Federal Information Resources Management Regulation 
                (Parts 201-1--201-99) [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--499)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 200--499)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10010)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare

[[Page 451]]

        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Office of Human Development Services, Department of 
                Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)

[[Page 452]]

       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Department of Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  United States Agency for International Development 
                (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        35  RESERVED
        44  Federal Emergency Management Agency (Parts 4400--4499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399)

[[Page 453]]

        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  General Services Administration Board of Contract 
                Appeals (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Research and Special Programs Administration, 
                Department of Transportation (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board, Department of 
                Transportation (Parts 1000--1399)
        XI  Bureau of Transportation Statistics, Department of 
                Transportation (Parts 1400--1499)
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)

[[Page 454]]

         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

                      CFR Index and Finding Aids

            Subject/Agency Index
            List of Agency Prepared Indexes
            Parallel Tables of Statutory Authorities and Rules
            List of CFR Titles, Chapters, Subchapters, and Parts
            Alphabetical List of Agencies Appearing in the CFR

[[Page 455]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of January 1, 2005)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Advanced Research Projects Agency                 32, I
Advisory Council on Historic Preservation         36, VIII
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development, United      22, II
     States
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            5, LXXIII
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Cooperative State Research, Education, and      7, XXXIV
       Extension Service
  Economic Research Service                       7, XXXVII
  Energy, Office of                               7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX

[[Page 456]]

Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Benefits Review Board                             20, VII
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase From People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Civil Rights, Commission on                       45, VII
Civil Rights, Office for                          34, I
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               44, IV
  Census Bureau                                   15, I
  Economic Affairs, Under Secretary               37, V
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Fishery Conservation and Management             50, VI
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV, VI
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology, Under Secretary for                 37, V
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Product Safety Commission                5, LXXI; 16, II
Cooperative State Research, Education, and        7, XXXIV
     Extension Service
Copyright Office                                  37, II
Corporation for National and Community Service    45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    28, VIII
     for the District of Columbia
Customs and Border Protection Bureau              19, I
Defense Contract Audit Agency                     32, I
Defense Department                                5, XXVI; 32, Subtitle A; 
                                                  40, VII

[[Page 457]]

  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 2
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
District of Columbia, Court Services and          28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Affairs, Under Secretary                 37, V
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Vocational and Adult Education, Office of       34, IV
Educational Research and Improvement, Office of   34, VII
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             5, XXIII; 10, II, III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   5, LIV; 40, I, IV, VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Administration, Office of                       5, XV
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                5, III, LXXVII; 14, VI; 
                                                  48, 99
  National Drug Control Policy, Office of         21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II

[[Page 458]]

  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       11, I
Federal Emergency Management Agency               44, I
  Federal Acquisition Regulation                  48, 44
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority, and General    5, XIV; 22, XIV
     Counsel of the Federal Labor Relations 
     Authority
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Fishery Conservation and Management               50, VI
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Accounting Office                         4, I
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5

[[Page 459]]

  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          5, XLV; 45, Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V; 42, I
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  6, I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection Bureau            19, I
  Federal Emergency Management Agency             44, I
  Immigration and Customs Enforcement Bureau      19, IV
  Immigration and Naturalization                  8, I
  Transportation Security Administration          49, XII
Housing and Urban Development, Department of      5, LXV; 24, Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Human Development Services, Office of             45, XIII
Immigration and Customs Enforcement Bureau        19, IV
Immigration and Naturalization                    8, I
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V; 42, I
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General

[[Page 460]]

  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  Minerals Management Service                     30, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Reclamation, Bureau of                          43, I
  Secretary of the Interior, Office of            43, Subtitle A
  Surface Mining and Reclamation Appeals, Board   30, III
       of
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Fishing and Related Activities      50, III
International Investment, Office of               31, VIII
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                5, XXVIII; 28, I, XI; 40, 
                                                  IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Offices of Independent Counsel                  28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  5, XLII
  Benefits Review Board                           20, VII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A

[[Page 461]]

  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II
Micronesian Status Negotiations, Office for       32, XXVII
Mine Safety and Health Administration             30, I
Minerals Management Service                       30, II
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
National Aeronautics and Space Administration     5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   45, XII, XXV
National Archives and Records Administration      5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Bureau of Standards                      15, II
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           21, III
National Foundation on the Arts and the           45, XI
     Humanities
National Highway Traffic Safety Administration    23, II, III; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Standards and Technology    15, II
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV, VI
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III
     Administration
National Transportation Safety Board              49, VIII
National Weather Service                          15, IX
Natural Resources Conservation Service            7, VI
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
   Commission
[[Page 462]]

Nuclear Regulatory Commission                     5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Offices of Independent Counsel                    28, VI
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 45, VIII
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Postal Rate Commission                            5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Regional Action Planning Commissions              13, V
Relocation Allowances                             41, 302
Research and Special Programs Administration      49, I
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                17, II
Selective Service System                          32, XVI
Small Business Administration                     13, I
Smithsonian Institution                           36, V
Social Security Administration                    20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining and Reclamation Appeals, Board of  30, III
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Technology, Under Secretary for                   37, V
Tennessee Valley Authority                        5, LXIX; 18, XIII

[[Page 463]]

Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     5, L
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 49, V
  Research and Special Programs Administration    49, I
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Surface Transportation Board                    49, X
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               5, XXI; 12, XV; 17, IV; 
                                                  31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection Bureau            19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Law Enforcement Training Center         31, VII
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  International Investment, Office of             31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Vocational and Adult Education, Office of         34, IV
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I
World Agricultural Outlook Board                  7, XXXVIII

[[Page 465]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations that were 
made by documents published in the Federal Register since January 1, 
2001, are enumerated in the following list. Entries indicate the nature 
of the changes effected. Page numbers refer to Federal Register pages. 
The user should consult the entries for chapters and parts as well as 
sections for revisions.
For the period before January 1, 2001, see the ``List of CFR Sections 
Affected, 1949-1963, 1964-1972, 1973-1985, and 1986-2000'' published in 
11 separate volumes.

                                  2001

12 CFR
                                                                   66 FR
                                                                    Page
Chapter II
201.51 Revised.....2211, 9907, 18185, 20901, 29009, 35530, 45753, 49098, 
                                                     52850, 57848, 65817
202 Compliance notification........................................41439
202.4 Revised; interim.............................................17785
202.9 (h) added; interim...........................................17785
202.17 Added; interim..............................................17785
202 Supplement I amended; interim..................................17786
203 Supplement I amended...........................................66295
204.9 Revised......................................................53078
205 Authority citation revised.....................................15192
    Compliance notification........................................41439
205.4 (a) redesignated as (a)(1); (a)(2) added; (c) revised; 
        interim....................................................17793
205.7 (b)(11) added................................................13412
205.16 Added.......................................................13412
205.17 Added; interim..............................................17793
205 Supplement I and Appendix A amended............................13412
    Supplement I amended...........................................15192
    Appendix A amended; interim....................................17793
    Supplement I amended; interim..................................17794
207 Added...........................................................2092
208 Authority citation revised...............................8634, 42933
208.3 (d)(1) revised................................................8634
208.71--208.77 (Subpart G) Revised.................................42933
208.71 (c) revised..................................................8749
208.77 (e) revised..................................................8749
208.81--208.86 (Subpart H) Regulation at 65 FR 75841 eff. date 
        delayed....................................................15345
208.100--208.101 (Subpart I) Regulation at 65 FR 75841 eff. date 
        delayed....................................................15345
208 Appendix D-2 revised............................................8634
    Appendix A amended......................................59636, 67074
    Appendix B amended.............................................59643
211 Authority citation revised......................................8636
211.1--211.13 (Subpart A) Revised..................................54374
211.5 (h)(2)(ii) revised; (l) added................................58655
211.8 (c)(3)(ii) and (iii) redesignated as (c)(3)(iii) and (iv); 
        new (c)(3)((ii) added......................................58655
211.9 Added.........................................................8636
    Footnote 5 amended.............................................58655
211.20-211.30 (Subpart B) Revised..................................54374
211.24 (i) added....................................................8636
211.31--211.34 (Subpart C) Revised.................................54374
213 Compliance notification........................................41439
213.3 (a)(5) added; interim........................................17328
213.6 Added; interim...............................................17328
213 Supplement I amended; interim..................................17328

                                  2002

12 CFR
                                                                   67 FR
                                                                    Page
Chapter II
201 Authority citation revised.....................................67785
201.1 Revised; eff. 1-9-03.........................................67785

[[Page 466]]

201.2 Revised; eff. 1-9-03.........................................67785
201.3 Revised; eff. 1-9-03.........................................67785
201.4 Revised; eff. 1-9-03.........................................67785
201.5 Revised; eff. 1-9-03.........................................67785
201.6 Removed; eff. 1-9-03.........................................67787
201.7 Removed; eff. 1-9-03.........................................67787
201.8 Removed; eff. 1-9-03.........................................67787
201.9 Removed; eff. 1-9-03.........................................67787
201.51 Revised; eff. 1-9-03........................................67787
    Revised........................................................69467
201.52 Removed; eff. 1-9-03........................................67787
203 Revised.........................................................7236
    Regulation at 67 FR 7236 eff. date delayed to 1-1-04...........30771
203.4 (a)(12) revised; (a)(14) added; eff. 1-1-04..................43223
203 Appendix A amended......................................30772, 43217
    Appendix A amended; eff. 1-1-04................................43223
    Appendix B amended; eff. 1-1-04................................43227
    Supplement I amended; eff. 1-1-04..............................43227
    Supplement I amended...........................................79845
204.7 (a)(1) amended; eff. 1-9-03..................................67787
204.9 Revised......................................................62636
208 Appendix A amended.......................................3797, 16977
    Appendix B amended..............................................3800
208.7 (b)(2), (3), (4) and (c)(1) revised; (b)(6) and (7) 
        redesignated as (b)(7) and (8); new (b)(6) added...........38848
208.36 (a) revised; interim........................................57941

                                  2003

12 CFR
                                                                   68 FR
                                                                    Page
Chapter II
201.51 (a), (b) and (c) revised..............................1794, 41054
202 Revised........................................................13161
    Appendix B amended.............................................53491
    Appendix C corrected...........................................14476
203.2 (c)(2), (e)(1)(ii), (2)(ii) and (j) revised..................74830
203.4 (a)(9) and (e) revised.......................................74830
203.5 (b)(3)(i), (ii), (c), (e) and (f) revised....................74830
203Appendix A amended..............................................74831
203 Supplement I amended....................................31592, 74833
204.9 Revised......................................................57790
206 Authority citation revised.....................................53283
206.1 (a) amended..................................................53283
206.2 (f) and (g) amended..........................................53283
206.3 (c)(1) amended...............................................53283
206.4 (b) amended..................................................53283
206.5 (a) Footnote 1 and (f) amended; (f)(i), (ii) and (iii) 
        redesignated as (f)(1), (2) and (3)........................53283
206.7 Removed......................................................53283
208.36 (a) revised..................................................4096
208.63 (b) revised.................................................25111
208 Appendix A amended; interim....................................56535
211 Authority citation revised.....................................25112
211.5 (m) added....................................................25112
211.24 (j) added...................................................25112
211.41 Revised......................................................1159
211.42 Revised......................................................1159
211.43 Revised......................................................1159
211.44 Revised......................................................1159
211.45 Revised......................................................1159
211.605 Added.......................................................7899

                                  2004

12 CFR
                                                                   69 FR
                                                                    Page
Title 12 Nomenclature change.......................................18803
Chapter II
201.51 (a) and (b) revised.............41389, 51002, 57836, 67635, 75819
203 Supplement I amended...........................................77139
204.9 Revised......................................................60545
208 Authority citation revised.....................................77617
208.3 (d)(1) revised; eff. 7-1-05..................................77617
208 Appendix A amended; interim....................................22385
    Appendix A corrected...........................................25672
    Appendix A amended.............................................44916
    Appendix E amended.............................................44918
    Appendix D-2 amended; eff. 7-1-05..............................77617
210 Authority citation revised.....................................62557
210.1 Amended......................................................62557
210.2 (h) amended; (i), (l)(3), (n) and (r) revised; undesignated 
        paragraph after (o) removed; (s) added.....................62557
210.3 (b) amended..................................................62558
210.4 (b)(2) amended...............................................62558
210.5 (b), (c) and (d) redesignated as (c), (d) and (e); new (b) 
        added; new (d)(3) redesignated from part of new (d)(2); 
        new (d)(1), (2), (3) and (e) amended; (a) and new (c)(3) 
        revised....................................................62558
210.6 (c) redesignated as (d); (a), (b) and new (d) revised; new 
        (c) added..................................................62559

[[Page 467]]

210.12 (d) through (i) redesignated as (e) through (j); new (d) 
        added; (b)(2) and new (g) amended; (c), new (e) and (f)(3) 
        revised;...................................................62560
210.13 Amended.....................................................62561
211 Authority citation revised; eff. 7-1-05........................77618
211.5 (l) revised; eff. 7-1-05.....................................77618
211.24 (i) revised; eff. 7-1-05....................................77618


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